ULIP Prospects Challenges_Group 5_Section C
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Transcript of ULIP Prospects Challenges_Group 5_Section C
8/3/2019 ULIP Prospects Challenges_Group 5_Section C
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Presented By
Group – 5, Section C
Ambica Prasad PGP/14/192
Amit Sansi PGP/14/193
Gopi Krishna PGP/14/196
Deepak Prasad PGP/14/210
8/3/2019 ULIP Prospects Challenges_Group 5_Section C
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Investopedia definition :• Insurance is a form of risk management in which one entity transfers the
cost of potential loss to another entity in exchange for monetarycompensation
Designed to protect the financial well-being of the individual
Important Terms in an insurance
• Insurer
• Insured
• Premium
Basically an excellent risk-management and wealth preservation tool
Required by Law in some cases
Insurance involves pooling funds from many insured entities to pay for thelosses that some may incur
Contingency contract
What is Insurance
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Auto
Life
Health
Home
Disability
Business
Types of Insurance
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Insurance provides security and safety
Gives you a peace of mind
Protects against mortgage payments
Eliminates dependency
Encourages saving
Means of investment
Why is Insurance needed
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What are ULIPs?• Abbreviation for Unit Linked Insurance Policy
Provides combination of Risk cover and Investment
Investment risks may also be borne by policy holder
Life insurance monies and investments are exposed to risks
More expensive than maintaining insurance and Mutual Funds separately
Understanding ULIPs
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Type I - a life insurance policy linked to an investment account
Type II - links life insurance to investments
Pension - links two types of benefits: life insurance and retirement income
Types of ULIPs
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National agency based out Hyderabad
Established to protect interests of insurance holders
Also to regulate the insurance industry and to ensure order and speedygrowth
IRDA vs. SEBI spat• Who controls ULIPs
IRDA
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Premium Allocation Charge
• It can be defined as the percentage of premium appropriated towards charges before
allocating the unit under the policy. It includes initial/renewal and commission expenses
Fund Management Charge (FMC)
• This charge is deducted before arriving to Net Asset Value. It is levied for the management of
funds
Mortality Charges
• Mortality charges provide cost of insurance coverage. Basically it is the cost of insurance cover
Policy/Administration charges
• This is the fees levied for administration of the plan. It is basically used to cover expenses
other than FMC and Premium Allocation charges
Service Tax Deductions
• Before allotment of the units the applicable service tax is deducted from the risk portion of
the premium
Charges on ULIPS
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Surrender Charges
• Surrender charges may be deducted on premature partial or full encashment of units as per
the policy
Switching Charge
• Within a product if you switch from one fund to another then switching charges are levied
Rider premium charge • This is the premium exclusive of expense loadings levied separately to cover the cost of rider
cover levied either by cancellation of units or by debiting the premium but not both
Partial withdrawal charge
• This is a charge levied on the unit fund at the time of part withdrawal of the fund during the
contract period
Miscellaneous charge
• This is a charge levied for any alterations within the contract, such as, increase in sum assured,
premium redirection, change in policy term etc
Charges on ULIPS
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Mutual fund is a mechanism for pooling the resources byissuing units to the investors and investing funds in securities inaccordance with objectives as disclosed in offer document
Investments in securities are spread across a wide cross-
section of industries and sectors and thus the risk is reducedThe profits or losses are shared by the investors in proportionto their investments
A mutual fund is required to be registered with Securities and
Exchange Board of India (SEBI) which regulates securitiesmarkets before it can collect funds from the public
A Mutual Fund
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Expense Ratio
• This basket of charges comprises the fund management fee, agentcommission, registrar fees and the selling and promotion expenses
• Front End Load
• It is associated with class “A” shares of Mutual funds. This fee is
paid when the shares are purchased. It typically goes to the brokerthat sells the fund’s shares. It is also known as “sales charge”
• No Load Fund
• It is associated with class “C” shares. In this the fund does not
charge any type of sales load• Back End Load
• It is associated with class “B” Mutual fund shares. This fee is paidwhen the shares are sold. It also goes to the broker that sells thefund’s shares
Charges in Mutual Funds
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Purchase fee: • This fee is levied on the shareholders by some funds at the time of
purchase of shares. Difference between purchase fee and front endload is that this charge goes to the fund and not to the broker.
Redemption fee: • This fee is levied on the shareholders by some funds at the time
shares are sold. Difference between redemption fee and front endload is that this charge goes to the fund and not to the broker
Exchange fee: • This fee is levied on the shareholders by some funds at the time of
transfer of fund within the same fund family.
