Time to swap your ULIPs for safer bets?

The good news is investors can make 5 to 6 switches during a year among funds depending on the insurance companies without incurring any costs, experts tell Chirag Madia.
Illustration: Dominic Xavier/Rediff.com

The rise in the equity markets hasn't benefited mutual fund houses alone. Even insurance companies have seen steady inflows into their unit-linked insurance plans or ULIPs.

According to the industry estimates, ULIPs have seen flows of around Rs 19,000 crore (including new business premium and renewal premium) up to August 2017 against Rs 15,000 crore in the previous financial year -- a year-on-year rise of around 27 per cent.

ULIPs are insurance-cum-investment products. They provide risk cover along with investment options in instruments such as stocks or bonds.

Given that these are neither pure investment (such as mutual funds) nor pure insurance (such as term plans) products, most financial planners do not advise you to invest in ULIPs.

But when stock markets start rising, many policyholder buy these hybrid products to take advantage of market conditions.

However, with market experts beginning to worry about sustainability of this rally for too long, ULIP investors also may have to start looking at making changes in their portfolio preferences.

"A major advantage of ULIPs is that one can switch from equity to debt or vice versa depending on their risk appetite," said Manoj Kumar Jain, managing director at Shriram Life.

The good news is that all ULIP holders can make several switches without incurring any cost during the year.

And the best part: There is no tax liability on inter-fund transfers.

ULIPs give equity, balanced and debt options to the investor.

"The decision of fund switching in ULIPs would depend on tenure of the policy and a customer's risk appetite. If the policy is due to mature in the near term, and the customer wants to minimise volatility, s/he may opt to switch from equity to debt at this point of time," said R M Vishakha, MD and CEO, IndiaFirst Life Insurance.

Investors can make five-six switches during a year among funds depending on the insurance companies.

However, there are insurance companies where the gains in equity are automatically transferred to debt.

For example: IndiaFirst Life has two plans called Money Balance and Wealth Maximiser. These policies give the option of automatic booking of gains in the equity fund.

"The idea here is to have a balanced portfolio and this strategy also helps to systematically transfer the equity gains into debt," added Vishakha.

Experts said if someone is not going to stay in the policy for the entire period, it really does not make sense to opt for equity option.

Also, new entrants should stay put for the entire tenure.

"We have seen huge flows of money coming through ULIPs in the past few months. However only long-term investors should put money in the equity option. Ones with short-term horizon should weigh their options and switch to debt at this point of time," said Rakesh Goyal, director, Probus Insurance Brokers Limited.

Even ULIPs, as a product, does not make much sense for the short-term policyholder because it means that one has to bear high costs in the initial years.

Typically, ULIPs have several charges such as premium allocation charges, fund management charge, policy administration charges, and mortality charges, among other.

The sum total of all these charges could be as high as 6 to 7 per cent a year in the first five years.