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Business Environment 1.
M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
CONTENTS
Sr.No. Particulars Page No.
1. Introduction 1.
2. Types Of Insurance 2.
3. LIC 4.
4. ULIP 5.
5. Buying ULIP--- An Important Note 20.
6. Types Of ULIP Plans 21.
7. How It Differ From Mutual Funds 23.
8. Systematic Planning Of ULIP 24.
9. 5 Points To Selecting A ULIP 30.
10. Case Study 34.
11. Is Investment In ULIP A Risky Option 40.
12. Important News 43.
13. Six Points To Note After Selecting A ULIPs 44.
14. Prominent Companies In ULIP 48.
15. Future Of ULIP 49.
16. Bibliography 50.
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Business Environment 2.
M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
Introduction to Insurance
What is insurance ±
The business of insurance is related to the economic value of the assets.
Every asset has a value. The asset would have been created through the
efforts of the owner. Every asset is expected to last for a certain period of
time during which it will perform. After that benefit will not be available.
None of them will last forever. The owner of is aware of this and so he
can manage the affairs and ensure by the end, the substitute is available.
Thus he makes sure value or income is not lost. However the asset may
get lost earlier. An accident or some unfortunate event may destroy it or
make it non-functional. In that case the owner and those deriving benefits
there from, would be deprived from the benefit and the planned
substitute would not have been ready. This is an adverse or an unpleasant
situation. Insurance is a mechanism to reduce such situation.
Brief History of Insurance
The business of insurance started with marine business. Traders used to
gather at Lloyd` s coffee house in London agreed to share their losses to
goods while being carried by ships. The losses used to occur by pirates
who robbed on the high seas or because of spoiling the goods or sinking
the ship. The first insurance policy was introduced in 1583 in England. In
India the, insurance begin in 1870 with life insurance being transacted by
English company, The European and the Albert. The first Indian
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Business Environment 3.
M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
insurance company was Bombay Mutual Assurance Society Ltd., formed
in 1870. This was followed by Oriental Life Assurance Co. in 1874, The
Bharat in 1896 and The Empire of India in 1897.
Later the Hindustan cooperative was formed in Calcutta, the United India
in madras, the Bombay life in Mumbai, the National in Calcutta, the New
India in Mumbai, the Jupiter in Mumbai and Lakshmi in New Delhi. By
the year 1956, when the life insurance was nationalized and the Life
Insurance Corporation was formed.
Types Of InsuranceInsurance Are Of Various Types-
Some of Them Are ±
1- Business Insurance
2- Dental Insurance
3- Deposit Insurance
4- Earthquake Insurance
5- Flood Insurance
6- General Insurance
7- Group Insurance
8- Health Insurance
9- Home Insurance
10- Keyman Insurance
11- Life Insurance
12- Loan Protection Insurance
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Business Environment 4.
M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
13- Marine Insurance
14- Parametric Insurance
15- Perpetual Insurance
16- Pension Term Assurance
17- Pet Insurance
18- Protection And Indemnity Insurance
19- Return Of Premium Life Insurance
20- Reinsurance
21- Safe Funded Health Care
22- Term Life Insurance
23- Terrorism Insurance
24- Title Insurance
25- Trade Credit Insurance
26- Travel Insurance
27- Universal Life Insurance
28- Vehicle Insurance
29- Vision Insurance
30- Wage Insurance
31- Whole Life Insurance
32- Workers Compensation Insurance
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Business Environment 5.
M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
Life insurance
As the business of ULIP is linked to life insurance I would like to brief
about a bit of life insurance. A human being is an income generating
asset. One` s manual labour, professional skills and business acumen are
the assets. This asset can also be lost through early death, or through
sickness or disabilities caused by accidents. Accidents may or may not
happen. Death will happen but the timing is uncertain. If it happens atthe time of one` s retirement, when it could be expected that the income
of the person would normally cease, the person concerned could have
made some other arrangements to meet the continuing needs. But if it
happens much earlier when the alternate arrangements are not in place,
there can be losses to the person and their dependents. Insurance is the
necessary tool to help those dependents.
A person, who may have made arrangements for the needs, after his
retirement would also need insurance. This is because the arrangements
would have been made on the basis of some expectations like, likely to
live for another 15 years, or that children will look after him. If any of
the expectations do not become true, the original arrangement would
become inadequate and there would be difficulties. Living too long can
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Business Environment 6.
M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
be as much a problem as dying too young. Both are the risks, which
need to be safeguarded against.
IRDA (Insurance regulatory and development authority), 1999 is an act
governing life insurance and ULIP.
ULIP
ULIP stands for Unit Linked Insurance Plan. It provides for life
insurance where the policy value at any time varies according to the
value of the underlying assets at the time. ULIP is life insurance solution
that provides for the benefits of protection and flexibility in investment.
The investment is denoted as units and is represented by the value that it
has attained called as Net Asset Value (NAV).
ULIP came into play in the 1960s and is popular in many countries in the
word. The reason that is attributed to the wide spread popularity of ULIP
is because of the transparency and the flexibility which it offers.
As times progressed the plans were also successfully mapped along with
life insurance need to retirement planning. In today¶s times, ULIP
provides solutions for insurance planning, financial needs, financial
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Business Environment 7.
M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
planning for children¶s future and retirement planning. These are
provided by the insurance companies or even banks.
