Unit Linked Insurance Plans (ULIPs) are popular investment instruments that offer the dual benefit of insurance and investment. ULIP fund switching in ULIPs is a strategic move that can help policyholders optimise their investments and achieve better returns.
This article will discuss how fund switching in ULIPs works, the benefits of fund switching, and the factors to consider before switching funds. The ULIP plan calculator is a simple tool that you can use to predict the return you might get at maturity by entering a few details.
Benefits of changing funds
Leveraging from funds performing well is the main goal of transferring funds, and as a result, a benefit. You can use this option if one or more of the funds in your portfolio are not making a gain or are performing much worse than their peers. Units can be entirely or partially transferred into various fund choices, including debt to equity and vice versa. Yet, monitor fund performance to make sure the transfer is in your favour, as it will help you make a wise choice. In a ULIP, it is simple to monitor the performance of your scheme because insurers routinely announce the net asset value of the funds.
When to change funds
Although it is impossible for investors to predict gains or losses, you can move to safer funds and make the most of your assets if you believe the market will decline. A significant amount of your investments can be moved to debt funds, and once the market recovers, you can convert them back to equity. You should park a sizeable portion of your cash in safe debt a few years in advance if your policy is about to mature or if you are getting close to your financial goals, such as your child’s education and wedding.
Let’s use an example to comprehend it better. A 24-year-old man named Mr. Ram Prakash has a 35-year investment of Rs. 1 lakh in an all-equity ULIP fund. Mr. Ram can initially keep all of his money in stocks. Yet it wouldn’t be a good idea to deposit all of his money in an all-equity fund after he settles down and starts a family (in, say, six years). Perhaps to protect his investment, he could put 15% of it into debt. You can use a ULIP plan calculator to estimate future returns and the value of a ULIP investment.
Impact of switching funds on insurance cover
The answer to this question depends upon the kind of product you purchased. Some insurers offer a higher fund value, or the sum promised at maturity, while others separate reimbursements for insurance and investments.
When insurers provide the fund value, or the sum assured: In this case, the difference between the sum assured and fund value is used to determine the mortality charges. Because the insurance amount will change depending on the investment value, you should exercise caution while moving funds. Be aware that changes made during the first years of investment will not affect insurance coverage, but it is recommended to move your asset allocation towards debt when you are getting close to maturity to prevent unpleasant surprises.
When insurance companies provide separate payments for investment and insurance: Mortality fees are computed here based on the whole sum assured during the policy’s duration. At the time the policy is purchased, the insurance coverage is chosen. So, any modification to the portfolio won’t have an impact on your insurance coverage.
Costs applied to fund switching
Most insurance companies don’t charge anything for the first 5 to 10 transfers.
Procedure to switch funds
The following two options are provided by insurers to carry out the Switch Fund request:
Option 1: Form submission
Send a properly completed and signed endorsement form to the insurance company’s local branch. You must specify the exact amounts to be moved, the current fund plan, and your chosen new fund option. Current money will be distributed to the new fund option in accordance with your request to switch funds.
Choice 2: Insurer portal
Via the self-service options provided by life insurance firms on their portals, policyholders can handle fund switches. Your username and password are required to access the insurer portal. The insurer will quickly handle your request when you enter the percentage of funds to be transferred from the old fund to the new fund.
You can choose the automated switching option if you lack market knowledge or don’t have the time to keep up with the market. In this case, your fund manager will make the stock and debt swaps on your behalf. ULIP fund switching is an essential feature of ULIPs that provides policyholders the flexibility to optimise their investments.
With the right approach and understanding, fund switching can help policyholders maximise their ULIP investments and achieve their long-term financial goals.