Hello,
I need your help again, I have come across a unique problem /situation and I need your help / guidance / advice.
Recently my uncle (Dad`d Friend) visited me and during the discussion a very interesting situation /problem came up. Last time you guys helped me a lot, I thought of sharing the problem with you in hope to get some feedback / advice.
- My uncle is retired (1 april 2008) he get Rs. 10,000 as pension.
- He received Rs 11, 00,000 as retirement corpus.
- He bought a plot of 3300 Sqft total cost 10, 00,000, good location but the appreciation in last 9 month is about Rs. 35-40 ( he bought because the broker told him that he woudl be able to make at least 1 lac in ayear)
- He also has 2 ULIPS (again the agent told him that he can sell it off in 3 years and earn good money, whcihis not entirely true)
1) 1,00,000 yearly Met smart Plus regular (1 yr old) NAV gone up from 15 to 21
2) 50,000 yearly Metlife smart gold (6 months old) NAV from 14 to 21
- He stays alone in his own house (cost about 6, 00,000), but it a old house and needs some repairs to continue to stay there.
- He has a medical insurance which is paid by his son (ICICI predential- hospital Care)
Given the income and outgoing, there is a clear imbalance, he cant stop the ULIP as he tends to lose lot of money as penalty but He cant afford it without selling off the property.
I suggested him to rent a small flat (1 BHK) and either sell or rent his old house. Use the money /cash generated from it for his expenses and wait for the right opportunity to sell the plot. I also asked him to reduce the ULIP payment after 3 years, if not stopping it completely.
Can you please suggest a way out? Whereby he doesnt have to depend on anybody for his expenses and be able to grow his 10 lacs.
Thanking you all in advance.
Dear brawnym,
Its again case to case basis. What was the intention of your uncle while buying the plot? Was it purely individual investment or was it kind of family property which he intends to pass on to his son? I will never advice him to sell the plot now or even to shift from current home. Again if your uncle intends to sell of his home finally, then he can look for doing a reverse mortgage. Its new in India but very famous in the US. You can do a google and see wat it means, its advantages and catch if any.
Regarding ULIPs, without even going to the scheme details and names, i believe that it can never be fruitful unless u stay invested (and pay premiums regularly) for more than 6years (for best performing schemes). It takes that 4-5yrs to just break even. So consider this your uncle has already paid 1.5lakh (1st year running) and will have to pay another 4.5 lakhs (consider 3 more years to break even) to just recover his initial investment of 6 lakhs. Now, its upto your uncle to decide if he really wants to put in that much over the next few years to get back his 1.5lakhs untrimmed and unexpanded or to discontinue (it will result in loss of 1.5 lakh) and invest the 4.5 lakh over the next 3 yrs in some balanced fund(or else) so as to target profit of 1.5 lakh. Again this decision is based on individual risk appetite. I know my frnd who was sold some stupid Bajaj Allianz ULIP (thru MLM model) and he discontinued after just one payment (his was quarterly payment mode so he virtually lost 1/4th annual charges). Also since he is in mid 20s he has age at his disposal and enough time to make up the loss. Your uncle probably wud have to still continue as 1.5lakh is pretty big amount.
I always believe that for retirees its best to get to some kind of agreement with their children in a manner which satisfies all. Consider this: My neighbor, aunt (widower) who has 3 daughters and has a good home in prime location. All her daughters are married. Aunty got retired some 2yrs back and the thought of living alone scared her. So she came up with a novel idea. The property she owned was worth some 40lakhs. So she put an agreement in which it was decided that one daughter will be the owner of the property after her death and she will also be taking care of aunt for rest of her life from now in the same home. This person (who will eventually be owner after aunt passes away) will have to pay 12lakh each to other 2 daughters. Now you may that the daughter taking property is at loss as she is paying 6lakh more. But consider this- she is staying in rent free home for some duration. So it was an approximate balancing act. It keeps aunt relaxed as there is someone to take care of her till her death. The pension she receives is more that enough for the ongoing ULIPs.
