Should you redeem your ULIP?

Is redeeming your unit-linked insurance policy the right choice?

by Arnav Pandya, Financial Chronicle 22/6/14


One of the questions that a lot of investors ask advisors relate to their unit-linked insurance policies (Ulips). Many of them have been holding these policies for a significant time period. During that time, many Ulips might have shown a value less than even the cost price. Now with the markets on an upswing, they are seeing an improvement in value. The amount in many cases has turned positive or has started showing a significant return. This is interesting from the point of view of investors because they are now faced with the question of what to do with the investment: should they sell and redeem the money?

Investment goals: The goals that have been set by an investor are a very crucial factor in the whole process of deciding on whether it is time to sell the Ulip. If there was a certain goal for which the Ulips were purchased and that goal has been achieved, then there would be no sense in continuing with the investment. A very good example of this would be an investment that was meant to generate Rs 5 lakh that would help in the purchase of an asset – or maybe a foreign trip — when it was planned several years ago. Now if that value has been reached and the goal has been achieved, then there is no need to continue with it. Hence no harm would be done by bringing the investment to an end.

For the long term: Most Ulip investments are for the long term, which could stretch from 10 to 15 years. In several cases, it could be that this period has been completed or is nearing completion, so sale is definitely an option. Also if the investor is witnessing a good return coming in on the investment, then a redemption would ensure that the investor goes to the next phase of the process. This would be a positive as far as the investor is concerned and they should be looking at making use of the good times currently being witnessed in the equity markets for the purpose of meeting personal financial goals. It should not be that they convert the long term to the short term out of desperation and not for any concrete reasons.

Patience: Often the investor loses patience with an investment and hence mentally decides to sell out because he is tired of tracking it and just wants to shrug off the burden. However, this attitude needs to be avoided since there is a good chance that the decision is not going to be appropriate or the most suitable one. This is the reason why we keep saying patience is key for an investor, especially in an investment like a Ulip, and they should ensure that patience is not lost even when times are tough and the going is not easy.

Returns: There are a lot of people who just look at the returns and feel disappointed that it compares unfavourable with several other options in the market. However, one has to ensure that the details that are being compared are correct: one should not compare oranges and apples. It is also important for investors to ensure that they are not overwhelmed by the short-term noise that they might hear in the market, making them lose focus on the long term. So do not take steps that can unravel all the hard work done over the past many years. The final objective for the investor should be effective use of the money.


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