<div><em>Many agents are asking Ulip-holders to exit after lock-in period of five years and replace them with new Ulips. <strong>Sunil Dhawan</strong> explains why it is not in your interest.</em></div><div> </div><div>Unit-linked insurance plans (Ulips) are fast falling prey to the wrong practice of ‘churning’, once a common practice in the mutual funds industry. Many distributors who are in the business of selling financial products have corroborated to this fact. </div><div> </div><div>Churning, in financial markets refers to the process of making an investor exit from an investment and redeploy funds in another scheme or a different plan. The idea is to earn commission from the fresh sale. This practice is called churning and is absolutely unethical by selling standards. </div><div> </div><div>The IRDAI, the insurance regulator had come out with Ulip guidelines in 2010. Of several structural changes including the capping of charges in Ulip, the lock-in period in them was increased from three to five years. Over the last 5 years, markets have generated a return of hardly 10 percent. After accounting for charges in the initial five years, the fund value would be lying low for most Ulip holders who had bought after the new guidelines are in place. </div><div> </div><div>Immediately after the mandatory lock-in of five years ends, many Ulip-holders are being approached by some agents of various companies. Their goal is to make the existing Ulip holders surrender the exiting policy and buy a new one from them. The pitch could be different by these agents but the objective is the same. </div><div> </div><div>A common pitch could be related with low NAVs. With markets having fallen in recent times, buying a new Ulip with ‘low NAV’ could be their favourite pitch. It’s a trap. Just avoid it. Even insurance companies are in the practice of launching new fund option thus laying a trap for some investors.</div><div> </div><div>Some would term the Ulip plan itself as a wrong product and make you buy a traditional plan which could be an endowment or a money back. As against a commission of 7-10 per cent in Ulips, earning in a traditional plan could be 35 per cent for the agent. At times, one may even paint a bad picture of the insurance company itself and make the Ulip holder dump not just the plan but also the insurer. </div><div> </div><div>As the markets are almost at the same level since 1-2 years, new investors are probably not coming in. Finding a new customer is always a difficult task for agents as compared to pitching an existing customer. This could be one of the reason for some agents to ‘churn’ in these times.</div><div> </div><div>What to do: Ulips are market linked investments and should be bought for long term goals which are at least ten years away. Costs in Ulips are amortized over the initial five years. If an exit is made immediately after five years, it’s only the insurer and the agent who had sold the policy stands to gain. As a policyholder, exit after five years is financially damaging. The actual growth in the fund value potentially would happen after five years. </div><div> </div><div>Continue with Ulip till the goal is achieved by putting in premiums each year. Charges from the fifth year onwards are considerably less than what it was in initial years. With less charges to eat into your returns, fund value would increase provided the markets too grows. </div><div> </div><div>One single Ulip may be enough to help you meet your goals at different life stages. Here, is how it can be accomplished. Now, the next time if an agent asks you to dump your existing investment and get a new one, you know exactly what to do.</div><div> </div><div> </div><div> </div><div> </div>
