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Ray of hope for the unfortunate buyers of ULIPs?

During the bull run of 2004-2007, ULIPs (Unit Linked Insurance Plans) sold like hot cakes. The booming markets grossly amplified the returns, despite the high-cost structure. Though ULIPs were market-linked products, the word 'insurance' led most policy buyers to equate them to the "low-risk" traditional insurance plans. And the regulatory controls were weak, resulting in rampant mis-selling.

However, the good times for insurance companies / agents... and bad times for the potential policy buyers... didn't last long. 

First, after the catastrophic collapse of the equity markets in 2008, the allure of "high-returns" disappeared. So agents and insurers had nothing exciting to offer to the prospective policy buyers. 

Then in 2010, woken up by intense hue and cry against the preposterous ULIPs, the insurance regulator came out with new regulations, These made the new ULIPs comparatively more customer-friendly than their earlier avtaar by drastically cutting down and limiting the charges on such plans.

This, effectively, killed the ULIPs' market and since then there has been a steady decline in the sales of ULIPs.

So while the further damage was contained, those who had already been misled and mis-sold, had no option but to live with their bad experience. 

There is, however, now a ray of hope for these unfortunate victims. The impact of the high up-front charges paid in the initial 3 to 5 years would have been somewhat mitigated by the lower charges subsequently. This, together with the recent upturn in the markets, would have probably brought their ULIPs in the positive territory, after being in the negative zone for long.

Most people would scamper and exit totally, with whatever little profits they have made, and thank their stars. There is, however, a better alternative to this. 

In case you have forgotten, your ULIPs come with a switch option. If you don't have the risk appetite to remain in equity and don't need this money immediately, you can switch to the "Debt Fund" option offered under your ULIP scheme. This will
- remove the equity-risk and your money will move to safer debt products
- since ULIPs are not taxed, your earnings would be tax-free (there are very few tax-free debt alternatives available in the market)
- moreover after 5 years they are quite liquid and you could withdraw your money any time
- if the interest rates soften over the next few months to few years, debt portfolio will produce excellent gains by way of capital appreciation.  

And, if you are willing to take some risk with equity, you can always do a part-switch to debt and have a suitable equity-debt allocation.

Moreover, this switch has no tax implications. Also, depending on the specific terms of your policy, a few switches/year are permitted free of cost (subsequent switches may be charged a nominal amount.) 

So don't hastily decide to Quit. Ponder. Then Switch.


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