When the stock markets are volatile and unpredictability becomes a
hindrance to encourage further investment, it leaves the customers
perplexed. To top it all if the debt market doesn¶t attract you because of
its low interest rate, investment may seem customary. However, lately
banks have been offering an 8% interest rate per annum for investors. A
reason good enough to invest in Fixed Deposits (FD).What¶s more? The
investments in FDs qualify for tax benefits too under Section 80 C of the
Income Tax Act, 1961, provided the minimum tenure selected is five
years.
If the inclination to invest in stock market still persists but are still
skeptical, try via Unit Linked Insurance Plan (ULIP) route. It provides
cushion to those who are risk averse. ULIPs offer insurance protection
along with the option to invest in the stock market. The best part of
investing in stocks via ULIPs is that you can choose the funds suiting
your risk profile.
If you know that a particular fund is at its high and is performing well,
with the switch over option you can move to that fund. You can do that
when the fund in which you have invested is performing poorly or you
feel the returns are high in some other fund. The funds offered by ULIPs
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Business Environment 8.
M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
give the investors an exposure to both high and low equity investments.
Based on your risk profile, make your pick .
Simple Explanation Of ULIPs ±
Suppose that you buy a ULIP when you are 30 years old. The sum
assured is Rs 5 lakh and the term is 20 years. The premium that you will
pay over a period of 20 years will work out to around Rs 25,000 to Rs
30,000 depending on the company you choose.
In a term policy, your premium will remain fixed throughout the term of
the policy. So that means, if you opt to invest in a mutual fund and buy a
term policy, the amount of investment and cost of insurance will not
change over a period of time. For a similar example as above, if the 30
year old were to take a term insurance policy for Rs 5 lakh, he would endup paying anywhere between Rs 40,000 to Rs 50,000 as insurance
premium.
This vast difference in cost of insurance is mainly because of cost of
distribution and administration as also the margins of the insurer. In a
ULIP, costs and margins are recovered commonly between the
investment portion and the insurance portion. However, if you were to
buy a term policy and a mutual fund, the insurance company will recover
its costs of distribution and administration as well as margins. The
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Business Environment 9.
M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
mutual fund would again recover the same costs from your investment
portion.
Flexibility
A ULIP will give you flexibility of increasing your life cover, while
maintaining the same premium. This is done by simply reducing your
investment allocation. So suppose you have a risk cover of Rs 5 lakh and
would like to increase it to Rs 6 lakh, you can still continue to pay the
same amount of premium. The only difference would be that the amount
deducted towards the risk cover would be more and therefore, the
amount invested would be less.
Says Puneet Nanda of ICICI Pru. Life Insurance, ³The reason whyULIPs have become popular is because they offer huge amount of
flexibility during the course of the policy. You can vary your mix
between protection and savings or within savings, your fund mix.´
If you have a term policy and would like to increase your life cover, your
only option would be to buy another term policy. This would mean
paying administration charges all over again.
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Business Environment 10.
M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
There¶s more to the flexibility. With a ULIP you don¶t have fear that
your policy will lapse if you were unable to pay your premium. The cost
of insurance will be taken out of your existing investment to keep the
policy going. But if you fail to pay premium on your term policy, it will
lapse.
Expenses
If you were to look at the expenses of a ULIP as compared with the
expenses of a mutual fund, there is a difference. In a ULIP charges are
front loaded, which means, most of the charges are recovered within the
first few years. That is why it does not make sense to invest in a ULIP if
you are looking at a short term. Look at a mutual fund if you are looking
at a time horizon of 3-5 years. In the long term, charges of a ULIP even
out and compare well with a mutual fund.
So if you are looking for a long-term investment avenue with an
insurance cover that goes with it, then ULIP is the product for you and if you are looking at a product that helps you focus purely on investment
and returns over a medium term, then go for a mutual fund. Experts say
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Business Environment 11.
M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
the two products are different and ideally you should have both in your
portfolio.
As financial planners, we get queries from our clients on how to go about
managing their finances.We were recently faced with a rather interesting
query related to ULIPs. In this article we discuss the query and our
solution for the same.
Let us look at the information available,
The client¶s age is 38 years and he wants a life insurance cover for
Rs 5,000,000. He has an above-average risk appetite.
He has been recommended a ULIP (unit linked insurance plan) by
his insurance agent with a sum assured of Rs 5,000,000 till he
reaches the age of 84 years. This works out to the client being
insured for a tenure of 46 years (i.e. 84 - 38).
The premium paying term however is only ten years and the actual
premium he will have to pay per annum is approximately Rs
894,000.
The client has also been advised by his agent to consider investing his
premiums in the µAggressive¶ (as has been defined by the insurance
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Business Environment 12.
M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
company in question) option, which allows upto 35% exposure to
equities.
We have always maintained that one¶s interests would be best served if
he keeps his life insurance and investment needs distinct.
Given below is our solution based on the client¶s needs.
The insurance component To begin with, we knew from our interaction
with the client and based on the Human Life Value Calculations that he
is underinsured. An immediate action point for him would be to buy a
term plan. And considering his annual income, he would need to buy a
term plan for more than the sum assured recommended on the ULIP (i.e.
Rs. 5,000,000). Even if we were to consider his sum assured to be Rs
5,000,000 (as per the ULIP) for a term plan, the annual premium hewould have to shell out would be approximately Rs 30,000 per annum
for a 30-Yr period.
The investment component
Having taken care of the client¶s insurance needs, now let¶s shift our
focus to his investments.We took into consideration the client¶s currentfinancial portfolio. He had a sizable portion of his portfolio invested in
fixed income instruments like bonds and fixed deposits. Bearing this in
mind, our view was he did not need to have another debt-heavy (ULIP
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Business Environment 13.
