4 reasons why ULIPs make sense

April 05, 2005 16:01 IST

Ask any individual who has purchased a life insurance policy in the past year or so and chances
are high that the policy will be a unit linked insurance plan.

ULIPs have been selling like proverbial 'hot cakes' in the recent past and they are likely to
continue to outsell their plain vanilla counterparts going ahead. So what is it that makes ULIPs
so attractive to the individual? Here, we have explored some reasons, which have made ULIPs so
irresistible.

Insurance cover plus savings

To begin with, ULIPs serve the purpose of providing life insurance combined with savings at
market-linked returns. To that extent, ULIPs can be termed as a two-in-one plan in terms of
giving an individual the twin benefits of life insurance plus savings. This is unlike comparable
instruments like a mutual fund for instance, which does not offer a life cover.

Multiple investment options

ULIPs offer a lot more variety than traditional life insurance plans. So there are multiple options
at the individual's disposal. ULIPs generally come in three broad variants:

 Aggressive ULIPs (which can typically invest 80%-100% in equities, balance in debt)
 Balanced ULIPs (can typically invest around 40%-60% in equities)
 Conservative ULIPs (can typically invest upto 20% in equities)

Although this is how the ULIP options are generally designed, the exact debt/equity allocations
may vary across insurance companies. Individuals can opt for a variant based on their risk
profile. For example, a 30-yr old individual looking at buying a life insurance plan that also helps
him build a corpus for retirement can consider investing in the Balanced or even the Aggressive
ULIP. Likewise, a risk-averse individual who is not comfortable with a high equity allocation
can opt for the Conservative ULIP.

Flexibility
Individuals may well ask how ULIPs are any different from mutual funds. After all, mutual
funds also offer hybrid/balanced schemes that allow an individual to select a plan according to
his risk profile. The difference lies in the flexibility that ULIPs afford the individual.

Individuals can switch between the ULIP variants outlined above to capitalize on investment
opportunities across the equity and debt markets. Some insurance companies allow a certain
number of 'free' switches. This is an important feature that allows the informed
individual/investor to benefit from the vagaries of stock/debt markets. For instance, when stock
markets were on the brink of 7,000 points (Sensex), the informed investor could have shifted his
assets from an Aggressive ULIP to a low-risk Conservative ULIP.
Switching also helps individuals on another front. They can shift from an Aggressive to a
Balanced or a Conservative ULIP as they approach retirement. This is a reflection of the change
in their risk appetite as they grow older.

Works like an SIP

Rupee cost-averaging is another important benefit associated with ULIPs. Individuals have
probably already heard of the Systematic Investment Plan (SIP) which is increasingly being
advocated by the mutual fund industry. With an SIP, individuals invest their monies regularly
over time intervals of a month/quarter and don't have to worry about 'timing' the stock markets.

These are not benefits peculiar to mutual funds. Not many realise that ULIPs also tend to do the
same, albeit on a quarterly/half-yearly basis. As a matter of fact, even the annual premium in a
ULIP works on the rupee cost-averaging principle. An added benefit with ULIPs is that
individuals can also invest a one-time amount in the ULIP either to benefit from opportunities in
the stock markets or if they have an investible surplus in a particular year that they wish to put
aside for the future.

ULIP v/s Endowment Plan for Life Insurance

This article is a comparison between the Unit Linked Insurance Plan (ULIP) and the regular
Endowment Plan for life insurance.

Till some time back, if you wanted to buy insurance, the only option you had was to
buy an endowment plan. Of course, there were many different plans, with many
different, fancy names. Each had its own table of promised or possible returns. But the
bottom line was - they were all endowment plans.

This means that when you wanted to buy insurance, you were forced to also invest at the same
time. On this insurance "investment", companies declared "bonuses" every year. No one knew
where the money was invested, and you, the policy holder, had no control over it. All you ever
knew was the "bonus" declared every year. And since Indians had been "investing" in insurance
for a very long time, we started expecting "returns" from our insurance policies as a given.

When the private insurance companies came into the picture, they saw a big opportunity. They
made us ask the question - if it is my money that is being invested, should I not have at least
some control over it?

And thus, the Unit Linked Insurance Plan (ULIP) was born.

