Should I surrender my Highest NAV Guaranteed Policy Now?

In the years 2009- 2011, insurance companies came with an innovative product named as highest NAV (Nest Asset Value) guaranteed plans. Innovation of the product was agents centric rather than being customer centric. Agents were given high commission and the policy was sold as ULIPs with equity like returns.

The product seemed to be best for the customers, which give you highest guaranteed NAV for the first 7 years that too investing your entire investment amount in the equity market. This was the biggest catch in the product. Insurance companies knew that the major portion of the amount would be invested in debt products and not in equity markets. But the product was sold as hot cake by telling the innocent investors-“Sir- think about it, if the market goes up, your money will grow. If the market goes down, your highest amount is protected.

And seriously, I am surprised, how IRDA allowed the product at that point of time? Incidentally the same regulator asked all insurance companies to stop selling these policies in 2013. But in these 3-4 years, Crores of policies were sold by all insurance companies including LIC.

How Highest NAV Guaranteed Plans Worked?

Before analyzing the product returns, let us see how these plans work?

Suppose you invested Rs. 1, 00,000 in the highest NAV guaranteed plan and were allotted 10,000 units at NAV of 10(I am not including the charges in ULIPs here). The fund manager invests the major chunk in   equity in the initial years depending on the market condition (though, no fund manager will do this and risk his/her own job). Suppose the fund value grows to Rs. 1, 40,000 and NAV grows to Rs. 14. The fund manager has to provide this Rs. 14 guaranteed value on maturity, even if there is a fall in NAV in future.

The smart fund manager will now invest Rs. 1 lakh, out of 1.4 Lakhs in debt instruments expecting a return of 6% for 6 years. 1 Lakh invested in debt funds at a CAGR return of 6% will give you 1.4 lakhs after 6 years.

So after 1 year, your portfolio will look like this

Total Fund Value -1.4 Lakhs

Amount invested in Equity – 40,000 – Less than 30% Equity

Amount Invested in Debt -1, 00,000 – more than 70 % Debt

This is the scenario after 1 year. 2^nd year onwards the equity allocation may be still less. For a policy started in 2011, now the allocation to equity is just 15% now!

So, you thought that your entire amount is going to be invested in equity while insurance companies knew that it is going to be in debt.

ICICI Pru Life Pinnacle Super Highest NAV Fund B – Analysis

Now, this is all theoretical concept, let us take one product and analyze – how it performed in last 7 years? Since, ICICI Prudential life insurance is most aggressive in selling ULIPs, I thought of analyzing ICICI Prulife Pinnacle Super NAV Fund B. The product was launched in 2011 and it has already completed 7 years in March and highest NAV locked is Rs. 16.28.

Premium – Rs. 1, 00,000 per year

Premium payment Term- 5 Years (The number of years for which you have to pay premium)

Policy Term – 10 Years (The policy will continue for 10 years)

Total Premium- Rs. 5, 00,000.

Premium actually invested will be less because there are premium allocation and policy administration charges in ULIP. I have not considered mortality charges as you are getting a life cover from these charges.

Premium Invested in 5 years – Rs. 4, 65,000.

No of Units Allocated – 42571 (Please check the table on how these units have been calculated)

Highest NAV Locked – Rs. 16.29

Fund Value Now- No. of Units Allocated*Highest NAV Locked =42571*16.29 = Rs. 6, 93,482

Though, you will not get the highest NAV if you surrender the policy before maturity. You will get the current NAV.

Returns 

Let us see, how much returns are there in the product (taking highest NAV)

Total Premium Paid – Rs. 5 Lakhs

Fund Value – Rs. 6.93 Lakhs

CAGR Returns – 6.7%

Even debt mutual funds or FD would have given you better returns in the last 7 years.

And after deducting the mortality and fund management charges, net CAGR in this product 6.47 %( as per the official website of ICICI Prulife)

Should You Surrender Now?

Now, this is the main question which needs to be answered. Should I surrender now or wait till maturity?

There was another catch in the policy which I have not mentioned in the beginning. The product promises to pay you 110% of highest NAV value if you hold the policy till maturity.

Let us see if it is good for you to hold the policy till maturity

Premium Invested in 5 years – Rs. 4, 65,000

No of Units Allocated – 42571

Highest NAV at Maturity – Rs. 16.28 * 110%= Rs. 17.91

Fund Value Now- No. of Units Allocated*Highest NAV Locked =42571*17.919 = Rs. 7, 62,830.

Though, you will not get the highest NAV if you surrender the policy before maturity. You will get the current NAV.

Let us see, how much returns are there in the product

Total Premium Paid – Rs. 5 Lakhs

Fund Value – Rs. 7.62 Lakhs

CAGR Returns – 6.2%

Your returns are reducing if you hold the policy for next 3 years. First time, I am seeing a product that is investing in debt funds and the returns are reducing with time.

If you deduct the mortality charges and fund management charges, the returns would be less than 6% for 10 years.

What should you do?

If you surrender the policy now and invest in debt mutual funds. You will have better returns.

So, this was a highest NAV product which gave you the lowest returns! Please share your views on the product. Below are the names of such policies withdrawn later by IRDA.

• ICICI’s Pinnacle
• Birla Sun Life Platinum Plus-III
• Bajaj Allianz Max Gain
• SBI Life Smart UlIP
• LIC Wealth Plus

Happy Investing!!Keep Investing!!