M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
with a 65% debt component) product in his portfolio. Instead what his
portfolio needed was a higher equity component; this would not only
µbalance¶ his portfolio but also ensure that the portfolio reflects his true
risk profile.
It was also relevant that the client invest in equities since he was
considering his investments from a long-term (over 30 years) horizon.
This could be achieved by investing in equity-oriented mutual funds.
Mutual funds can offer several benefits:
Several studies have shown that over the long term, equities give a
higher return vis-à-vis fixed income instruments like bonds and
government securities. And given that the client¶s investment
horizon is of over 30 years, this is an ideal time frame to reap the
rewards of investing in equities. Also, over a 30-Yr period, a 100%
equity mutual fund is better geared to outperform a ULIP portfolio
with a 65% debt component.
ULIP tend to be expensive propositions (vis-a-vis mutual funds)
during the initial years. However, over longer time horizons, the
expenses balance out and ULIPs work out to be cheaper as
compared to mutual funds. However, even if the lower expenses of
a ULIP vis-à-vis that of a mutual fund scheme were to be
considered, the latter would still surface as the better option.
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Business Environment 14.
M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
Several mutual funds also have a track record to boast of.
Personalfn¶s recommended equity-oriented funds have a proven
track record extending over several years and across market cycles.
ULIPs do not have much of a track record to show for; in fact most
ULIPs are yet to experience a bear phase.
Investing in a mutual fund portfolio will offer the benefit of
diversification to the client. The investor will reap the reward of
diversifying across several fund management styles. On the other
hand, by investing all his money in just one ULIP, the client would
be committing his entire corpus to just one style of investment. This
can prove to be quite risky over the long term.
You can make adjustments to your mutual fund portfolio. If you
believe you have made a wrong investment decision, you can
redeem your investment in a particular mutual fund and invest in
another one. Such adjustments are not entirely feasible in a ULIP.
T he T ax Aspect
we also had to contend with Section 80C tax benefits. However, given
the client¶s annual income, the Section 80C tax benefits were being taken
care of by way of Employees¶ Provident Fund (EPF) as well the
recommended term plan. The client therefore can invest in regular
diversified mutual funds and not necessarily in tax saving funds (ELSS).
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Business Environment 15.
M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
As can be seen, term plans combined with mutual funds have the
potential to add considerable value to an investor¶s portfolio. In our view
individuals should first ensure that they are adequately covered by opting
for a term plan. Then they can either opt for ULIPs for the investment
component or as we have shown, they can consider mutual funds.
Unit Linked Insurance Policies (ULIPs) as an investment avenue are
closest to mutual funds in terms of their structure and functioning. As is
the cases with mutual funds, investors in ULIPs are allotted units by the
insurance company and a net asset value (NAV) is declared for the same
on a daily basis.
Similarly ULIP investors have the option of investing across various
schemes similar to the ones found in the mutual funds domain, i.e.
diversified equity funds, balanced funds and debt funds to name a few.
Generally speaking, ULIPs can be termed as mutual fund schemes with
an insurance component.
However it should not be construed that barring the insurance element
there is nothing differentiating mutual funds from ULIPs.
Despite the seemingly comparable structures there are various factorswherein the two differ.
In this article we evaluate the two avenues on certain common
parameters and find out how they measure up.
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Business Environment 16.
M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
1. Mode of investment/ investment amounts
Mutual fund investors have the option of either making lump sum
investments or investing using the systematic investment plan (SIP) route
which entails commitments over longer time horizons. The minimum
investment amounts are laid out by the fund house.
ULIP investors also have the choice of investing in a lump sum (single
premium) or using the conventional route, i.e. making premium
payments on an annual, half-yearly, quarterly or monthly basis. In
ULIPs, determining the premium paid is often the starting point for the
investment activity.
This is in stark contrast to conventional insurance plans where the sum
assured is the starting point and premiums to be paid are determined
thereafter.
ULIP investors also have the flexibility to alter the premium amounts
during the policy's tenure. For example an individual with access to
surplus funds can enhance the contribution thereby ensuring that his
surplus funds are gainfully invested; conversely an individual faced with
a liquidity crunch has the option of paying a lower amount (the
difference being adjusted in the accumulated value of his ULIP). The
freedom to modify premium payments at one's convenience clearly gives
ULIP investors an edge over their mutual fund counterparts.
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Business Environment 17.
M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
2. Expenses
In mutual fund investments, expenses charged for various activities like
fund management, sales and marketing, administration among others are
subject to pre-determined upper limits as prescribed by the Securities and
Exchange Board of India.
For example equity-oriented funds can charge their investors a maximum
of 2.5% per annum on a recurring basis for all their expenses; any
expense above the prescribed limit is borne by the fund house and not the
investors.
Similarly funds also charge their investors entry and exit loads (in most
cases, either is applicable). Entry loads are charged at the timing of
making an investment while the exit load is charged at the time of sale.
Insurance companies have a free hand in levying expenses on their ULIP
products with no upper limits being prescribed by the regulator, i.e. the
Insurance Regulatory and Development Authority. This explains the
complex and at times 'unwieldy' expense structures on ULIP offerings.
The only restraint placed is that insurers are required to notify the
regulator of all the expenses that will be charged on their ULIP offerings.
Expenses can have far-reaching consequences on investors since higher
expenses translate into lower amounts being invested and a smaller
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Business Environment 18.
M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
corpus being accumulated. ULIP-related expenses have been dealt with
in detail in the article "Understanding ULIP expenses".
