Articles

One of the important features offered by life insurance companies in their unit-linked insurance plans or Ulips, as they are popularly called, is the option to switch funds. Companies offer their customers a certain number of free fund switches, usually four in a year. However, some companies such as Tata AIG Life Insurance and Bharti Axa Life Insurance offer as many as 12 free switches in a year. But statistics given by insurance companies reveals that hardly 3-5 per cent of customers switch funds in their entire policy tenure.

In a unit-linked insurance plan, risk of investment lies with the customer. Therefore, the customer decides asset class where she/he wants to invest. Companies have four to five fund options, mainly equity, debt and a mix of both. Customers choose a fund depending upon their risk appetites. Any switch over the limit prescribed companies is chargeable. Insurance companies charge between Rs100-500 per extra switch. However, insurance companies do not allow carry forward of unutilised free switches to the next policy year.

"Investment in insurance is for longer term. We have seen very few people exercising the option to switch funds. Majority of investors do not move their funds in the entire policy tenure. Their investments is locked in the option exercised by them at the time of buying the policy," said GN Agarwal, chief actuary, Future Generali India Life Insurance. Financial planners say investors should actively keep a track of their investment in Ulips on a regular basis. "People keep track of their equity investments and NAV or net asset value of their mutual funds on a daily basis but very few people keep tab of Ulips and treat it as passive investment. However, one should smartly exercise options given in the policy," said Kartik Varma, a certified financial planner.

Depending upon market situation, one can divert funds. If policyholder risk appetite is high and age is on the customer's side, they can can divert majority of their portfolio to equities. However, for those who prefer to take calculative risks, then they can divert the investment to a balanced fund, which is a mix of debt and equity. In a volatile equity market, risk averse investors can divert their entire investments to debt funds. Debt funds in the high interest rate scenario offer attractive returns. The bond index, looked by life insurance companies, has given an annualised return of 7 per cent in the last three years.

Since it is impossible to time the market, a decision should be taken based on customers' financial goals.