A joke in the personal finance industry is that investors are more willing to buy insurance policies than mutual funds. When quick profits become more challenging or losses become the order of the day, it's probably natural for investors to take shelter under safety. But then can insurance be a supplement for investors.
The question assumes significance, as it is not the job of an insurance policy to provide capital or yield comfort. However, in the last 3-4 years, insurance is being sold as an investment option rather than as a risk cover and hence, investors too have begun to expect insurance to do the job of wealth creation. One of the reasons could be due to the fact that the middle income segment, till the current decade, used insurance as a savings product. The legacy seems to have passed on over the years and products like the unit-linked insurance plan (ULIP) have only strengthened the belief of investors that insurance is for investment. However, investors can go for their insurance product according to their comfort. Analysts reiterate the word comfort because there has always been a debate on the differences between ULIPs and traditional products. While ULIPs are more expensive than many other products like term plans, increasing awareness of ULIP should end the debate. Hence, for those who prefer ULIP over other insurance products, this should be the perfect time.
The biggest advantage with ULIP is that it allows the investors to take advantage of the equity market besides providing insurance cover. While these policies get sold on their own during boom market conditions, investors with a long horizon should actually look at a higher equity component in the current market environment. While it may be tough for investors to plunge into the stock market during tough market conditions, they have little to worry when are investing for the long term. The added advantage with ULIP is that the fund manager takes a long term call on his stocks and the fund management style too is more passive when compared with mutual funds. As a result, in a weak market, the fund manager has the advantage of buying stocks cheap which has been the case in the present environment.
Unfortunately, investors more often tend to take cues from the sentiment surrounding them rather than their individual needs. For instance, a higher equity component in an ULIP is a risky proposition for an investor who is closer to his retirement irrespective of the market environment. On the other hand, a young investor can afford to go for complete allocation towards equity since he has a long innings ahead of him. As a result, the choice of investment option in an ULIP needs to be driven by individual needs rather than pure market sentiments.
Coming back to the choice of the ULIP option in the present market environment, the investors have the added advantage of low PE ratios, due to the recent corrections. For an investor looking at an ULIP with a payment term of 10-15 years, the downside risk is limited as markets have discounted a good chunk of bad news. While it is a difficult task to invest at rock bottom prices, insurance investors can look at the option of monthly payments for their premium payments, if they don't have the appetite for short-term losses. While no one likes to see negative returns in their portfolio, the equity markets demand a tolerance for losses and ULIP is no exception. One may argue that the investor has the choice of debt too in an ULIP but such investors are better off with traditional products. Not only does it save them from the trouble of market exposure but also ensures lower cost for their policies.
The question assumes significance, as it is not the job of an insurance policy to provide capital or yield comfort. However, in the last 3-4 years, insurance is being sold as an investment option rather than as a risk cover and hence, investors too have begun to expect insurance to do the job of wealth creation. One of the reasons could be due to the fact that the middle income segment, till the current decade, used insurance as a savings product. The legacy seems to have passed on over the years and products like the unit-linked insurance plan (ULIP) have only strengthened the belief of investors that insurance is for investment. However, investors can go for their insurance product according to their comfort. Analysts reiterate the word comfort because there has always been a debate on the differences between ULIPs and traditional products. While ULIPs are more expensive than many other products like term plans, increasing awareness of ULIP should end the debate. Hence, for those who prefer ULIP over other insurance products, this should be the perfect time.
The biggest advantage with ULIP is that it allows the investors to take advantage of the equity market besides providing insurance cover. While these policies get sold on their own during boom market conditions, investors with a long horizon should actually look at a higher equity component in the current market environment. While it may be tough for investors to plunge into the stock market during tough market conditions, they have little to worry when are investing for the long term. The added advantage with ULIP is that the fund manager takes a long term call on his stocks and the fund management style too is more passive when compared with mutual funds. As a result, in a weak market, the fund manager has the advantage of buying stocks cheap which has been the case in the present environment.
Unfortunately, investors more often tend to take cues from the sentiment surrounding them rather than their individual needs. For instance, a higher equity component in an ULIP is a risky proposition for an investor who is closer to his retirement irrespective of the market environment. On the other hand, a young investor can afford to go for complete allocation towards equity since he has a long innings ahead of him. As a result, the choice of investment option in an ULIP needs to be driven by individual needs rather than pure market sentiments.
Coming back to the choice of the ULIP option in the present market environment, the investors have the added advantage of low PE ratios, due to the recent corrections. For an investor looking at an ULIP with a payment term of 10-15 years, the downside risk is limited as markets have discounted a good chunk of bad news. While it is a difficult task to invest at rock bottom prices, insurance investors can look at the option of monthly payments for their premium payments, if they don't have the appetite for short-term losses. While no one likes to see negative returns in their portfolio, the equity markets demand a tolerance for losses and ULIP is no exception. One may argue that the investor has the choice of debt too in an ULIP but such investors are better off with traditional products. Not only does it save them from the trouble of market exposure but also ensures lower cost for their policies.