3. Portfolio Disclosure
Mutual fund houses are required to statutorily declare their portfolios on
a quarterly basis, albeit most fund houses do so on a monthly basis.
Investors get the opportunity to see where their monies are being
invested and how they have been managed by studying the portfolio.
There is lack of consensus on whether ULIPs are required to disclose
their portfolios. During our interactions with leading insurers we came
across divergent views on this issue.
While one school of thought believes that disclosing portfolios on a
quarterly basis is mandatory, the other believes that there is no legalobligation to do so and that insurers are required to disclose their
portfolios only on demand.
Some insurance companies do declare their portfolios on a
monthly/quarterly basis. However the lack of transparency in ULIP
investments could be a cause for concern considering that the amountinvested in insurance policies is essentially meant to provide for
contingencies and for long-term needs like retirement; regular portfolio
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Business Environment 19.
M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
disclosures on the other hand can enable investors to make timely
investment decisions.
4. Flexibility in Altering Asset Solution
As was stated earlier, offerings in both the mutual funds segment and
ULIPs segment are largely comparable. For example plans that invest
their entire corpus in equities (diversified equity funds), a 60:40
allotment in equity and debt instruments (balanced funds) and those
investing only in debt instruments (debt funds) can be found in both
ULIPs and mutual funds.
If a mutual fund investor in a diversified equity fund wishes to shift his
corpus into a debt from the same fund house, he could have to bear an
exit load and/or entry load.
On the other hand most insurance companies permit their ULIP inventors
to shift investments across various plans/asset classes either at a nominal
or no cost (usually, a couple of switches are allowed free of charge every
year and a cost has to be borne for additional switches).
Effectively the ULIP investor is given the option to invest across assetclasses as per his convenience in a cost-effective manner.
This can prove to be very useful for investors, for example in a bull
market when the ULIP investor's equity component has appreciated, he
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Business Environment 20.
M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
can book profits by simply transferring the requisite amount to a debt-
oriented plan.
5. Tax Benefits
ULIP investments qualify for deductions under Section 80C of the
Income Tax Act. This holds well, irrespective of the nature of the plan
chosen by the investor. On the other hand in the mutual funds domain,
only investments in tax-saving funds (also referred to as equity-linked
savings schemes) are eligible for Section 80C benefits.
Maturity proceeds from ULIPs are tax free. In case of equity-oriented
funds (for example diversified equity funds, balanced funds), if the
investments are held for a period over 12 months, the gains are tax free;
conversely investments sold within a 12-month period attract short-term
capital gains tax @ 10%.
Similarly, debt-oriented funds attract a long-term capital gains tax @
10%, while a short-term capital gain is taxed at the investor's marginal
tax rate.
Despite the seemingly similar structures evidently both mutual funds and
ULIPs have their unique set of advantages to offer. As always, it is vital
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Business Environment 21.
M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
for investors to be aware of the nuances in both offerings and make
informed decisions.
Buying ULIPs? ± An important note-
Unit linked insurance plans have caught the fancy of individuals over the
past few years. In fact, most individuals opting for life insurance now go
in for ULIPs as opposed to term plans or endowment plans. Therefore, it
becomes important for individuals to understand what to look for in a
ULIP before finalising one. I outline 5 parameters that ULIPs need to be
evaluated upon before individuals zero-in on a unit-linked product.
ULIPs differ significantly from traditional endowment plans in the way
they invest their monies. ULIPs have an investment mandate, which
allows them to 'shift' assets freely between equities and debt. This isunlike saving-based plans like endowment plans, which invest pre-
dominantly in specified debt instruments like bonds and government
securities. The amount of money invested in equity has the potential to
make a significant difference to the returns that the plan can generate
over the long run.
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Business Environment 22.
M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
Types of ULIP Plans ± (Features)
ULIP is a contractual savings-cum-insurance plan that offers the following features:
y High returns
y Maturity bonus
y Life insurance cover
y Safety of capital
y
Life protection
y Investment and Savings
y Flexibility
y Adjustable Life Cover
y Investment Options
y Transparency
y Options to take additional cover against
y Death due to accident
y Disability
y Critical Illness
y Surgeries
y Liquidity
y Tax planning
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Business Environment 23.
M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
Who can invest in ULIPs?
It is open to any resident of India who is above 18 years of age.
Individuals less than 55 years and 6 months of age can join the plan for
10 years and those less than 50 years and 6 months for 15 years
contributing 1/10th and 1/15th of the target amount every year,
respectively.
ULIPs: How it differs from mutual funds
Even as ULIPs are selling like hot cakes, one common doubt in most
people¶s mind is why they cannot buy a mutual fund and top it up with a
term insurance policy instead of buying a ULIP? There are a number of
matters to consider here ± the cost of life insurance, the reason for
investment, the investment horizon and so on. Similarly ULIP investors
have the option of investing across various schemes similar to the ones
found in the mutual funds domain, i.e. diversified equity funds, balanced
funds and debt funds to name a few. Generally speaking, ULIPs can be
termed as mutual fund schemes with an insurance component.
However it should not be construed that barring the insurance element
there is nothing differentiating mutual funds from ULIPs.
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Business Environment 24.
M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
But still here are some basic differences ±
ULIPs Mutual funds
Investment amounts- Determined by the
investor and can be
modified as well.
Minimum investment
amounts are
determined by the
fund house.
