Is Surrendering A ULIP Policy During The Market Meltdown A Good Idea?

ulip policy market meltdown unit-linked insurance plan

With the on-going market conditions amidst the pandemic, it can be concerning many of the investors who have contributed their hard-earned money in a financial instrument. Many people have also become anxious due to the negative market movement, making them consider surrendering their investments. One of these financial tools includes Unit-Linked Insurance Plan or ULIP plan which has an investment component. So as an investor what should you do during a market meltdown? Some might advise you to liquidate your investments and others might ask you to hold it. So, let’s understand the best way to avoid losing money during a situation like this. 

This Is Why You Should Stay Invested In ULIPs 

The fall in the market is very evident and is also reflected in the Net Asset Values (NAV) of funds. Thus, the value of your ULIP fund may also seem low giving you the impression of fewer profits in the foreseeable future. If you are a first-time investor who trusted the market’s stability, this scenario can be worrisome. But on the flip side, surrendering your policy at a time like this can lead to increased losses. This is because giving up your ULIP policy at current rates will drive you to more damage than holding your ULIP investment until the market situation settles. Hence, you should stay invested in your Unit-Linked Insurance Plan and practice different strategies to reduce losses. 

How Do ULIPs Work? 

The premium paid for the ULIP policy is divided in a specific proportion where one part gets utilised to secure a life cover and other gets invested in various debt and equity funds. The pool of money generated through many policyholders is then invested in market instruments in varying proportion to get lucrative returns. You have the choice to choose between fund types based on your risk appetite and financial goals. The three asset classes; equity, debt and hybrid funds have varying risk factors and rate of returns. As equity funds invest in market-linked instruments, the risk is higher due to volatility but good returns can be expected in the long- term. Whereas debt funds do not invest in market-linked instruments, the risk is lower but returns are limited suitable for short-term. Hybrid funds are a mix of both with medium risk and profit opportunities. Depending on your insurance provider, a ULIP benefit that you can enjoy is the free fund switches which allow you to shift between funds if the returns aren’t satisfying. 

Policyholders of ULIPs are also allotted units like in mutual funds where each unit has a Net Asset Value which changes regularly. This value determines the net rate of returns of ULIPs. This Net Asset Value varies depending on market conditions and the performance of the fund you chose. 

To get better returns from your ULIP investment, you can try the asset allocation strategy where you allocate the premium in a fixed proportion between debt and equity funds. If you have invested in debt funds, you can move some of your money to equity and take advantage of the lower ULIP NAVs. You can also try other ULIP strategies and try to gain the most from the lows of the market rather than surrendering the policy. 

Even if the on-going situation may demand you to exit the funds and get what you can before it’s too late, liquidating your investments can cause major losses. The efforts you have put in to hold funds for long-term benefits will go in vain. Rather than surrendering your ULIP policy, you can wait out the storm or try to switch between asset classes to earn some gains.

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