May be you uncle can visit some lawyer and draft some agreement. Even if the present home is old and doesnt look attractive, it has land value which is very high so never a good idea to sell and move to an apartment.
To conclude, I guess you/your uncle can look at reverse mortgage or this kind of agreement sharing with his son to lead a peaceful and relaxed life.
Plot he has to sell at some point but I dont think its this time or need which demands him to sell it right now.
ULIPs is a big catch here. But since it was a mistake made by him (by choosing them), he has to pay some price for the mistake in way of either continuing for next 3-4 years to break even or discontinue(not an advisable option).
3)There are about 6-7 room and he stays alone(not that there is any problems with his son but he has no company in Pune) so i though he can shift to a decent 1 BHK flat nearby and rent out his home which may generate some revenue for him and the value also appreciates.
4) His son is ready to pay for the ULIP, do you think it is advisable?
It depends on how comfortable your uncle is taking money from his son. If its ok, then no better deal
I don`t quite agree with ULIP advantages that Mr Sharmaji mentioned. The only advantage I can think of ULIPs in long run is, it helps u shuffle your portfolio (debt to equity and vice versa) easily. Other than that everything you say about ULIPs is common and other instruments in markets provide u similar (or better) advantages.
You have not mentioned your uncles age, but since he is retired I am assuming his age is 60. I am going to portray the charges your uncle will incur.
Met Smart Plus Charges
======================
Assumption 1 - Uncle`s age is 60
Assumption 2 - Sum Assured is 10 times premium = 10 Lakhs
Premium = Rs.1,00,000
Mortality Charges
Year 1 = 10436
Year 2 = 11544
Year 3 = 12821
Admin Charges
Year 1 = 2400
Year 2 = 900
Year 3 = 900
Premium Allocation Charge
Year 1 = 5000
Year 2 = 5000
Year 3 = 5000
Case 1: Your uncle decides to surrender after 3 years.
================================
Surrender Charge
Year 4 = 70000 (70% of first year premium)
So rougly, your uncle will incur Rs.1,24,000 in charges (including surrender charges, mortality charges, admin charges and premium allocation charge) if he decides to surrender after 3 years. This is 24% more than the first premium he has already paid. So he tends to loose more by surrendering after three years.
Case 2: Your uncle`s son decides to pay the premiums and keep the policy alive
================================
Please be aware that the mortality charges will keep increasing year after year.
Mortality Charges
Year 4 = 14273
Year 5 = 15904
Now if we add admin charges and premium allocation charges, every year 20%+ of the premium paid goes towards charges and this keeps increasing. It is not a good option to continue the policy either and keep paying premiums.
Conclusion
==========
Your uncle is in a loose - loose situation. He tends to loose even if he continues to pay his premiums or stops paying. I feel sad for him. I am suprised the agent said you can redeem the funds after 3 years especially with steep surrender charges. This is a classic case of mis-selling by insurance agents.
Though it is painful for a retired person like your uncle, my advise is to look at this investment as a bad investment. Do not pay any more premiums and increase your losses. Please forget about this investment and pray that the growth in fund value is able to pay for the charges. And let us keep little hope that some time in the future he gets something back (when surrender charges are not as high).
PS: Do not ever ever ever ever ever ever think of selling property to keep an insurance policy alive. This is a horrible option to think of especially when you know 20%+ of your yearly premium is disappearing in charges.
Raj,
good calculation...so can it be concluded for any one in general(any age group) that its a better option to terminate traditional ULIP premium in initial years so as to minimize further losses? I guess there are other instruments in market (in combination like MF, term insurance, PPF etc) which will provide better and more transparent returns than common ULIPs?
For Insurance, only Pure Term Plan is BEST. The reason, insurance agents don`t promote / sell these because they get very less commission, while in money back plans they get good commission and in ULIPS they get very very high commission.
This is the reason, they promote / sell ULIPs at first place.