What is a Unit Linked Insurance Plan (ULIP)?

It is a type of insurance, in which your premium amount is dived into two parts.
 1. One part, a small fraction of your premium, is used to provide you insurance.
2. The other part, the much larger portion, is used to buy "units" of investment.

The first part (insurance part) depends on the sum insured - the higher the sum insured, the more
is the money spent to buy insurance.

The money from the other part (investment part) is invested based on the type of the units - it can
be largely in equities, or only in debt, and all the flavours in-between. The value of these units
increases depending on the returns these investments provide.

At any time, the sum insured is either the original sum insured that you chose at the time of
buying insurance, or the NAV of all your units - whichever is higher.

So, what is the advantage of a ULIP over an endowment plan? The answer is: Control

A Unit Linked Insurance Plan (ULIP) provides you much more control over where your money
is invested - You decide which kind of units to buy - they can be largely for stocks, for debt, or a
combination of both.

Also, you can switch between different units - usually a couple of times a year, depending on
your insurance company. This means that depending on your analysis, you can move from stocks
to debt to a hybrid investment - whichever way you want.

This compares very favourably to endowment plans, where you have absolutely no control over
where your money is invested.

Another big advantage of ULIPs is that after a couple of years of buying the plan, even if you are
unable to pay the premiums, the insurance cover continues. When you don't pay the premium,
the insurance company sells some units to get an amount so that it can continue to provide the
life cover for you!

So, that is the comparison between ULIPs and Endowment plans, and ULIPs are definitely a
better choice when compared to Endowment Plans. No wonder they are so popular!!

But are they the best way to buy insurance? Nope!! To find out, read the article ""Term policy"
is the best policy"
“Term policy” (term insurance) is the best
policy
This article compares endowment policies and ULIP with Term Insurance, and recommends the
best option for life insurance.

We know that a Unit Linked Insurance Plan (ULIP) proves to be better than an
Endowment plan.

(Don't know this yet? Read "ULIP v/s Endowment Plan for Life Insurance")

But the real question is - Is a Unit Linked Insurance Plan the best way of buying insurance? Let
me cut to the chase and give you a straight answer - No, it is not. And now, let's see why!

Why does one buy life insurance? What is the need for life insurance?

The answer is simple - Life insurance is bought so that our dependents can continue to lead a
normal life even when we are not around.

When you buy insurance for your car, or your home, do you expect any return on that
"investment"? Do you expect that if the car doesn't meet with any accident, you would get the
money plus some interest on it back at the end of the year?

Of course not! Then, why should we expect our Life Insurance to pay us back, and in turn pay a
lot more for insurance than it actually costs? Should we not buy "pure" insurance, like we do for
our car or home?

Yes - that is exactly what we should do! We should understand that insurance and investments
are different, and they need to be treated differently.

For investments, you need to identify goals and strategies, and make investments accordingly.
(Please read "Goal Based Investing").

For life insurance, you need to calculate an amount that your dependents would need, so that
they can lead a normal life out of the returns generated from it. This amount should be the "Sum
Insured" when you buy a life insurance policy, and it should be a risk-only policy.

Term Insurance provides such a pure, risk-only cover for your life. It is a type of insurance
where your premium amount is used only to buy insurance for you - just like car or home
insurance.
Since the premium amount is used only for insurance, the biggest benefit of a term insurance
policy is that it provides life insurance at the lowest possible price. This means that the money
saved can be invested in other avenues to fulfill other goals, while still enjoying the benefit of
adequate insurance!

One perceived drawback of Term insurance plans is that you don't get back any money at the end
of the term if you survive. As we discussed earlier, just like insurance for your car, you need not
get anything back!

But if the fact that you don't get back any money at the end of the term bothers you, there is a
variant of term plans available - and it is called Term insurance plan with return of premiums
(ROP). Here, if you survive the term of the policy, you get back all the premiums you have paid.
And the added benefit is that this amount is tax free! But please note that the premium amounts
are higher in term insurance with return of premiums as compared to regular term insurance
plans.

