The current bear market has led to net asset values of equity-based funds of Ulips declining in value significantly. What will be the impact on Ulip buyers?
The market mayhem has not left any financial sector untouched. While till a few weeks ago the industry was discussing the effect of falling markets on mutual funds and banks, now it is the turn of the insurance industry to come under the spotlight for the wrong reasons. According to industry estimates, the net asset values (NAV) of unit-linked insurance plans (Ulips) have dropped almost 30-40 per cent till date in this calendar year, causing severe dent in the fund value of investors.

Falling markets send NAVs plunging
With the stock markets in the doldrums, unit-linked insurance plans, especially growth and balanced funds, have taken a beating. In the case of equity funds, NAVs have dropped 30-40 per cent, while in the case of balanced and other debt funds they have dropped 15-20 per cent.
While this may be irrelevant keeping in mind the fact that Ulips are long-term vehicles, a fall in NAV erodes the fund value. This could affect Ulip buyers who plan to withdraw their funds prematurely.

The second fallout of a market crash is on death cover. Type I Ulips, which pay the higher of sum assured or fund value as death benefit, were sold to investors on the back of high returns that the markets have generated. ?Brokers and agents do not sell policies but dreams through Ulip products. Ulips are sold more as investment solutions than as insurance polices, which should not be the case,? says Praveen Aggarwal, director, SMC Insurance Brokers. ?Investors who were banking on high returns from Ulips and opted for low sum assured could face the brunt in these times,? he adds.

The repercussions
If you are a long-term investor who has invested in Ulips with a purpose, and doesn?t intend to make premature withdrawals, then you may rest assured. Explains Yashish Dahiya, chief executive officer, Policy Bazaar: ?It?s not important how much NAVs have dropped. Ulips are long-term investments. Post deductions they will give returns of 4-5 per cent over the long term. But if you look at them from a short-term perspective, with the bearish market conditions that have prevailed recently, very few funds have positively growing NAVs.?
He further adds: ?An important point here is that while the NAV is a good real time indicator of how your fund is performing, the true indication of the overall performance of your investment is the IRR (internal rate of return).?

The falling markets could worry two types of investors. First are the ones who bought a unit-linked policy with the intention of enjoying the holiday premium after payment of three premiums. And the second are the ones who invested in such polices through the single-premium mode.

Most insurance companies allow premium holiday for a set period of time, usually more than two years, or till the fund value reaches a set limit. During the bull run, investors enjoyed the entire premium holiday period without worrying much about fund size. However, falling markets will definitely not give them such luxury now. ?Investors who have opted for this route might have to top up their investments to ensure that they enjoy the premium holiday period,? says Jaideep Lunial, a Chandigarh-based financial planner.
Trouble might also crop up for single-premium investors. ?If the fund value falls below a set limit, insurance companies have the right to cancel the policy,? says R. Krishnamurthy, managing director, Watson Wyatt.
Investors who have chosen any of these two plans can top up their investments to avoid such a scenario. ?In fact this is a good time to top up your investments, if your company allows,? says Lunial.

Points to remember
Express Money has always advocated that insurance should never be mixed with investment. But still, if what you get at maturity of the policy is more important to you, here are a few things you should take note of.
?One should not totally bank on Ulips for life insurance cover. One should opt for a combination of traditional plans and Ulips. A traditional plan will act as a cushion and give a certain sum assured irrespective of how equities perform,? says Anuj Agarwal, chief financial officer, SBI Life.

If you are a savvy investor and have invested in Ulips, use the switch option. A switch option allows the investor to divert his funds free of charge from one fund to another. ?In the long term, equities will always give the best returns. An investor should assess his risk appetite and liquidity needs and make use of the switch option. At such levels, valuations are quite attractive and definitely call for some buying,? says Puneet Nanda, chief investment officer, ICICI Prudentail Life Insurance.