What Happens to the ULIP Premiums You Have Paid if the Market Crashes?

ATK
New Delhi [India], December 20: ULIPs are a type of life insurance policy where the premiums you pay are put into investments linked to the market. These plans not only allow you to gain returns that outpace inflation, but they also provide life cover to ensure your family's financial security should you no longer be present. This blend of investment and insurance makes ULIPs appealing to a wide variety of Indian investors and insurance-seekers.
Despite all these benefits, the returns you can expect from a ULIP are not assured. ULIP earnings rely on how the invested securities perform. Anyone who has invested in a ULIP will always have one eye looking at the performance of the market. The market is always vulnerable to unexpected crashes, and this directly affects investments like ULIPs that invest in market-linked funds. These crashes can be triggered by a multitude of reasons, and they are always difficult to predict.
It is natural to ponder over what will become of your ULIP investments if there is a downturn in the market. Is it possible that you might lose it all? To answer this, let's first understand-
What do you mean by 'Risk' when it comes it ULIPs?
As ULIPs invest in market linked funds, the risks are defined by the stability of the underlying assets. ULIPs feature a variety of fund choices. They include:
1. Equity-based funds known for their potential for high returns but also accompanied by considerable risk.
2. Debt-based funds which deliver returns that are stable but on the lower side.
3. Balanced, or hybrid funds, investing in a mix of both equities and debt, striking a medium level of risk and return.
The investment fund you select gives you control over the market risks in your ULIPs.
Additionally, ULIPs come with an option to switch funds, allowing you to adjust your investments with changing market conditions. As you switch between funds, the risk profile of your investment changes accordingly. For example, moving from an equity-focused fund to a debt-focused fund would lower your risk and vice versa.
What happens if the market crashes?
The effect of a market crash on your ULIP investment depends on the type of fund you've chosen. Here's what might happen in case of a market crash:
1. If your money is in equity-focused funds, a market downturn would reduce the value of the equities your fund holds, which would decrease the overall value of your corpus.
2. Investments in debt-focused funds would be less impacted by a market crash since these funds either avoid or minimally include equities. Debt funds are generally unaffected by equity market crashes.
3. For those in hybrid or balanced funds, the fund value would go down since the equity part of the fund would decrease in value with a market crash, though not as drastically as with pure equity funds due to the stabilizing presence of debt investments.
What should you do to ensure minimal damage to your ULIP portfolio?
If your investments are in equity or balanced funds, remember that you can always switch to debt funds during a market crash to mitigate losses and safeguard the earnings you've accumulated thus far.
Moreover, if your investment horizon is long-term, market crashes shouldn't be a major concern, as markets have historically shown to self-correct over time. The pandemic market response illustrates this point: after an initial drop, the market not only recovered but reached new highs. From a long-term perspective, market fluctuations become less alarming.
Is it advised to discontinue the ULIP policy?
Frankly, discontinuing any policy, including ULIPs, is generally not recommended, especially if the long-term picture doesn't point to a complete loss. ULIPs are flexible, allowing you to switch between funds as needed based on market trends. By staying informed and updating your investment portfolio, you can minimize the chances of disappointing returns from ULIP funds.
ULIPs are considered secure for long-term financial planning. Insurance regulators have set regulations to limit charges and reduce yield reduction, which helps maintain ULIP performance and returns over time. You can use a ULIP calculator to get an idea of potential returns at the time of purchasing it.
Even with market downturns, a wise investment strategy means you won't see a significant loss in the long run. Furthermore, ULIPs offer the option for partial withdrawals if you need access to your funds. However, discontinuing a ULIP policy might incur extra charges.
The bottom line
Market volatility and short-term downturns generally have little impact on long-term investment funds like ULIPs. When investing in ULIPs like Edelweiss Tokio Life - Wealth Secure+, it's important to keep a long-term view. If you're invested in equity funds, manage your portfolio actively. When the market trends downward, you can switch to debt funds to lessen the impact on your investments. Then, as the market recovers, you can switch back to equity funds to capture potential gains.
Markets have a consistent pattern of bouncing back after a fall. So, in the face of a downturn, don't panic. Take advantage of the flexibility ULIPs offer and manage your investments smartly.
(ADVERTORIAL DISCLAIMER: The above press release has been provided by ATK. ANI will not be responsible in any way for the content of the same)