Illustration:

For a sum insured of Rs. 10 Lakhs for 25 years for a 30 year old male, following are the
indicative market rates:

1. Endowment plan: Rs. 38,109 per year

2. Term plan with return of premium: Rs. 8,836 a year
3. Term plan: Rs. 2,964 a year

As you can see, there is a huge difference in the premiums, and as we discussed earlier, this
saved money may be invested better in other avenues.

Please read "Are ULIPs a costly form of term insurance plus MF investments?" to know how
term insurance and the money saved can be utilized effectively.

Are ULIPs a costly form of term insurance

plus MF investments?
This article compares Unit Linked Insurance Plan (ULIP) with a combination of term insurance
& Equity Linked Savings Scheme (ELSS) investment, and judges the utility of each strategy.
(ULIP versus Mutual Funds - MF)

In "ULIP v/s Endowment Plan for Life Insurance", we saw that Unit Linked Insurance Plans
(ULIPs) are better than traditional endowment plans. But then, in ""Term policy" is the best
policy", we discussed that investments should be separated from insurance, and therefore, we
 concluded that term plans are the best form of insurance.

So, here, let's see how the benefit of Unit Linked Insurance Plans (ULIPs) can be achieved (and
bettered!!) using a combination of Term Insurance and Equity Linked Savings Scheme (ELSS)
mutual fund (MF).

Let's recap the benefits of Unit Linked Insurance Plans (ULIPs):

1. Flexibility to choose the type of investment scheme - Mostly equity, mostly debt, and
various combinations in-between
2. Transparency - You know where your investments are being made, and you know the
charges incurred by you

(For more details, please read "ULIP v/s Endowment Plan for Life Insurance")

Here is what we are going to do: First option is to buy insurance using a ULIP. The second
option is to buy insurance using a term plan, and since term insurance is a lot cheaper than
ULIPs, invest the difference in the premiums in ELSS.

Let's walk through a real-life example and see how both these options compare.

Here is a comparison of charges for a ULIP and a term plan for a sum assured of Rs. 10 Lakhs
for a 30 year old male (Policy term is 25 years):

Insurance Company SBI Life SBI Life

Scheme Name SBI Horizon II (ULIP) SBI Shield (Term Plan)
Premium (Per Year) Rs. 80,000 Rs. 2,963

Thus, for our option B (combination of Term Insurance and ELSS), we would invest the
difference - Rs. 77,037 per year - in an ELSS.

ULIPs charge a fee, called "Premium Allocation Charge" every year. Generally, this fee is very
high in the initial 2-3 years, and goes down for subsequent years. Apart from this, ULIPs also
charge a yearly "Fund Management Fee", just like mutual funds. (The names for these fees may
differ a little among fund houses). These fees are charged as a percentage of money invested.
For the ULIP in our example, the Fund Management Fee is 1.5%, and the "Premium Allocation
Charge" is as follows:

Year 1 15%
Years 2 and 3 10%
Year 4 onwards 5%

As you can see, the charge is the maximum in the initial years. This is the biggest disadvantage
of ULIPs - since the investment is for a very long term, the higher fee in the initial years has a
huge impact on your final returns due to the compounding effect. (We would see it illustrated
in our example)

The premium of a ULIP is broken down into two components. The first is the "Mortality
Charge", which is the amount for insuring your life. The second is the remaining amount, which
is invested in the option you choose.

Let's say that the mortality charge for the ULIP is also Rs. 2,963. Thus, the amount remaining for
investment is also Rs. Rs. 77,037 per year.

If we deduct the "Premium Allocation Charge" and the "Fund Management Fee", the amount
remaining for investment is:

Year 1 Rs. 64,499

Years 2 and 3 Rs. 68,293
Year 4 onwards Rs. 72,087

On an average, ELSS schemes have a fund management fee of 2%. Thus, amount actually
invested would be Rs. 75,496 per year in the case of ELSS.

