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Here are some guidelines to help you decide what to do with the Ulip policy you already hold
Volatile equity markets have not spared even insurance policyholders, especially the unit-linked insurance policy holders, as most Ulips have the option to invest as much as 90% in equities. If you have chosen to invest in Ulips just for 5 years, or as a short-term trading instrument, you cannot afford redemption. The cost structure of Ulips is so high in the initial years that there is limited scope to a make profit. In fact, you may be even staring at some losses in the initial years. However, this does not mean you should never sell your Ulip holdings. But before pressing the exit button, you should do a thorough evaluation of your policy and its performance to decide whether to stay invested or quit. Here are some pointers:
DON’T EXIT AFTER 5 YEARS
You have to pay the premium only for five years is the most commonly used sales pitch and a myth propagated by insurance agents who are out to dispel clients’ resistance to purchasing a product with a long-term financial commitment. “While the IRDA regulations permit you to withdraw after 5 years, it is often incorrectly used as a USP by agents, who do not explain the negative consequences of such premature withdrawals. Of course, unlike the older regime of a 3-year lock-in, surrender charges are not levied under the new regime but the fund value may still be ‘underwater’ (i.e. lower than the premium paid),” says Jayant Pai, CFP, vicepresident, Parag Parikh Financial Advisory Services.
INVESTED AT THE PEAK 21,000 LEVELS?
“An investor needs to realise that if it is only a timing error, it will get sorted out over time. They need to compare the performance of the fund, in which they have invested, with the benchmarks. If it is better than the benchmark, then it would be a good fund (and Ulip) to retain. If not, you should exit and reinvest in various other investment avenues,” says Suresh Sadagopan, founder and CFP, Ladder 7 Financial Advisories.
You should be aware of the pros and cons of investing in Ulips prior to purchasing them. Ulips are not guaranteed products. Hence the market risk has to be borne by the policy-holder. “This is compounded if you opt for a single premium Ulip as it does not offer any scope for rupee-cost averaging, unlike a Ulip where the premium is paid frequently (monthly/quarterly or annually). If you want to indulge in market timing, you may switch to a less equityoriented option if you are apprehensive of the market corrections, and then switch back into the equity option once the correction has played out. Of course, this is easier said than done,” says Pai of Parag Parikh Financial Advisory Services.
FULLY PAID UP A BETTER OPTION THAN SELLING ULIP
Once the initial allocation charges were paid, most Ulips which were sold in the past did not have high allocation charges in the later years. If that be the case, then investors could continue paying premiums. Loss or profit would depend upon how the markets behave.
“However, in case allocation charges are high even in later years, then it would make sense to make their Ulips fully paid up and invest an equivalent of the annual Ulip premium in equity mutual funds, without any entry loads as well buy a term insurance policy,” says Rishi Nathany, CEO of Dalmia Securities.
However, if you convert a policy into ‘Fully Paid Up’ status, the life cover too proportionately reduces. Hence ensure that you have an alternate policy which offers adequate life cover and consider Ulips primarily for investment purposes. In case of a fully paid-up policy, you can stop paying premiums. But the policy itself will still be active with the insurance company for the time being. It continues to earn interest and has a certain cash value based on where the funds are being invested. This policy can be in the fully paid up status till maturity.
In case of premature withdrawal, you can surrender the policy to receive a cash value of the paid-up policy. “You may exit a Ulip if there is consistent underperformance vis-à-vis its benchmark; there are constant fund manager changes or you wish to consolidate your insurance policies. However, you must weigh the impact cost of such withdrawal vis-a-vis the monetary impact of continuing to pay the premia for the entire tenure of the policy,” says Pai. The bottom line is Ulips are long-term protection cum investment vehicles.
Investment returns can be volatile in the short-medium term. You should not take a very narrow or tactical view with Ulips and invest/divest on a short-term basis as you may do with a trading portfolio. If the individual is likely to invest in equity/balanced products, then it may make sense to stay invested since the bulk of the upfront costs in the Ulips would have been charged already and from here on, it may be quite beneficial. If the individual wants to exit equity altogether, this was not the right product to start with,” says Vishal Kapoor, head of wealth management at Standard Chartered Bank.
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