Unit Linked Insurance Plans -- ULIPs -- all of sudden became a popular investment vehicle with investors in the past one year.
The reason: perhaps the bull phase or the lure of market-linked returns that insurance companies have been advertising. But with the markets now having corrected significantly, many investors are wondering whether they should have opted for a ULIP in the first place.
A single cornerstone advantage ULIPs offer is that they leave the asset allocation decision in the hands of investors themselves. You are in control of how you want to distribute your money across the broad asset classes and how and when you want to reallocate.
You can withdraw from these plans (after the initial lock in period) without any tax implication as withdrawals and death claim proceeds under ULIPs qualify for (capital gains) tax exemption under Section 10 (10D) of the Income Tax Act.
But such flexibility can be a big disadvantage if you are not 'an expert'. You could choose to be more in equities (like you probably did late last year or early this year), when the time is probably right to go into low risk debt. Or vice versa. The impact of such incorrect decisions could be significant.
To understand the risk involved in taking a ULIP let's take a look at the table below:
ICICI Life Link and Life Term Plan
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Birla Flexi Life Line Whole life Plan
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As can be seen in the table, ICICI ULIP Growth Option's NAV (up to 100 per cent investment in equity) has declined 17.1 per cent since January 1, 2004. ICICI ULIP Protector Option's NAV (up to 35 per cent investment in equity) has declined by only 2.8 per cent largely because it has a lower exposure to the stock markets. Similarly Birla ULIP's Enhancer's NAV (upto 35 per cent investment in equity), dipped 6.99 per cent even as Birla ULIP Protector's NAV (up to 10 per cent investment in equity) fell only by 2.9 per cent.
Indeed, those who had invested in the 'aggressive' ULIPs have been badly hit. And expectedly so. With higher risk, come higher returns. There is no debate there.
However, the issue here is that most investors ventured into these 'aggressive' ULIPs on the belief that returns will be nothing short of fantastic. That their hopes have been dashed is very apparent.
We have been approached by several ULIP holders requesting guidance to surrender their policies, which have been sold to them by unscrupulous agents on the basis of false 'promises.'
What should you do now?
If already invested in a ULIP:
Ensure that the equity component is in line with your risk appetite. If it is not, make amends now. Do not wait for the markets to correct upwards.
If considering taking a ULIP:
Do not get carried away by fancy projections made by unscrupulous sales agents. Focus on your requirement and risk profile. At any rate give the aggressive 100% equity plans a miss.
Understand the cost of taking a ULIP. Sometimes a pure life insurance and mutual fund combination may turn out to be more cost effective.