The following table compares the returns generated by our two options, if we assume the rate of
return to be 12% per year for both these:

Download the spreadsheet for the calculations

ULIP ELSS
 Amount Cumulative value of Amount Cumulative value of
Invested investments Invested investments

Year 1 64499 72239 75496 84556

Year 2 68293 157396 75496 179258

Year 3 68293 252772 75496 285325

Year 4 72087 363843 75496 404120

Year 5 72087 488242 75496 537170

Year 6 72087 627569 75496 686186

Year 7 72087 783615 75496 853085

Year 8 72087 958387 75496 1040011

Year 9 72087 1154131 75496 1249368

Year 10 72087 1373364 75496 1483848

Year 11 72087 1618906 75496 1746465

Year 12 72087 1893913 75496 2040597

Year 13 72087 2201920 75496 2370024

Year 14 72087 2546888 75496 2738983

Year 15 72087 2933253 75496 3152217

Year 16 72087 3365981 75496 3615038

Year 17 72087 3850636 75496 4133399

Year 18 72087 4393451 75496 4713962

Year 19 72087 5001402 75496 5364194

Year 20 72087 5682309 75496 6092453

Year 21 72087 6444924 75496 6908103

Year 22 72087 7299052 75496 7821631

Year 23 72087 8255676 75496 8844783

Year 24 72087 9327095 75496 9990712

Year 25 72087 10527085 75496 11274154

(Continued on the next page....)

What do we see? At the end of 25 years, ULIP returns Rs. 1,05,27,085, whereas ELSS returns Rs.
1,12,74,154. There is a net gain of Rs. 7.47 Lakhs!! This, when the insurance cover for both the
schemes is the same!

But that's not all - it can get even better. With ULIPs, your investment options are limited to the
4-5 schemes offered by your insurance company. Whereas in ELSS, you have a wide choice
among fund houses, and you can switch between them if you feel your investment is not giving
adequate returns.

Thus, although we have assumed the return to be the same of ULIP and ELSS, the return for
ELSS can definitely be better. Even if it is 13%, the returns would be as follows:

Download the spreadsheet for the calculations

ULIP ELSS

Amount Cumulative value of Amount Cumulative value of

Invested investments Invested investments

Year 1 64499 72239 75496 85311

Year 2 68293 157396 75496 181712

Year 3 68293 252772 75496 290645

Year 4 72087 363843 75496 413740

Year 5 72087 488242 75496 552837

Year 6 72087 627569 75496 710016

Year 7 72087 783615 75496 887629

Year 8 72087 958387 75496 1088332

Year 9 72087 1154131 75496 1315126

Year 10 72087 1373364 75496 1571403

Year 11 72087 1618906 75496 1860996

Year 12 72087 1893913 75496 2188237

Year 13 72087 2201920 75496 2558018

Year 14 72087 2546888 75496 2975871

Year 15 72087 2933253 75496 3448045

Year 16 72087 3365981 75496 3981602

Year 17 72087 3850636 75496 4584521

Year 18 72087 4393451 75496 5265819

Year 19 72087 5001402 75496 6035687

Year 20 72087 5682309 75496 6905637

Year 21 72087 6444924 75496 7888680

Year 22 72087 7299052 75496 8999519

Year 23 72087 8255676 75496 10254768

Year 24 72087 9327095 75496 11673198

Year 25 72087 10527085 75496 13276025

We see that the return generated by ELSS is Rs. 1,32,76,025 - this is around Rs. 27.5 Lakhs
more than the Unit Linked Insurance Plan (ULIP)! The best part about this is that this is a
very likely scenario, as you would have the most flexibility to invest your funds while using
Equity Linked Savings Scheme (ELSS).

Tax Treatment: The full amount invested in a Unit Linked Insurance Plan (ULIP) is eligible for
Section 80C benefit. The full amount invested in an Equity Linked Savings Scheme (ELSS) and
the amount spent to buy Term Insurance is also eligible for Section 80C benefit. Thus, both the
options - Unit Linked Insurance Plans (ULIPs) and a combination of Term Insurance and Equity
Linked Savings Scheme (ELSS) mutual fund (MF) - have the same tax implication, and there
would be no impact on the returns even if we consider income tax.

Conclusion:

The combination of Term Insurance and Equity Linked Savings Scheme (ELSS) mutual fund
(MF) wins hands down as compared to Unit Linked Insurance Plan (ULIP). Following are the
benefits:

• Better returns - The example clearly illustrates why separating investment from insurance
makes better financial sense! The potential for superior returns is very high compared to a
ULIP.
• Full flexibility - You can choose not just ANY mutual fund (MF) scheme, but can also
switch MF houses. This is IMPOSSIBLE in ULIPs!