Expenses
No upper limits,
expenses determined
by the insurance
company
Upper limits for
expenses chargeable
to investors have been
set by the regulator
Portfolio disclosure Not mandatory*
Quarterly disclosures
are mandatory
Modifying asset
allocation
Generally permitted
for free or at a
nominal cost
Entry/exit loads have
to be borne by the
investor
Tax benefits
Section 80C benefits
are available on all
ULIP investments
Section 80C benefits
are available only on
investments in tax-
saving funds
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Business Environment 25.
M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
* There is lack of consensus on whether ULIPs are required to disclose
their portfolios.While some insurers claim that disclosing portfolios on a
quarterly basis is mandatory, others state that there is no legal obligation
to do so.
How ULIPs can make you rich!(systematic
planning of ULIPs)- by Personal finance.
Ever since unit-linked insurance plans (ULIPs) made their debut, they
have become a subject of much discussion and debate. On the one hand,
they were a trifle too complicated for individuals not yet exposed to the
stock markets; on the other hand, they were much-maligned because of
the 'unusually high' costs.
As ULIPs made their presence felt, insurers were more open to
discussing the costs and how they evened out over the long term. This
and the flexibility that ULIPs offer became important points that made
individuals consider adding them to their portfolios.
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M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
Today, more individuals are open to using the ULIP-way to create wealth
over the long term. Here we outline exactly how ULIPs can help you
fulfill that responsibility.
If you are between 25 and 35 years of age
You are young, probably married and even have kids. If you are the sole
breadwinner in the family, then you have quite a few responsibilities to
fulfill right from planning for your child's education/marriage to planning
for your own retirement to providing for the family in your absence.
The last responsibility is the most critical and ironically it is the easiest
and cheapest one of the lot to fulfill. At Personal fn, we have always
been votaries of term insurance -- the cheapest way to get a life cover for
you.
Term insurance is also insurance in its 'purest' form, in other words there
is no savings element in it, which ensures your premiums are very low.
There is no better product to provide for your family in case of an
eventuality and all individuals must consider taking a term plan.
Term insurance of course takes a huge burden off your chest as also your
wallet. But it still leaves you with a problem. If term insurance is only
going to take care of the 'risk' element, who is going to take care of the
'savings' part.
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M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
This is where ULIPs come in. Of course, that is not to say that ULIPs do
not have an insurance element, they do, but it is limited largely to the
earlier years and after a point they don the mantle of an investment
product.
So how can ULIPs help you save for child's education/marriage,
planning for retirement and other investment-related objectives? ULIPs
can do all this and more because they come with a lot of variety.
Consider this; except for term insurance (because it does not make
sense), just about every life insurance product has a ULIP option. So you
have endowment ULIP, child plan ULIPs and pension ULIPs. As a
matter of fact, there are some life insurance companies that only have
ULIP products; they don't have traditional endowment, pension and child
plans at all!
What that tells you is that if you are willing to take on some risk, a ULIP
can help you meet a lot of your financial objectives.
If you are looking to set aside some money for your child's education, the
5%-6% return on an endowment plan may not even take care of inflation,
let alone provide for a medical or MBA degree. The return you earn on achild plan should not just counter inflation, it should be enough to cover
the cost of education.
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M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
Again, a long-term investment objective like retirement planning could
do with an equity 'push'. Here is where a ULIP pension plan can add
value to your retirement portfolio. Likewise a ULIP endowment plan can
help you meet investment objectives like buying property or setting up a
business for instance.
If you are between 35 and 45 years of age
By the time you reach the 35-45 age bracket, some of your existing
ULIPs are probably nearing maturity. For instance, if you had taken a
ULIP child plan earlier on, it is likely to mature in this age bracket to
coincide with the need (higher education/marriage) you had in mind at
the time of taking the ULIP.
However, if you married late or did not begin planning your finances at
an early stage in your life, now is the time. If you haven't insured
yourself as yet, go for a term insurance plan.
The advantage of taking a term plan at a slightly advanced age is that you
have a better idea of how your lifestyle is likely to pan out goingforward. In terms of costs, term plans remain your cheapest option no
matter when you take one.
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M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
You can opt for some of the ULIPs we mentioned for individuals in the
25-35 years age bracket depending on your needs. Remember, unlike
endowment, which gets really expensive at an advanced age, ULIPs
because of the way they are structured, do not turn out that expensive.
If you are over 45 years of age
In this age bracket, it is likely that you are insured. However, you still
need to review your insurance cover taking into consideration the
changes in your lifestyle, income, needs and financial commitments.
Beef up your insurance cover through a term plan.
By this time, your ULIP pension plan will have matured. You can then
opt for an annuity, immediate or deferred, depending on your
requirements.
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M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
5 very important steps to selecting the right ULIP
How to select the right ULIP
For a product capable of adding significant value to investors' portfolios,
ULIPs have far too many critics. After having interacted with a number
of investors who were very disillusioned with their ULIPs investments;
often the disappointment stemmed from poor and inappropriate selection.
I present a 5-step investment strategy that will guide investors in the
selection process and enable them to choose the right ULIP.
1. Understand the Concept of ULIPs Do as much homework as possible before investing in an ULIP. Thisway you will be fully aware of what you are getting into and make an
informed decision.
More importantly, it will ensure that you are not faced with any
unpleasant surprises at a later stage. Our experience suggests that
investors on most occasions fail to realise what they are getting into andunscrupulous agents should get a lot of 'credit' for the same.
Gather information on ULIPs, the various options available and
understand their working. Read ULIP-related information available on
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financialWeb sites, newspapers and sales literature circulated by
insurance companies.
