If your ULIP has matured, opt for staggered payment to benefit from a market recovery later

Through a circular dated April 4, the insurance market watchdog IRDAI has asked insurers to offer settlement options where the maturity proceeds can be taken in instalments over five years, to policyholders whose unit-linked life insurance policies (ULIPs) are maturing up to May 31, 2020. With NAV of all ULIP funds down due to the market crash now, the move will save investors.

Here we look at what this settlement option means and if you should opt for it.

Settlement option

In ULIPs, generally, on maturity, the number of units available to the credit of the policy get encashed at the net asset value (NAV) per unit as on the date of maturity. Now, there will be a settlement option given to the policyholder, who can choose to encash the units at the NAV on the date of each instalment over a period not exceeding five years. The instalment quantum will be decided thus: The available number of units shall be divided by the number of instalments to arrive at a number of units for each instalment which will then be multiplied by the NAV on the date of payment.

This is explained by IRDAI in its FAQ thus: if the policyholder opts for settlement in five annual instalments, the first instalment will be one-fifth of the number of units available to the credit of the policy on the date of maturity, multiplied by the NAV as on that date. The second instalment will be one-fourth of the balance number of units multiplied by the NAV as on that date, and so on. IRDAI allows the settlement option to be given in monthly, quarterly, half-yearly or yearly frequency and for a maximum period of five years from the original date of maturity.

Anytime during the five years, the policyholder can opt for complete withdrawal, and the balance units as on the date of option will be encashed at the NAV rate prevailing on that date. During the settlement period, insurance companies are allowed to deduct only fund management charges.

Note that the settlement option can’t be exercised on death claims; it will be available only to the policyholder on maturity. Further, note that the life insurance cover will not continue during the period of settlement. In case of death of the policyholder during the settlement option period, the nominee will be paid the remaining units at the NAV as on the date of intimation of death.

While all insurers offering ULIPs have to offer this settlement option (some insurers in the market already offer the option in their ULIPs), it is not compulsory for you to take it; you can still take the maturity proceeds as lump sum.

Also, not in all ULIPs are insurance companies required to offer this option; pension and variable insurance products are out of the ambit.

Our take

It is a good move by IRDAI to help policyholders. In the market rout since February, ULIP NAVs have been hit hard. For instance, returns of large-cap funds of ULIPs have fallen by 25 per cent in the last two months. Those invested in mid-cap funds have lost even sharper ― their NAVs are down by 30 per cent (average). Thus, five-year returns of most large- and mid-cap ULIPs now stand at zero per cent. So, the insurance market regulator has asked companies selling ULIPs to offer their policyholders an option to take the maturing amount in settlements over 1/2/3/4/5 years.

In this period, if the market recovers, the policyholder will regain full or at least some portion of the lost returns. That said, note that this option is not open for all; it can be used only by those of you whose ULIPs are maturing up to May 31, 2020. Also, the risk of investment during the settlement period is only going to be borne by you ― the ULIP holder. Your corpus may go up or down depending on the market situation in the settlement period.

So, the ball is in your court. If you do not want the maturity amount in emergency, you can leave it invested in the market and take it out in a staggered manner over the next three or five years. Given that you will not be allowed to switch funds (or make partial withdrawals) during the settlement option, decide on the category of funds you want to be invested-in at the time of availing the settlement option itself.

The one lesson from the market rout is that if you are in the last years of your investment or in say mutual funds, it is advisable to transfer them to a debt fund.

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