As always, there remains one universal condition for getting these superior returns - you need to
be disciplined in your investments. You should invest regularly in the ELSS, and you should not
withdraw any amount form your corpus before time.

Happy investing!
ULIP: Is it for you?

(04-May-2004 )

Unit-linked life insurance offers the interesting option of combining protection and
tax advantages of life insurance with the attractive prospects of investing in
equities.

A unit-linked plan works on a minimum premium basis and not on a sum assured one. You
decide the amount you can contribute at regular intervals. ULIP offers you insurance cover till
your insurance needs are fulfilled, beyond that it becomes an investment avenue.

How they compare?

To explain how ULIP works we will compare HDFC ULIP Endowment plan with HDFC
Endowment plan.

Premium
In case of ULIP, you pay a minimum premium of Rs 10,000 per annum irrespective of age and
term of the policy. Premiums levels can be either reduced or increased if premiums have been
paid regularly for three years and the unit fund value is at least Rs 15,000. The flexibility of
increasing premium contributions in an existing account helps policyholders manage their cash
flows.

In normal/traditional endowment plans the premium is calculated on the basis of age and the
term and the amount you pay, as premium remains the same for the full term. The minimum
premium is Rs 1,500 annually.

Sum assured
The sum assured depends on your age and the cover you take in case of ULIP. Depending on
your age at entry, you may choose between 3 levels of cover - low, medium or high.

In the traditional plan, the sum assured is calculated by age and term of the policy to which
premium factor is applied.

Top-ups
Apart from your regular contributions, in case of ULIP, you can also make additional payments
to increase the savings component. These top-ups do not affect the sum assured. Normal
endowment policy does not offer you these benefits.

Investment
You choose the fund where you want to invest your money. HDFC offers a choice of five funds -
liquid, defensive, secure managed, secure defensive and growth. The Liquid Fund is the least
risky with investments in bank deposits and short-term money market instruments. Growth Fund
is the riskiest with an investment of up to 100% in equities.
In traditional insurance plans your money is invested keeping in view the IRDA specification
i.e.minimum 85% in debt with the balance in equities.

Charges?
As is the case with unit-linked plans, this plan, too, imposes charges, on both the funds invested
by the policyholder and by cancellation of units. These charges vary depending on the kind of
premium payment option chosen (single or regular).

Other charges include a fund management charge of 0.80% of the fund value per annum, apart
from a flat fee of Rs 15 per month deducted by cancellation of units

In case of ULIP, for the first 2 years the investment content rate is 73% of the premium and for
the remaining years 99%. Risk cover charges (for death sum assured, critical illness, accidental
death) are charged for cancelling units on each monthly charge date, based on the person’s
age at that time.

In traditional plans, the charges are not disclosed. There is an annual fee of Rs 150 for regular
premium policies and Rs 300 for single premium ones.

Returns
In case of ULIP, in an eventuality you receive the sum assured or fund value whichever is higher
and on maturity the fund value. In normal endowment plan, in either case you receive the same
benefit i.e. the sum assured and vested bonus.

In case you stop paying premiums?

If this is in the first 3 years then in case of ULIP, on cancellation of the policy before paying
regular premium for 3 years, there is a charge of 25% of the outstanding premiums due during
this 3-year period. In case of normal endowment the policy lapses and nothing is paid back

If you stop paying premiums after 3 years, in ULIP you have the option to make policy paid up,
provided the policy has accumulated sufficient policy value. At present this amount is Rs 15,000.
If the fund value of a paid up policy falls below Rs 15,000 then the policy is cancelled and the
fund value is returned to you. The risk cover continues for the sum assured even though the
policy has reached the paid up status.

In traditional plan the policy becomes a paid up policy.

Medicals
In both the plans the norms for medicals are similar i.e. medicals are compulsory.

What is the right strategy for you?

While making an investment in ULIP get the agent to disclose the costs. Compare across
companies, product categories and within products. Insurance is a long-term contract, with low
liquidity and potentially higher costs. Look at these costs before considering a ULIP for
investment.
Case study: A ULIP too expensive

(04-Sep-2006 )

An attractive sales pitch about a product instinctively raises queries in the audience’s mind. Our
financial planning team at Personalfn recently received one such query regarding a unit linked
insurance plan (ULIP) from a leading public sector insurance company, which we would like to
share with our visitors.