2. Focus on Your Need and Risk Profile Identify a plan that is best suited for you (in terms of allocation of money
between equity and debt instruments). Your risk appetite should be the
deciding criterion in choosing the plan.
As a result if you have a high risk appetite, then an aggressive investment
option with a higher equity component is likely to be more suited.
Similarly your existing investment portfolio and the equity-debt
allocation therein also need to be given due importance before selecting a
plan.
Opting for a plan that is lop-sided in favour of equities, only with the
objective of clocking attractive returns can and does spell disaster in
most cases.
3. Compare ULIP Products from Various Insurance Companies Compare products offered by various insurance companies on parameters
like expenses, premium payments and performance among others. For example, information on premium payments will help you get a better
picture of the minimum outlay since ULIPs work on premium payments
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as opposed to sum assured in the case of conventional insurance
products.
Compare the ULIPs' performance i.e. find out how the debt, equity and
balanced schemes are performing; also study the portfolios of various
plans. Expenses are a significant factor in ULIPs; hence an assessment
on this parameter is warranted as well.
Enquire about the top-up facility offered by ULIPs i.e. additional lump
sum investments which can be made to enhance the policy's savings
portion. This option enables policyholders to increase the premium
amounts, thereby providing presenting an opportunity to gainfully invest
any surplus funds available.
Find out about the number of times you can make free switches (i.e.
change the asset allocation of your ULIP account) from one investment plan to another. Some insurance companies offer multiple free switches
every year while others do so only after the completion of a stipulated
period.
4. G o for an Experienced Insurance Advisor
Select an advisor who is not only conversant with the functioning of debt
and equity markets, but also independent and unbiased. Ask for
references of clients he has serviced earlier and cross-check his service
standards.
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When your agent recommends a ULIP from a given company, put forth
some product-related questions to test him and also ask him why the
products from other insurers should not be considered.
Insurance advice at all times must be unbiased and independent; also
your agent must be willing to inform you about the pros and cons of
buying a particular plan. His job should not be restricted to doing paper
work like filling forms and delivering receipts; instead he should keep
track of your plan and offer you advice on a regular basis.
5. Does Your ULIP Offer A M inimum G uarantee? In a market-linked product, protecting the investment's downside can be
a huge advantage. Find out if the ULIP you are considering offers a
minimum guarantee and what costs have to be borne for the same.
This step is very important as investors mainly go for minimum
guarantee plans of any ULIPs.
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M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
A very famous case study on mis-selling of ULIPs.
Cases of ULIPs being mis-sold never cease to amaze us. One such caseinvolved a 55-Yr old client who was sold a Rs 500,000 pa premium
ULIP by a private sector bank.
Even though we have seen several cases of ULIPs (unit-linked insurance
plans) being sold to the most improbable of investors, this case had us
completely taken aback. One look at the facts of the case and we are surethat even our visitors will be left with a similar feeling.
Facts of the case:
1. The client is 55 years old
2. She does not have a regular source of income, so investing for a
regular income was her top priority
3. Her only investments are in fixed deposits (FDs)
4. She will inherit a huge sum of money at the age of 60 years
5. She is not very literate in matters of investment and finance
6. She is not very liquid (i.e. has less cash)
It is apparent from the client's age and investment profile that a Rs
500,000 ULIP, which was invested completely in equities, was the last
thing she needed. In fact, there was no reason to recommend anything
even remotely risky.While ULIPs could be suitable to individuals based
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on their risk profile and investment objectives (your financial planner is
best placed to assess the suitability of a ULIP), in our client's case there
was little scope for a ULIP to add any significant value to her portfolio.
Add to this the fact, that being relatively illiquid; she could not afford to
pay the premiums for the following years.
Experts review
Let us examine why ULIPs were unsuitable for her.
1. To begin with, she was not explained what ULIPs are all about; this is
not surprising since a lot of clients we know have bought ULIPs without
appreciating how they can contribute to their investment/insurance
objectives. Given that she was not very well versed even with the basics
of investment and insurance, we believe selling her a Rs 500,000 ULIP
amounted to professional misconduct of the highest order and coming
from a reputed bank, this is even more alarming.
2. Now selling a ULIP to someone who does not need it is one thing, and
selling her a Rs 500,000 ULIP is another thing that ranks as even more
atrocious.We fail to understand how a Rs 500,000 ULIP could be of any
assistance to a 55-Yr old lady, who has no source of income and who is
just looking to remain invested in a low risk avenue that provides a
regular income until she turns 60 years when her father's sizeable
inheritance will come her way.
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serve her well over 5-Yr tenure. And since she was not in a position to
pay the premium even in the second year, effectively she lost out on her
capital as well. Not to mention that there was no monthly income being
generated by the product!
Bank washes hands off the mis-selling
When Personal finance met the client and learnt about the mis-selling of
the ULIP, we urged her to take this up strongly with the bank, which sold
her the ULIP. To her dismay, the bank shirked responsibility over the
mis-selling and professed helplessness in view of the fact that the agent
(who mis-sold the ULIP) had been transferred to another city! To those
who agree with the bank's excuse, we would like to state that any selling
(or mis-selling) that happens on the bank's premise is the bank's business
whether that person is the bank's employee or a third-party employee or
whether he is still with the bank or has been transferred or has quit the bank altogether. If the bank disagrees with what we have said, then they
should put up a notice to that effect in the branch.
How we would have done it differently?