Transaction fees
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Mutual Funds vs. ULIPULIPs Mutual Funds
Investment amountDetermined by the investorand can be modified as well
Minimum investmentamounts are determined by
the fund house
Expenses No upper limits, expensesdetermined by the insurance
company
Upper limits for expenseschargeable to investors have
been set by the regulator
Modifying asset allocationGenerally permitted for free
or at a nominal costEntry/exit loads have to be
borne by the investor
Tax benefits Section 80C benefits areavailable on all ULIPinvestments
Section 80C benefits areavailable only on investmentsin tax-saving funds
Portfolio disclosure Not mandatory Quarterly disclosures aremandatory
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Advantagesof ULIP
ULIP's provide insurance cover
All ULIP's come under section 80C and can saveinvestors tax
Additional benefits like Critical illness cover,Accidental benefits can be purchased too
Premature redemption is allowed in ULIP's. It is
not allowed in MF's
Provides flexibility in investment. An investor canchoose an appropriate policy as per his risk taking
appetite. One can also shift between fundoptions
Equity and debt allocation details
Age band Equity component Debt component
0 - 25 85% 15%
26 - 35 75% 25%
36 - 45 65% 35%
46 - 55 55% 45%
56 - 65 45% 55%
66 - 75 35% 65%
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Disadvantagesof ULIP
ULIP's come with a huge entry load. MF's do nothave any entry load
ULIP's maturity period is generally 5-20 years.Hence not suitable for short term investment
ULIP's have a compulsion of investment. They willat least make you pay the first 3 premiums
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Categories of ULIPGeneral Description Nature of investments Risk Category
Equity funds Primarily invested incompany stocks withgeneral aim of capital
appreciation
Medium to high
Bond funds/ Fixed incomebond
Invested in corporate bonds,government securities and
other fixed income securities
Medium
Cash funds Also known as money
market fund – Invested incash, bank deposits andmoney market instruments
Low
Balanced funds Combining equityinvestments with fixed
income instruments
Medium
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Performance of ULIPs
0.00
5.00
10.00
15.00
20.00
25.00
0
20
40
60
80
100
120
140
160
180
80-100%
Equity
Diversified
Plans
60-100%
Equity
Diversified
Plans
10-100%
Equity
Diversified
Plans
Index
Plans
Hybrid
Equity
Oriented
Plans
Hybrid
Debt
Oriented
Plans
Guaranteed
Plans
Debt
Plans
Gilt Plans Liquid
Plans
ULIPs and performance
No. of Plans Return Since Inception(in CAGR)
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-10.00
-5.00
0.00
5.00
10.00
15.00
20.00
25.00
1 Year 2 Year CAGR 3 Year CAGR 5 Year CAGR Since Inception CAGR
Returns over range of periods
80-100% Equity Diversified Plans 60-100% Equity Diversified Plans 10-100% Equity Diversified Plans
Index Plans Hybrid Equity Oriented Plans Hybrid Debt Oriented Plans
Guaranteed Plans Debt Plans Gilt Plans
Liquid Plans
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-10.00
-5.00
0.00
5.00
10.00
15.00
20.00
25.00
1 Year 2 Year CAGR 3 Year CAGR 5 Year CAGR Since Inception CAGR
S&P CNX Nifty 80-100% Equity Diversified Plans Index Plans Debt Plans Liquid Plans
Compared to Benchmark
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ULIPs
Industry and potential purchasers love them
Most of the people who have them tend to hate
them
or
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Accusations of mis-selling and hard-selling
Most investors admit that they don't understand how it works
It is extremely difficult to compare different Ulip products
• Have to look at not only return but also cost which varies depending upon age,
company etc.
• Companies overstate their yields
Distributors are the biggest profit makers in stead of investors
Early exit options
Creeping costs
Challenges
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ULIP – A matter of contention between SEBI and IRDA
Finally IRDA won the battle and now ULIP is mostly an insurance product
Tightening of norms for ULIP
Recent Developments
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•
Increase in lock in period from 3 years to 5 years• A step towards making ULIP a long term insurance product
rather than a short term product
All ULIPs, except pension, are annuity products and have to
have either a mortality cover or a health coverAll ULIP pension or annuity products will offer a minimumguaranteed return of 4.5 % annually or as specified by theIRDA from time-to-time
• protect the life time savings of pensioners from any adversemarket fluctuations at the time of maturity
New rules
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Capping been rationalized to ensure that the difference inyield is capped from the fifth year onwards
• Frontloading of charges will reduce
• Reduces the overall charges
• Smoothens the charge structure for the policyholder
Top up on insurance premiums will be treated as a singlepremium
•
means that every top up that one makes will have to havean additional insurance cover backing it as well
No partial withdrawals allowed for pension and annuityproducts
New Rules
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Need to bring distributors under control through regulation
Consumers need to be more aware
Making this product standardized
Stringent rules for selection of agents who mis-sell these products
Agents from third party who can advise which is the best for the investore.g. Certified Financial Planner (CFP)
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