First let’s understand the client’s profile.

1. The client, a 28-Yr old high net worth individual (HNI), was advised by his insurance
agent to go for a ULIP with a sum assured of Rs 500,000, and the policy term being 46
years. In this way, he would be insured till the age of 74 years. The agent recommended
that he opt for a single premium policy, which amounts to a one-time premium of Rs
100,000.
2. The client was advised to go for the equity option, where he could have 100% equity
exposure and hence earn higher returns. The returns projected to him were calculated at a
rate of 15% CAGR.

The ULIP has an annual charge of 2%, annual administration charge of Rs 720 and fund
management charge of 1.5%.

As always we examined this case with the objective of analysing whether the product would add
value to the client’s portfolio and fulfil his insurance/investment objectives. This is what we
concluded:

1. To begin with, the client did not have a life cover. So our basic objective was to ensure
that the product he was being recommended provided him adequate insurance cover.

Individuals in quest of life insurance are often too returns-centric forgetting that they
must first and foremost have adequate life cover that can provide financial stability to
their dependents in their absence. So priority has to be given to the insurance component.
The investment component i.e. returns can come separately at a later stage.

In this case, the client was being recommended an insurance cover of Rs 500,000, which
is a pittance for an HNI. In case of an unfortunate event, the amount of Rs 500,000 would
not even service the family car let alone provide financial stability to the family.

2. A brief analysis of the product and the returns generated by it over a period of 46 years
(the policy term) tells us, that the investment corpus will take 12 years to exceed Rs
500,000. So if the client expires before that, he will get only the sum assured i.e. Rs
500,000!
 Ideally, a person of his financial standing should get himself insured for a much larger
amount and not subject his life cover to the vagaries of the stock markets.

3. For some strange reason, the returns projected to the client have been calculated at an
optimistic rate of 15% CAGR. According to IRDA's (Insurance And Regulatory
Development Authority) revised ULIP guidelines, agents are bound to show benefit
illustrations based on an optimistic estimate of 10% (simple growth or CAGR) and a
conservative estimate of 6%. Moreover, the guidelines dictate that clients are to sign on
the benefit illustration. Not surprisingly, the agent did not take our client’s
acknowledgement on the 15% CAGR illustration since he was violating the ULIP
guidelines. If reported by the client, backed by his signature, this would have amounted
to loss of agency for the insurance agent.

Our solution

1. We advocate that all individuals (HNI or otherwise) buy a term plan for an amount that
can be considered reasonable given their life style, income, expenses and contingent
expenses among others. The capital appreciation can be taken care of through
investments like NSC (National Savings Certificate), PPF (Public Provident Fund),
mutual funds/stocks and fixed deposits.
2. For the investment component, mutual funds can play an important role in the client’s
portfolio. Mutual funds give investors an opportunity to access equity and debt markets in
a convenient manner. Given that our client does not have the time and competence to
track these markets, mutual funds become an obvious choice.
3. In terms of expenses, mutual funds are more cost-effective than the ULIP that was
recommended to our client. The annual expenses incurred on the ULIP are 3.50% (2.00%
recurring and 1.50% fund management charges). In contrast, mutual funds are managed
at an annual expense of 2.50% (maximum) of net assets. Over a period of 48 years, there
is a good chance this number could reduce since according to the expenses slab defined
by SEBI, higher net assets result in lower expenses.
4. Put simply, the client must on priority opt for term plan that, in his absence, can provide
adequate financial stability to his family. He can then consider investing to take care of
the returns. If you are wondering why ULIPs do not feature in our solution to the client,
it’s because in this particular case the ULIP was too expensive. If there is a ULIP that can
match the returns and the lower expenses of a mutual fund, it can be an option for
investors.