For investment, a mix of MF and PPF are best, while a part of saving should be in Bank Fixed Deposits (in case of emergency needs, these can be liquidated).
For insurance I would always suggest Term Insurance.
For investments I would suggest MFs and PPF.
With the new tax laws FD`s and RD`s are also going to be attractive since these will have the same tax treatment as MF`s.
Regarding existing ULIP investment, we can not make a generalized statement that surrendering is the best option. Each ULIP has to be analyzed individually if it fits in the bigger scheme of things for that individual
Dear brawnym, first of all I`m sorry for replying late as I was on vacation.
Here r my views -
ULIPs - No matter under what consideration (or should i say under the inflaunce of ins. agent as well as greed of quick returns) ur uncle invested in these ULIPs, this was a mistake. From ur query it`s already clear that there is no financial liability on Uncle (children education, career, home loan......).
In absence of any liability, having a risk cover in the form of a ULIP is an absolute waste of money & the same is also reflected in the nos. put up by dear VVRK. Even if his son opts to pay the future prem., the cost of insuance `ll eat a big chunk of the fund value & the prem. allocation charge `ll eat up the prem. amount. So continuing the ULIP is a strict NO-NO.
Plot - Here again the greed of quick return overcame every other sensible thinking. In my view, There is no guarantee of the return from the plot. The price may remain as it is for long period & it may just shoot off the roof in near future. Both cases r hazardous for uncle. Liquidity of the money at his will or as per his need is also a big question in this case. In my view even if the plot can be sold without any gain sell it immediately. Out of total sell proceeds of 10L Rs. invest this way to have cash income in his hand - 2L*3 account of SCSS in his bank (total 6L Rs.) the 3 SCSS accts. `ll provide appx. qtly. earning of 13500 Rs.(this is equal to mly. earning of appx. 4500 Rs.) I`m advising specifically to invest in 3 different SCSS account due to the reason that in case of need of some liquidity, he may liquidate only 1 SCSS acct. & remaining acct. `ll keep on working for him. Out of remaining 4L Rs. invest 3L Rs. in POMIS. Appx. mly. earnings from this `ll be 2000 Rs. For remaining 1L Rs. invest in Birla MIP Savings 5 plan (the most conservative MIP).
The income generated from these 3 instruments `ll be able to help him plan his expenses better. If any surplus is there (I`m sure about it), he may invest thru mly SIP in DSP Top 100 & HDFC Top 200 fund to get a kick in return.
Old House - Reverse mortgage is a good option but i think from the above investments his current as well as future needs r already taken care off, hence the only question remains - the house requires major repairs & he don`t have liquid cash for that. In my view, here is son should offer the reverse mortgage to him. The son should pay for all the repair works & in turn Uncle `ll enter in the reverse mortgage agreement with his son that he `ll live in this house till his life & his son can claim the house only after his death. In all probability, the repairing cost `ll be around 1.5-2L Rs. so his son may provide him the difference of house value to repair cost either in monthly installments or in a one lump sum, as both r comfortable with. Selling this house & after that living on rent is not a great idea. Yes once the repairing work is over, he may also put a part of the house on rent. the rental income `ll also support his income. As per ur post, his son is capable of paying 1.5L rs. yly. prem. so i assume that on immediate basis, he may pay the entire repairing cost.
Since he(Uncle) has paid 1.5L for ULIPs whcih is a big amount by all means, also The NAV has also gone up by about 50%, he is very reluctant to let go.
I`ll meet my uncle is couple of days, let`s see how he reacts.
You uncle can continue the ULIP without any Problem. He can make Partial withdrawl of Rs.50000 ( or less/more )every year(after 3 years Completion) & pay the Premium for next year.
He can Switch the Profit into DEBT Fund of ULIP. He can also OPT for 50% in DEBT & 50% in Equity.
A GOOD / CHEAP ULIP is an EXCELLENT option for Retirement Planning if understood Properly.
| NIFTY 
