Are ULIPs safe and what is the best time to buy them

For quite sometime now, I have admired the knowledge and acumen of Mr. Rajveer Chauhan, the insurance agent who has sold more than a dozen insurance policies to my parents and me. During a casual chat, he complained that he is unable to sell ULIP plans since the equity market is very uncertain. It came as a surprise because for one – the statement came from an experienced insurance advisor and two – the markets have always remained and will continue to be uncertain!

I was now looking forward to hearing his views and queries on ULIPs and markets. So, I participated in the conversation and started exchanging reasons for investing or not investing in unit-linked plans. He responded that his customers had a lot of questions and doubts and he was short of answers. He thought it was safe to wait for the market to undergo a correction and then he could peacefully resume to sell ULIPs again.

Usual Customer fears and questions are:

1. The basic fear of a customer is “Sensex is so high… does it make sense to enter the market now?”
2. Another fear of customers: “What happens if there is a market correction? In that case I would lose money, so why enter now? Why not wait for the market correction to happen before plunging into ULIP investment?”
3. Last but not least: “ULIP is related to the market returns. So if the market falls, I will lose all my money.”

Even though ULIP is a simple product, it is not clearly and properly understood by most. Some of the features of ULIP:

• Long Term Product - From September 2010, ULIP has a clause of 5 year lock-in along with minimum 5 years premium need to be paid. Moreover, no withdrawal is permitted before the 5 year lock-in period is over. Thus ULIP is necessarily a long term product. If the customer is looking at short term returns and wishes to exit the product as soon as the minimum requirement of lock-in is over, then ask him to park his funds in other short term products like Mutual Funds, etc and not ULIPs. This is a long term product and it can never yield good returns if compared with short term products. It definitely has other benefits but it is surely not a short term investment opportunity.
• Flexible - ULIP offers a wide range of flexibilities like Partial Withdrawal, Switching from one fund to another, Loans, Premium Redirection, etc which other insurance and investment products do not.
• Transparent - The charges are categorically mentioned in the brochure so that customers are fully aware of all the charges long before investing their funds. No other products mention their charges so explicitly
• Goal based - In ULIPs there is a wide range of funds to choose from according to the investment goal of the individual.
• One stop solution - ULIP being a mixture product provides both protection along with investment. Previously customers had to opt for different product for protection and a different one for investment purpose. Now it is a much easier task since both the benefits are provided under the same product namely ULIP.

Now, to answer the fears and the doubts mentioned by Rajveer, I provided him with some answers and clarifications:

ULIP is usually associated only with equity and debt is completely forgotten. ULIPs have both Equity and Debt fund Options. But whenever people talk of ULIP, they immediately associate it with equity market and the debt and money market fund is conveniently forgotten. So, if you feel that it is not the right time to invest in the equity market---don’t! Just invest in the debt fund but boycotting ULIPs only because the equity market is on a high, completely doesn’t make sense.

Equity funds have a maximum equity exposure of 100% and minimum exposure of 40-60%. Thus in a bearish market, when the fund managers believe that the market will fall and not rise further, they keep only the minimum exposure in equity and park the rest of the funds in debt or money market fund where the market correction will not affect the NAV so heavily. Only when the market is bullish again and they believe that they will profit from the equity market rise, they slowly and steadily move the funds out of debt and money market funds to equity products.

Concept of switching- People ask for switches only while purchasing a policy and seldom exercise the option during the entire tenure. The option of Switching can be exercised very effectively.

-          You can invest in debt fund if you are bearish about the equity market

-          And then switch to equity fund when you consider the market to be bullish again

Anytime is a good time to invest as long as your goals are set right and you know why and where you are investing. Rajveer seemed convinced with the above explanations but many of us still hold some apprehension against the equity markets. The only way to get over this fear is by getting our basics correct about the equity markets and its functioning.