ULIP Portfolios: Need for more transparency

(01-Aug-2006 )

This article was written by Personalfn for Business India, and was carried in its July 16, 2006
issue with the title, “Be more transparent”. The original draft, in its entirety, has been retained
here.
Traditionally, life insurance products have usually been considered as ‘safe’ investment options,
which also offer a life cover. However, since unit linked insurance plans (ULIPs) burst onto the
scene a few years ago, the rules and definitions of life insurance have undergone a sea change.
The popularity of ULIPs can also be attributed partly to the scrapping of ‘assured return’
insurance schemes and falling interest rates which rendered conventional products like
endowment plans unattractive. At Personalfn however, we feel that individuals need to
understand ULIPs a lot better before they make a decision to invest in it.

Simply put, depending on their mandate, ULIPs can invest in the stock and debt markets in
varying proportions. How a ULIP can invest its money is laid down by the insurer in the product
literature. A few life insurance companies also declare their ULIP portfolios on a regular basis,
which reveal the stock and debt holdings across their ULIP products. However, given the
disparities in ULIP portfolio disclosures, we believe the Insurance Regulatory and Development
Authority (IRDA) needs to look at various issues related to portfolio disclosure so that
individuals can make informed decisions. Given below are our concerns pertaining to ULIP
disclosure norms.

1. Declaration of portfolios
With the growing popularity of ULIPs, we decided to analyse ULIP portfolios from across
various life insurance companies. However, to our dismay, we found that not many companies
make their portfolios available in public domain. While this information may be available to
individuals who are ‘insiders’ (i.e. company employees), fact of the matter is that investors have
a hard time accessing these portfolios

It is pertinent that an investment avenue as complex as a ULIP is understood appropriately

before making investments in it. With the numerous variations available across products and
companies, it becomes necessary that individuals study the portfolios to understand the
philosophy adopted by the ULIP in question. Just to cite an example, the portfolio will reveal the
quality and nature of companies that form part of the ULIP portfolio. While four insurance
companies i.e. ICICI PruLife, Kotak life, HDFC Standard Life and Aviva Life declared their
portfolios on their websites, we failed to procure the same for other companies.

2. Lack of consistency across portfolios

While evaluating the ULIP portfolios of life insurance companies, we observed that the
presentation of data lacked consistency. For example, relevant data points like the assets under
management (AUM) and the benchmark indices were missing for some ULIPs under our
scanner. Barring ICICI PruLife, no one declared their AUMs. On the other hand, Aviva had not
even mentioned the benchmark index for its ULIP. The AUM becomes relevant in that a higher
AUM helps in achieving economies of scale, which in turn, could result in reducing costs like
transaction and brokerage. The benchmark on the other hand, serves as a yardstick for
understanding how well a ULIP has performed during a given timeframe.

3. Investment mandate
Another important factor is the investment mandate. It is critical for individuals to know the
investment mandate of ULIPs before they consider investing in it. For example, our research
team noticed that while ULIPs from HDFC Standard Life, Kotak Life and ICICI PruLife
invested predominantly in large cap companies, Aviva Life invested liberally in midcaps.

While it is not ‘wrong’ to invest in midcaps, we feel that insurance companies should ideally
reveal the investment mandates for their products; this in turn will educate investors about how
their investments will be managed. A risk-averse investor may be unwilling to participate in a
ULIP that is heavily invested in mid cap stocks. Mid cap stocks tend to be high risk high return
investment propositions vis-à-vis their large cap peers. We believe that ULIPs should have an
explicit investment mandate. For example Bajaj Allianz clearly states that one of their ULIP
options can invest in companies in the mid cap segment. At least the individual knows what he is
getting into while buying life insurance.

4. Standard format
Another problem we faced while analysing ULIPs was the manner in which the data was
presented. For example, while most ULIP portfolios declared their holdings alongwith the
percentages held in each individual stock, MetLife in their quarterly portfolio update chose to
declare only the names of stocks invested in without any information on how much it had
invested in each stock. Another observation was that the benchmarks were not made available
alongside the ULIP portfolios under review - we had to ‘hunt’ for them. ULIPs should ideally
give out a consolidated portfolio that contains all the relevant information and data points like
net assets, benchmarks, past performance among others in one place.

ULIPs can take a leaf out of the books of mutual funds. Mutual funds have a guideline, which
requires them to declare their portfolios (‘fact sheets’ in mutual fund industry parlance) once
every quarter. Most mutual fund houses on their part however, declare their portfolios on a
monthly basis. They also display the portfolios on their company websites. This helps the
investing community in understanding the investments better and take an informed decision.

