Check the importance of Switching facility of ULIP

Insurance | admin | November 6, 2011 at 5:00 am

A Ulip combines the benefits of life insurance with the advantage of market-linked returns to give the investor the best of both worlds. The insurance aspect of a Ulip is fairly simple and doesn't require any active intervention by the policyholder.

However, the investment part of the product needs to be handled with prudence to maximise the returns. The switching facility in the Ulip plays a key role in this regard. You can use it to tweak your asset allocation proactively. This can be a strategic change to suit your altered financial circumstances or a tactical juggling to gain from a short-term movement in the market.

This option is especially useful when you want to rebalance your portfolio because of a change in the value of a certain asset class. Typically, the asset allocation of an individual depends on the following factors:

Risk appetite: The level of risk that the investor is willing to take decides how much money he can put in volatile asset classes such as equities. This, in turn, depends on his age, liabilities and dependants, his financial status and experience with past investments.

Financial goals: The objective of the investment also defines the asset mix. The goal could be saving for your child's education, buying a new house or building a regular stream of income after retirement. A non-negotiable goal, such as a child's education, will have a different mix than that for buying a car or a second house.

Investment horizon: The time for which you want to stay invested has an impact on the risk that you can take. For example, if you have a long-term goal in mind, say, building a corpus for your child's wedding, you can invest in a risky portfolio that will fetch higher returns as the risk reduces over a longer period of time. However, if you need the money in the near future, then you should look for a safer portfolio for your investment.

How Ulips can help: Though Ulip investors can shift their money seamlessly from equity funds to debt funds without any charge or tax implications, only about 15% of policyholders actually use this facility. An overwhelming majority of the Ulip investors doesn't change the asset allocation even though there may be compelling reasons to do so. For instance, if the investor finds that a surge in the stock market has changed his asset allocation, he may book profits by shifting some of the portion out of the equity fund to the debt fund.

If, on the other hand, the stock market recedes and the equity allocation falls below the desired level, it is time to shift the money from the debt fund to the equity fund. The best part is that any capital gain earned from the switching is tax-free. However, most Ulip policyholders have their corpuses invested in equity funds throughout the policy term.

They are either not aware of the switching facility or cannot find the time to make the switch. Some even believe they can't tweak the allocation before the mandatory lock-in period. This period applies only to withdrawals, not to switching. You can alter the investment mix of your Ulip any time you want depending on your view of the market. Switching is easier if you take the online route. Most insurance companies allow their customers to access and operate their Ulips online.

Automatic asset allocation: For the investors who are not market savvy or don't have the time to monitor stock prices, some Ulips also offer structured lifestage portfolio strategies. Under this option, the investment mix of the Ulip is managed by keeping the investor's age and remaining term in mind. When the investor is young, a bigger portion of the copus is allocated to equities.

As he grows older, the fund manager gradually shifts the corpus to debt. By the time he is 50, almost 80% of the portfolio is in debt and only 20% is exposed to equities. In this manner, the risk to the investor's portfolio is gradually reduced.

Keep in mind: While asset allocation is a critical decision in your financial planning, there is no standardised way to do it. Every investor requires a customised solution. It is also important to note that asset allocation is not a one-time event; it's a continuous process of fine-tuning your investments in order to suit your requirements.

Source: Economic Times