As financial planners, a big advantage with this particular case was the
clear-cut time frame (i.e. 5 years) that the client had in mind. She justwished to be invested in an avenue for 5 years that would generate
regular income; after 5 years she would inherit her father's money. Also
it was abundantly clear to us from our interaction with the client that she
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had a lower risk appetite. In view of these two points, we would have
recommended that:
1. The client invested in an FMP (fixed maturity plan) over shorter
tenures and roll over at the end of the tenure. To provide for a source of
income she could opt for the dividend option. Being market-linked FMPs
provide an opportunity to generate higher returns (than FDs) depending
on how debt markets are placed at a point in time.
2. A structured mutual fund product would have been suitable for the
client. These mutual funds are predominantly invested in debt to provide
capital preservation; the smaller equity component (usually 15-20 per
cent of assets) provides for capital appreciation. These funds, although
not capital-guaranteed investments, offer low-risk investors the
opportunity to clock higher returns than debt funds at marginally higher
risk. Again, she could opt for the dividend option.
3. The Post Office Monthly Income Scheme is an option for investors
looking for regular income. Among all fixed income investment options,
POMIS is one of rare avenues that assures a monthly income.We would
have recommended that the client make the most of this opportunity to
earn an assured monthly income.
4. She could enhance her investments in FDs. Many companies (like
HDFC for instance, have a monthly income option on their FDs. The
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client could invest in FDs of such companies to avail of the monthly
income option.
In our view, investing in ULIPs was a pointless exercise that should
never have been recommended to the client. It neither fulfilled her
investment objective nor coincided with her investment tenure. As we
have shown, both these critical parameters could have been fulfilled
better by low-risk FMPs, debt funds & FDs.
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M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
Is investment in ULIPs a risky option?
Has the recent performance of the stock market left you with a regretful
feeling for not being a part of the soaring market? Do you have a flavour
for the market but also want some wise investment at the same time? If
yes, then Unit Linked Insurance Plans (ULIP) is the answer.
ULIPs also known as investment plans is a perfect package that comes
with insurance coverage and investment options. So that leaves you with
the opportunity of investing in equities. But you do need to keep in mind
that the investments in stocks are subject to the vagaries of the market.
The volatility in equity markets can keep you uneasy and disturbed since
you wouldn¶t like to see your reserve being affected. You need to know
your risk appetite and then make a choice accordingly by choosing an
appropriate fund. ULIPs offer you the option to invest in anyone of thefour funds. If you are not inclined to take a lot of risk then you can
certainly invest in secured or balanced fund.
However the best part of having an investment plan is that you can
switch from one fund to another, which you find less risky. For example
if Mr. Patil has invested in growth fund and has found that theinvestment in this particular fund is going to fall then he does have the
choice of switching over to another fund which he finds safer, it could be
a growth, balanced or any other fund. For example if you choose LIC¶s
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M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
µJeevan Plus', the policyholder has to choose any one from the four
funds, which are Bond, Secured, Balanced and Growth funds.Within a
given policy year, four switches are allowed free of charge. After the
completion of one year, Rs.100 is charged for per switching of the fund.
Two factors considered responsible for the advent of ULIPs are firstly-
the entry of private insurance companies in the insurance sector and the
second factor being the decline of assured returns on endowment plans.
Private players proved their innovation with the introduction of ULIPs.
The performance of these plans has also been quite impressive with the
recent figures revealing that the private insurers have acquired a business
of Rs 4,768 crore whereas LIC managed to obtain Rs 2,758.6 crore.
The performance of stock market especially in the last few months has
made ULIPS all the more popular. It is the only option that lets you to bea part of the stock market and at the same time offers insurance cover. It
is like the best of two things clubbed into one. And honestly things
couldn¶t get any better when we bring its other features into the
limelight.
An innovative aspect of ULIPs is the 'top-up' facility. A top-up is a one-time additional investment that is paid apart from the annual premium of
the policy. This feature works well when you have a surplus that you are
looking to invest in a market-linked avenue. ULIPs also have the facility
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M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
that allows you to skip premiums if you have paid your premiums
regularly for the first three years. For instance, if you have paid your
premiums dutifully for the first three years then you have missed out the
payment of fourth year's premium then the insurance company will make
the necessary adjustments from your investment surplus and will make
sure that the policy remains active. But it is always advisable to pay the
premiums regularly to avoid troubles. Such facilities are not available
with any other policy. This makes it a differentiating factor when
compared to policies like endowment, term or money back policies.
Another important feature is that ULIPs disclose their portfolios
regularly. This gives you an idea of how the money is being managed.
Another important aspect is its µliquidity¶ factor. Since ULIP investments
are NAV-based it is possible to withdraw a portion of your investments
before maturity. It is possible only after the completion of the lock-in period. Such facility is not available with in a traditional endowment
policy.With ULIPs one can also avail the tax benefits which is offered
under Section 80C. This is subject to a maximum limit of Rs 1, 00,000.
Investment plans are particularly for those looking for security with an
inclination for the share market. To make it easier to choose, LIC offersµFuture Plus¶ and µJeevan Plus¶ which are unit linked plans.
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M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
To sum it up in all we can say that investment in a ULIP is not that
risky as insurance part is covered and the risk is just that of a stock
market.
Important news in print media regarding ULIPs
1. IRDA Keen to Ensure ULIPs Transparency.
In the last two/three years the unit linked products have become very
popular among customers and the share of this product in the total
portfolio of the life insurance companies has increased significantly. The
IRDA is keen to ensure that all unit linked products are transparent and
that customers from every walk of life can compare features and charges
across products and across companies. The ULIP guidelines issued over
the last two years are the steps initiated by the Authority towards
achieving this. As a continuation of the process, we have decided that
actuarial funded products be phased out so that products across
companies could be compared and understood easily by the customers.
