Investors looking to invest for the long term and get the benefit of markets usually choose ULIPs to invest and accumulate wealth. However, “the volatility of the last six months in the Indian equity markets has led to many investors staying away from unit-linked insurance plans (ULIPs). Investors are instead choosing to invest in guaranteed plans and term plans in the time of despair,” says Rakesh Goyal, Director, Probus Insurance.
While term plans offer pure insurance and guaranteed plans offer guaranteed lump-sum payments at maturity, ULIPs offer both insurance and market returns. Industry experts say, with multiple charges being extremely low now-ULIPs have become one of the best bets for long-term wealth creation.
Goyal says, “This is the time to go and invest in ULIPs. However, if someone is already in ULIPs, he/she could go for multiple changes in the plans to get better returns.” One of the major benefits of ULIPs is that they allow policyholders to switch between one plan to another (equity to debt or vice-versa).
So, experts say, if investors think that equity markets have run up and might correct going forward, they could switch to debt-until equity markets reach fair value again.
Another important point while getting better returns in ULIPs is the optimization of asset allocation, suggests experts. For instance, if a 30-year individual has all the investments in traditional products like bank FDs or traditional insurance plans- it is advised that he/she should invest the full amount in the equity of ULIPs and not go for balanced funds.
However, if one is near their goal and the policy matures in the next 3-5 years, it is better to slide towards debt funds. Goyal of Probus Insurance says, “In the current scenario if someone wants to invest in debt-they should go move at the short term to medium term funds. Itâ€™s no point staying invested in very short tenure (liquid plans) or long tenures (G-Sec plans).” He further adds, “This is because portfolios with a duration of 2-4 years, look attractive. Yields in the 4-5 year space continue to remain over 4.5-5 per cent compared with 1 year which is under 4 per cent. If the interest rates are reduced going forward this segment is likely to outperform the longer end.”
Categories like short duration funds and medium duration funds usually have a duration in the range of 1-4 years. Since February 2019, the RBI has reduced the key policy rates by 250 basis points (100 basis points = 1 per cent). The prices of fixed income securities are governed by interest rates prevailing in the markets. Interest rates and the price of fixed income securities are inversely proportional. When interest rates decline, the prices of fixed income securities increase.
Industry experts say one should not stop the premium payments and let the policy lapse. When a policyholder buys ULIPs, the insurance companies levy a charge for insurance protection upon his death and to cover other expenses, known as mortality charge. It is usually deducted along with other charges, before investing the policyholder’s money. Typically, the mortality charge of ULIPs increases as the policyholder ages. Nowadays the charges on the Ulips are very low and as the investments continue to go for a longer duration-the charges come down.
Goyal of Probus Insurance says, “Over the period of time mortality charges have come down and many insurers are giving back the mortality charges at the maturity of the policy to attract a greater number of investors. Many insurers have started giving mortality charges back to the policyholders-which is important for more wealth generation.”
Experts always suggest, one should invest in equities with a long term view and have a proper asset allocation, as equity is the only product that is likely to give inflation-beating returns in the long term.