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Having second thoughts about your ULIP? | August 06, 2008 11:34 IST

The turbulence in equity markets has impacted more investors than one would have initially thought. The hardest hit are those who invest directly in the stock markets (i.e. direct equities). Then there are investors who aim at diluting the risk of investing directly in equities by routing their investments through mutual funds.

Expectedly, this category of investors has also felt the heat from the stock market turbulence. There is yet another category of investors to rival both these categories in terms of equity investments i.e. ULIP (unit linked insurance plan) investors.

If too many visitors haven't given a thought to the fact that ULIP investors have considerable investments in equities, it's largely because ULIPs are a mixture of insurance and investments, and sold under varying (marketing) guises depending on the situation.

However, there are investors who are fully aware of the fact that ULIPs are facing the heat as much as other equity-linked investments. There is more than a fair chance that these are the investors who have invested in ULIPs (especially in the aggressive option that invests heavily in equities) and often without truly appreciating the ULIPs' market-linked nature.

What are ULIPs
Simply put, ULIPs combine the benefits of an insurance policy and a market-linked investment. A certain proportion of the premium paid is invested in market-linked instruments like equities and bonds (in line with the stated mandate) and the balance is used to provide for the expenses incurred on providing the investor with an insurance cover. Investments in ULIPs are eligible for tax benefit under Section 80C.

The story so far with ULIPs
ULIPs were launched at an opportune time when stock markets had just taken off. Being market-linked, they were major beneficiaries of the secular rise in stock markets. The buoyant stock markets coupled with attractive sales commissions on ULIPs played key roles in the rampant mis-selling of ULIPs. Consequently, many investors ended up buying ULIPs for all the wrong reasons. Just as worryingly, a lot of investors chose the aggressive (and riskier) option in a bid to clock higher returns.

Why ULIPs investors are shocked now
Of the three categories we mentioned earlier - stock investors, equity fund investors and ULIP investors; the latter are most stunned by the sudden turn of events (read market downturn). This is mainly because stocks and equity funds have been in existence for several years; as a result, investors have seen a cycle and know what a downturn can do to their portfolios.

On the contrary, most ULIP investors unfortunately do not know what it is to be in a downturn and are very worried to see a huge hole in their ULIP investments. Add to this the fact that many investors have invested in ULIPs for their children's education (child ULIPs) or retirement (pension ULIPs) and one can better understand their anxiety.

Double whammy
Expectedly, ULIP investors want to know if they should continue with their policies. Their nervousness can be traced to two reasons in particular. One, the expenses on ULIPs (which can be quite steep, but were overlooked in the rally), are beginning to pinch the investor now. Two, with markets in a decline, investors are not sure if they should be investing in equities at this stage.

It's not surprising therefore, to find investors complaining that their ULIPs have fallen to such levels that do not even cover the premiums paid so far. This is a result of the cumulative impact of high ULIP costs and market volatility.

What investors must do now
Case 1:
Investors who have opted for a ULIP with a clearly defined investment objective (retirement, child's education, among others), have a long-enough investment tenure (at least 10 years) and can take on the risk involved must stay the course and remain invested in the ULIP; of course, the underlying assumption is that the ULIP is a well-managed one.

To find out more about the latter, investors would do well to study the portfolios of their ULIPs and find out if the investment style is in line with the stated mandate. Also, investors should compare the performance of their ULIPs with that of their benchmarks and similar offerings from other insurance companies. The insurance advisor/insurance company can help investors in procuring the required information. The fact remains that over the long-term, if carefully selected, equities can add considerably to the investor's portfolio. But for that he must be prepared for the intermittent volatility like the one at present.

Case 2:
Investors who do not belong to the above category will find themselves in a rather unenviable situation. Clearly, investors must shoulder part of the blame for investing in a ULIP without conducting due diligence. They have probably opted for a ULIP either because they were projected attractive returns or merely for the tax benefit or for some other lesser objective.

Such investors must take a call on whether they should continue the ULIP. While the instinctive reaction could be to exit the ULIP, we recommend that they should not make a hasty decision. Instead, they must interact with the insurance advisor and explore all available options; also soliciting information about the surrender value will help in making a decision. The key lies in minimising the damage.

If you are wondering why the insurance advisor features prominently in both the options, the reasons are obvious. A life insurance policy can be tailor-made to the individual's needs. The individual's age, premium amount, tenure of policy among other details are unique to him.

The insurance advisor designs a policy based on these inputs and the individual opts for the policy based on his advisor's recommendation. The insurance advisor, as a 'representative' of the life insurance company, has a responsibility towards his client in terms of addressing his concerns with regards to the policy both before and after the sale.

Especially in the second case the advisor deserves to shoulder a part of the blame for having failed to educate the investor about the investment proposition offered by the ULIP. It's only fair that now, he plays his part in bailing out the investor.

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