What Happens to the Ulip Premiums Paid If the Market Crashes

ULIPs are life insurance plans that invest the premium in market-linked securities. As such, ULIPs help you earn attractive and inflation-adjusted market-linked returns to build up a suitable corpus for your financial goals. Along with investment returns, ULIPs also offer life insurance coverage that helps in securing your family’s finances in your absence. This potent combination of insurance and investment makes ULIPs quite popular.

However, when it comes to returns, there’s no guarantee. The returns from ULIPs depend on the performance of the underlying securities. As such, you might wonder what would happen to your investment if the market crashes. Would you lose everything? Let’s understand –

ULIPs offer different types of investment funds. These include the following –

• Equity-oriented funds that invest primarily in the equity market. These funds have a high return-generating potential. However, the volatility risks are also high.
• Debt-oriented funds invest primarily in debt instruments that carry a fixed rate of interest. The risk is low since debt instruments are fixed-income instruments. Thus, debt funds offer low yet stable returns.
• Balanced or hybrid funds that invest in both equity and debt in varying proportions. These funds have a moderate risk-return profile.

You have the choice of the investment fund. You can choose one or more funds for investing your premium. Thus, market risks in ULIPs depend on your choice of fund.

Moreover, you get the switching option whereby you can change the investment funds as the market dynamics change. As you switch the fund, the associated risk also changes. For instance, if you switch from an equity fund to a debt fund, the risk will reduce and vice-versa.

The equity market is volatile. It is influenced by different socio-economic factors, domestically as well as internationally. Thus, the market might be in an uptrend for some time or even suffer a crash. The most common example is the latest pandemic. As the pandemic hit India and lockdowns were imposed, the market crashed considerably.

The impact of the crash on your ULIP depends on the fund in which you have invested. Here’s how –

• If you have invested in equity-oriented funds, your fund value would suffer if the market crashes. The value of the underlying equity securities would fall reducing your overall fund value.
• If you have invested in debt-oriented funds, your fund value will not be affected much. This is because debt funds either do not invest in equity or invest minimally. A market crash does not affect debt securities. So, your fund value would, more or less, remain intact.
• If you have invested in hybrid or balanced funds, your fund value will reduce. The equity component of the portfolio will fall in value after a market crash. This will pull down your overall fund value. However, the reduction will not be as high as an equity fund since the fund also has a debt component.

Even if you have invested in equity or balanced funds, you always have the option to switch when the market crashes. You can switch to the debt fund to cut your losses and protect your capital and returns generated so far.

Furthermore, if you have a long-term horizon, you need not worry about market crashes because the market tends to correct itself in the long run. As the pandemic example shows, though the market crashed initially, it recovered and even touched record highs. So, with a long-term outlook, you don’t have to worry about market crashes.

Though the markets are volatile, short-term market crashes might not affect your corpus in the long run. Invest in ULIPs with a long-term perspective. If you have chosen equity funds, manage your investments proactively. If the market enters a downswing and starts falling, you can switch to debt funds to minimize losses. Thereafter, as the market recovers and starts climbing, switch back to equity funds to enjoy attractive returns.

The market has an uncanny ability to recover and climb to good highs after crashes. So, if there’s a crash, don’t panic. Use the flexibility allowed under ULIPs and manage your investments wisely.