I’m 28 with multiple ULIPs, a car loan, and too many mutual funds — should I surrender my ULIPs and simplify my portfolio?

I am 28 and have been contributing Rs 15,000/month to four LIC ULIPs over the last five years, and Rs 65,000/year to a term-linked ULIP (TATA AIA Smart Sampoorna Raksha) for the past two years. I also have a 7-year car loan of Rs 6 lakh at 7.5% p.a. and an over-diversified mutual fund portfolio managed by multiple agents, which I am now consolidating under a single advisor. As I take control of my investments, I seek guidance on whether to continue ULIP premiums, the tax implications of stopping them, and strategies to optimize my insurance, loan, and MF holdings for long-term wealth growth.

Advice by Anooj Mehta, Vice President, Partner Success at 1 Finance

ULIPs should be viewed as insurance products, not investments. Given that the 5-year lock-in period for your LIC ULIPs has ended, it is advisable to stop paying premiums and surrender these policies. The surrender proceeds will be tax-exempt under Section 10(10D) of the Income Tax Act, and these funds can be effectively redirected to repay your car loan if you feel overwhelmed by debt. However, a 7.5% car loan interest rate is not excessively high. If your cash flow permits, continuing EMI payments while investing the surrendered amount in equity mutual funds could yield better long-term growth.

For the TATA AIA Smart Sampoorna Raksha ULIP, since you have completed only two years, you can continue payments until the 5-year lock-in is completed, so that you avoid discontinuation charges and ensure tax efficiency. Alternatively, you could stop premiums now but expect returns on paid premiums to be modest (similar to savings bank account interest) until the lock-in ends.

Over-diversified mutual fund portfolios tend to dilute returns and complicate management (scheme overlaps, reduced NAVs as they are regular schemes). Consolidating your funds under the guidance of a qualified, fee-based advisor is crucial. Aim to hold no more than 3-4 schemes, focusing on direct mutual funds for cost efficiency. Before increasing your equity investments, ensure you have a well-structured emergency fund in place.

Replacing ULIP insurance with a plain-term insurance policy is highly recommended, as it provides far greater coverage at substantially lower premiums, freeing up more capital to invest for wealth creation. A fee-based advisor can assist in prioritizing your emergency corpus, insurance cover, and asset allocation to build a robust and optimized financial strategy that aligns with your long-term goals.

Understanding ULIPs

Unit-linked insurance Plans (ULIPs) are hybrid financial products that combine life insurance and market-linked investment. A portion of the premium goes toward life cover, while the remaining is invested in equity, debt, or balanced funds, depending on the investor’s chosen plan.

However, financial experts caution that ULIPs should be viewed primarily as insurance products, not as pure investments. Their returns are often lower than mutual funds due to higher charges, such as allocation fees, fund management costs, and mortality charges.

ULIPs come with a mandatory 5-year lock-in period, during which withdrawals are not allowed. Once this period ends, policyholders can surrender their ULIPs without tax implications under Section 10(10D) of the Income Tax Act, provided conditions are met. After surrendering, investors may choose to redirect the proceeds toward loan repayment or reinvest them in mutual funds for potentially better long-term growth.

Continuing ULIP premiums after the lock-in makes sense only if the plan offers strong performance and minimal charges. Otherwise, switching to a term insurance policy for protection and equity mutual funds for wealth creation is a more cost-effective approach, ensuring better transparency, flexibility, and long-term returns.