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Impact of stock market crash on insurance / ULIP holders

The NAV (Net Asset Value) of Unit Linked Insurance Plan’s units keeps changing with the prevailing market price of the stocks in which it invests. Definitely, the crash / correction in the stock market has an impact on the ULIP holders’ insurance cover. This article discusses this in detail.

All of us having dependents buy life insurance. Life insurance is bought to take care of our dependents when we are not around.

How much insurance is bought depends on multiple factors, but the most important is the amount that your dependents would need to sustain a reasonable lifestyle. (For more on how much life insurance should be bought, please read “How much is your life worth?“)

So, the bottom line is that we do our analysis, and buy life insurance that is adequate for our and our family’s needs.

And if you are among the ones who go by the latest trends, you would have bought a ULIP, or a Unit Linked Insurance Plan. (To know more about ULIP, please read “ULIP v/s Endowment Plan for Life Insurance“).

In Unit Linked Insurance Plans, the sum insured is the higher of:

  1. The original sum insured that you chose at the time of buying insurance, or
  2. The NAV of all your units

And this, friends, can wreck havoc on your life insurance calculations! Let’s understand how…

Invested in a ULIP…

Say you invested in a ULIP in the past 3-4 years. You would have seen the value of your units shoot up due to the meteoric rise of the Indian stock market. This also means that your sum assured (that is, your life insurance cover) would have gone up considerably.

Take the example of the very popular ULIP – SBI Life’s Horizon. Say, you owned 10000 units of Horizon in Oct 2005, when the NAV was Rs. 15.5 per unit. In Dec 2007, the NAV of each unit increased to Rs. 41. Thus, your Sum Assured increased from Rs. 1,55,000 to Rs. 4,10,000. And that’s a huge increase!

Now, all prudent people revise their insurance cover from time to time, depending on the changes in their life – like getting a higher paying job, getting married, becoming a parent, etc.

So, if you would have experienced any of these events, you would have felt the need to increase your life insurance cover. But then, you would have realized that the increase in the value of your ULIP units has already taken care of it! And you would have felt really proud a bout buying the perfect insurance cover – a cover that took care of even your future insurance needs!

In case of our example of SBI Life’s Horizon ULIP, your insurance cover would have already increased by Rs. 2,55,000 from Oct 2005 to Dec 2007, thus taking care of at least a part of your increased life insurance needs.

…and then came a stock market crash!

Since the stock market had been moving up for so many years in a row, we almost forgot that it can go down as well! And that’s exactly what happened, although many people didn’t expect it at all.

And with this crash (or correction, as you may want to call it), the value of your ULIP units crashed too! And that means that your life insurance cover also went down.

In case of SBI Life’s Horizon ULIP, the current NAV of each unit is Rs. 31.6. This means that your life insurance cover is Rs. 3,16,000, or Rs. 94,000 less than your life insurance cover in Dec 2007!

Time to recheck your life insurance cover

And therefore, this is a right time to do a quick recheck of your life insurance cover. The steps are:

  1. Find out how much life insurance you need (For more, please read “How much is your life worth?“)
  2. Find out how much life insurance you have
  3. Find out the Shortfall / Surplus. Shortfall / Surplus = Life insurance cover needed – Life insurance cover already there

If you have a surplus – congratulations, you don’t need to do anything! Just sit back and relax!

But if you have a shortfall – as most people having bought a ULIP would have – you need to buy enough life insurance to overcome this shortfall.

For example, if your insurance need has increased to Rs. 4,00,000. Your insurance cover in Dec 2007 was quite adequate. But now, your insurance cover is only Rs. 3,16,000. Your shortfall in this case is Rs. 4,00,000 – Rs. 3,16,000 = Rs. 84,000.

Therefore, you need to buy life insurance of Rs. 84,000.

As I always say, the best way to buy life insurance is to buy a term insurance cover – it provides the maximum possible cover at the minimum cost (Please read “Term policy is the best policy” for a detailed analysis).

So go ahead and buy more term insurance to cover yourself adequately – after all, it is your family’s future at stake….

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