Technically there is nothing wrong with the actuarial funded products
and they are not detrimental to the interests of the policyholders. Further
they have been approved by the IRDA.
Companies having actuarial funded products have been asked to
withdraw them over a period of time. They can continue to sell the
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M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
products till then and customers, both existing and new, can continue to
enjoy the benefits of these products and have no reason to feel
concerned.
To reiterate, our objective is to remove complexity in all unit linked
products and ensure comparison across ULIP¶s of all companies. The
existing/new customers who have purchased these products need not
worry under any circumstances as policyholder interests will be protected
by the insurers and the Authority.
2. Six Points to Note, After Selecting To Investing
In A ULIP-
Since ULIPs offer a lot of flexibility, you need to keep some points in
mind to optimize the benefits associated with them.
y Notice we have recommended ULIP child plans/pension plans and
even term insurance for most individuals.When you opt for these
plans it is important you do this after taking your insurance
consultant into confidence. He is the one who is going to help you
with the numbers, so you need to tell him exactly what you are
looking for in an insurance plan.
y Remember there is an insurance cover associated with ULIPs.
Since it is also likely that you have other insurance plans like term
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and/or endowment, it is important you have a clear idea of exactly
how much your insurance cover is worth after considering all your
insurance plans. This number will prove helpful when you review
your insurance cover at regular intervals.
y Likewise, ULIPs also have an investment element. You are likely
to have investments in mutual funds, stocks, bonds and fixed
deposits as well. You need to add up the market value of all these
investments while calculating your investment worth. This number
will prove useful when you wish to beef up your investments in a particular asset.
y ULIPs derive their 'power to perform' from equities.When you
have a lot of aggressive ULIPs in your portfolio it means that you
are overweight on equities. Add to this your investments in stocks
and equity funds, and your exposure to equities increases even
further. To temper your equity exposure, it is generally advisable to
opt for conservative/balanced ULIPs (maximum 50% equity
exposure).
y Even if you are a high-risk investor, you must gradually shift your
assets to a conservative ULIP option as your age advances.
Financial prudence dictates that risk reduces as age increases; thisneeds to reflect in all your investments including ULIPs.
y Like with all investments, it is prudent to diversify your ULIP
investments. This is necessary due to several reasons with financial
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M ihir Asher / M BA / Semester II ³ Unit Link Insurance Plan (ULIP)´
prudence being the most important reason. Varying flexibility
levels in ULIPs across insurance companies is another factor that
should make you opt for a ULIP from more than one insurance
company. Varying level of expenses in ULIPs is another reason to
opt for ULIPs across insurance companies to keep expenses on the
lower side.
3. IRDA keen to ensure ULIPs transparency.
In the last two/three years the unit linked products have become very popular among customers and the share of this product in the total
portfolio of the life insurance companies has increased significantly. The
IRDA is keen to ensure that all unit linked products are transparent and
that customers from every walk of life can compare features and charges
across products and across companies. The ULIP guidelines issued over
the last two years are the steps initiated by the Authority towards
achieving this. As a continuation of the process, we have decided that
actuarial funded products be phased out so that products across
companies could be compared and understood easily by the customers.
Technically there is nothing wrong with the actuarial funded products
and they are not detrimental to the interests of the policyholders. Further
they have been approved by the IRDA.
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Companies having actuarial funded products have been asked to
withdraw them over a period of time. They can continue to sell the
products till then and customers, both existing and new, can continue to
enjoy the benefits of these products and have no reason to feel
concerned.
To reiterate, our objective is to remove complexity in all unit linked
products and ensure comparison across ULIP¶s of all companies. The
existing/new customers who have purchased these products need notworry under any circumstances as policyholder interests will be protected
by the insurers and the Authority.
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Prominent companies in the ULIP-
1- Reliance life insurance
2- SBI life insurance
3- Aviva life
4- Bharti AXA life
5- Birla sun Life
6- HDFC Standard life
7- ICICI Prudential life
8- ING VYASA
9- Kotak mahindra (old)
10- LIC life
11- Met life
12- Sahara life
13- Shriram life
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Future of ULIP- The future of ULIP is pretty bright as we
can see the companies in the ULIP and mainly insurance sector is
increasing day by day. I have some information to add to this. When I had attended a seminar on µAccounting standards¶ at
IMC,(Indian merchants chamber) there the speaker , Mr. S. Clement had
told us that according to the data collected by the CMIE ( Centre for
Monitoring Indian Economy), the Insurance sector is the most capital
generating sector in the recent years, in the services sector even ahead of
banking.
As per the data published in the economic times January 3 ,2008 issue
by the Invest India Incomes and Savings Survey 2007, the demand
forecasts for life insurance products is given. In that, the distribution of
people who are planning to buy products of life insurance is given. There
the state of Bihar tops the list, where around 16, 00,000 buyers are
expected to buy life insurance products. This is followed by Andhra
Pradesh, Maharashtra, and Gujarat.
It is also to be noticed here that IRDA has planned to enhance the
penetration of insurance in rural areas. In this endeavor it has planned to
allow grocery shops to sell the insurance products in their shops like they
sell recharge coupons for mobiles
So hereby, we can say that life insurance is developing so fast that it is
now reaching rural India where 90% of population has no insurance
protection against losses.
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Bibliography
Worldwide Web Sites
y www.moneycontrol.com
y www.irda.org
y www.personalfn.com
Newspapers
y Economic Times
y Times Of India
Thank you,