Difference between Switch of funds and Premium redirection

Rajesh is an ULIP policyholder with an equity-based investment fund. The recent volatility in the stock market spooked Rajesh, a conservative investor. He immediately switched his funds into a debt-based investment fund.

After a few days, he paid his renewal premium. Subsequently, he received his annual policy account statement. He was shocked to see that the last premium paid by him was invested in his earlier equity fund. Enraged, he shot out an email to the insurer attaching copies of his 'switch of fund' request and the insurance company’s letter confirming the switch to the debt fund. He demanded that the insurance company correct their error immediately and ensure that his last premium is transferred to the debt fund without any losses to him.

The insurance company responded stating that there was no mistake at their end. The request given by him was only for switch of funds and not for premium redirection. Accordingly, they had switched the existing funds to the debt fund. As Rajesh had not given a premium redirection request the premium paid by him was invested in the equity fund. Rajesh is more confused now. Let’s help him solve the puzzle:

Many policyholders think that giving a switch request will ensure that existing funds and future premiums will be allocated as per the switch request. However, as we see from Rajesh’s experience that this is not how it works. A fund switch applies only to the existing funds and not to future premiums. In case you want your future premiums also to go in to the new fund(s), then you need to submit a premium redirection request too.

You may be wondering why two different requests are needed. The answer to this lies in the essence of an ULIP. An ULIP allows a policyholder to not just participate in the performance of the capital markets, but also allows him to make asset allocations in various types of funds, review it and re-balance it as per the market conditions, life stage, goals etc. Thus, ULIPs give policyholders flexibility and control to manage their funds. Let us understand this with a few illustrations:

Customer A has an equity fund in his ULIP policy. During the initial years of the policy the equity fund NAV was quite low and this helped him buy more units on premium payments. After some years, he sees that the equity fund has performed very well and the NAV has gone up considerably. Accordingly, his policy fund value (NAV*units held) has seen good growth.

Now his next premium is due. If the premium is used to buy units of the equity fund, he will get considerably less units on account of high NAV. At the same time, he sees that the debt markets are looking very attractive and he wishes to participate in this performance but he also wants to keep the equity fund and enjoy the good performance of the same. So, what does he do? He gives a premium redirection request to the debt fund. Since the premium redirection is concerned only with future premium allocations and not with existing funds, his current funds are untouched (remain in equity fund itself). Subsequently he pays the premium which is used to buy units of the debt fund (as per premium redirection request). We can see here how this customer has used the premium redirection request to manage his funds.

Customer B is an investor with a low risk appetite and accordingly has chosen a debt fund. When his premium is due, he sees that the markets are quite volatile and the NAV of the equity fund is quite low. As per his financial advisor the equity fund is quite a promising one and is expected to perform well and that B should make good use of the market correction to buy units of this fund. B being a conservative investor does not want to put all his apples in a single basket. He only wants the fresh premiums to go the equity fund and wants the existing funds to remain in debt. He gives a premium redirection request to equity. Subsequently he pays the premium which is used to buy units of the equity fund and earlier funds remain in debt only. Thus, like Customer A, B too has used the premium redirection request to manage his funds.

Customer C has an equity-based fund. His policy will mature in a few years. He has earmarked the maturity value to fund his daughter’s wedding. Since the goal is approaching in a few years-time, he wants to adopt a very conservative approach and safeguard his kitty from market volatility. So, he gives a switch of fund and premium redirection request to debt fund. The switch request ensures that his existing funds are switched to debt. The premium redirection request ensures that the future premiums paid are allocated to the debt fund. Here he has used both switch and premium redirection features to manage his policy.

Trust the illustrations provided have helped to decipher how switch and redirection are different and why insurers provide these separate features in ULIPs. Also, it is advisable to contact your financial advisor before making a fund switch and/or premium redirection request so that you can take a decision which is most beneficial for you as per your current life stage, goals, market conditions etc.