ULIPs - the way forward

The dispute between regulators over unit linked insurance plans (ULIPs) marketed by insurance companies has left many investors confused. Here's an FAQ to address some of the doubts that investors may have:

What is the status of my existing ULIP after the SEBI ban? Should I continue to pay my renewal premium? Will it be accepted?

With both the regulators agreeing to jointly seek a binding legal mandate from a Court in this matter, there is as of now no change in the status of your ULIP.

If you have taken the ULIP to meet any of your financial goals, you should not stop paying the annual premium. The insurance companies will continue to accept the renewal premium.

SEBI's clarification this week also exempts ULIPs existing as on April 9, 2010, from the earlier ban.

Should I surrender my ULIP as there seems to be some regulatory problem?

The current issue is not about ULIPs, but about who will regulate them. Hence, you need not surrender the policy, especially if it is less than five years old.

ULIPs typically collect high surrender charges in the first five years. The surrender charges could be as high as 25 per cent if you have paid premium only for two years.

Apart from that, due to high initial upfront charges you may not even get what you have invested.

So don't make a hasty decision.

Will my money be safe if there is change in the regulator?

You need not worry about that. The issue of safety will arise only if the insurance company is going bankrupt.

In ULIPs, the money collected is mainly invested in equity and debt instruments based on the mandate of the policy. Your investments do carry market risk and can suffer if the portfolio of the fund does not perform. But as long as the equity and debt markets are functioning smoothly, a change in the regulator will not impact you.

I have paid premium for three years. Will I continue to get risk cover on my life if I stop paying premium?

Policyholders will be covered for life risk as long as your fund value is above the regular premium payable. If your fund value falls below this threshold due to adverse market conditions, then your policy will be closed and the proceeds will be paid to you, after deduction of surrender and other charges.

I have paid premium for two years. Is it possible for me to surrender the policy?

If you stop regular premium payments before three years have passed, your funds will be held in suspense, after deduction of surrender charges. The amount in the policy will be paid out to you only at the end of the third year.

Is it possible for me to convert my ULIP to a pure term insurance products?

It is not possible to convert your ULIP into another product. If you have decided to close the ULIP, with that proceeds you can buy a new term insurance policy.

Is investing in a ULIP a bad investment decision? If I pay premium for three years for a 10-year term, will it affect the overall return?

ULIPs are not a bad product per se. Insurance is a long-term product and the cost structures are designed in such a way that only investors who with the fund for 8-10 years will reap the benefits of the investment. Early exit is penalised through high charges.

If you bought a ULIP believing it to be a three-year product, then it will fail to reward you for the risk of blocking your money.

In a ULIP, more of your money goes to build your fund value only from the third year onwards. Therefore, only someone who keeps investing for 8-10 years may get an equity market return.

The major problem with an ULIP is that if the product underperforms the market for the initial years and if you try to exit, investors suffer a double whammy – low returns and high charges.

Should I invest in a ULIP today, given all this controversy?

First and foremost, it is to be understood that insurance are long- term product intended for, say, 10-15 years. We do not know how the current dispute on regulations will end. But it may alter the structure, costs and other features of products. Some changes may also be beneficial for investors.

Under the uncertain situation, it may be better to postpone the investment in new ULIPs and wait for clarity.

Tomorrow if the life insurance agent's commission is reduced, like mutual funds, and if he stops collecting the premium cheque and stops advising me, how should I handle the situation?

If that does happen, based on the service you require and the service rendered by the agent, you can negotiate and fix an advisory fee for him. You should also note that payments and reminders about renewal premium have become easier to deal with as several options are available.

To pay premia, you can opt for electronic clearance mode, credit card payment option, online payment or use the cheque-drop facility.

via BL