Unfortunately, insurance companies haven’t been proactive as far as declaration of portfolios is

concerned. In fact, at the time of writing this article (June 23, 2006), HDFC Standard Life still
had the April 2006 portfolio on their website while in case of Aviva, there was no sign of a
portfolio beyond the one declared for March 2006. While the IRDA needs to be commended for
its efforts to modify the basic structure of ULIP products, it’s time the authority took steps to
ensure that sufficient guidelines for the declaration of ULIP portfolios are in place and that
information is made easily available to the retail investor.
ULIP Guidelines: IRDA makes a start

(25-Sep-2006 )

This article was written by Personalfn for Business India, and was carried in its
September 24, 2006 issue with the title, "IRDA makes a start". The original draft, in
its entirety, has been retained here.

After being witness to rampant misrepresentation of ULIPs (unit linked insurance plans), the
regulator a Insurance Regulatory and Development Authority (IRDA) finally introduced some
much-needed guidelines to lend an element of insurance to an otherwise investment product.
However, we maintain that there is still more to be done to make ULIPs more transparent and
make it even more insurance oriented.

First some background a ULIPs made an entry at a rather opportune time for insurance
companies. The mood in equity markets was very pessimistic; however, at those levels (BSE
Sensex less than 3,000 points) markets could go in only one direction - up. And take off they did
in an unprecedented manner. From 3,000 points, the BSE Sensex surged furiously to over 12,000
points leaving investors breathless.

Why are we talking of stockmarkets in an insurance article where we propose to discuss the
latest ULIP guidelines? Because unfortunately, not just fund managers, even insurance
companies were rather excited by the sharp rise in stockmarkets. When you come to think of it,
insurance companies should be more concerned about insuring lives than the vagaries of
stockmarkets. However, in ULIPs, they had a product that was more geared towards a offering a
return than insuring lives.

And this anomaly was put to good use by insurance agents. ULIPs were spoken of in the same
breath as mutual funds. In fact, many agents even went as far as projecting ULIPs superior to
mutual funds because they attract tax benefits (under Section 80C) on all options, unlike mutual
funds where you get a tax benefit only on the ELSS (equity-linked savings scheme) category.

Moreover, ULIPs were shown to be a short-cut investment/insurance avenue – for instance,
investors were encouraged to pay premiums only for the first 3 years and not necessarily over the
entire tenure of the policy. The reason is because the expenses in the initial 3 years premium are
so high that insurance companies recover the entire cost of the policy (including life cover
charges) and can do without the remaining premiums.
While these marketing gimmicks were glaring, the IRDA, to their credit, did intervene at regular
intervals to infuse some much-needed sanity. But as we, at Personalfn, have seen on the mutual
fund side, at times the regulator must come down heavily as financial service providers can take
quite a while to get the hint.

On July 1, 2006, the IRDA introduced revised ULIP guidelines to correct "some" of these
anomalies, we say some because much is yet to be achieved, but more on that later.

For one IRDA has given the new ULIP a face, in insurance a face can be taken as the sum
assured and the tenure. The old ULIP lacked both and individuals did not have an inkling about
either even after taking the ULIP. The latest guidelines dictate that:

1. Term/Tenure

 The ULIP client must have the option to choose a term/tenure.

 If no term is defined, then the term will be defined as 70 minus the age of the client. For
example if the client is opting for ULIP at the age of 30 then the policy term would be 40
years.

 The ULIP must have a minimum tenure of 5 years.

2. Sum Assured
On the same lines, now there is a sum assured that clients can associate with. The minimum sum
assured is calculated as:

(Term/2 * Annual Premium) or (5 * Annual Premium) whichever is higher.

There is no clarity with regards to the maximum sum assured.

The sum assured is treated as sacred under the new guidelines; it cannot be reduced at any point
during the term of the policy except under certain conditions like a partial withdrawal within
two years of death or all partial withdrawals after 60 years of age. This way the client is at ease
with regards to the sum assured at his disposal.

3. Premium payments
If less than first 3 years premiums are paid, the life cover will lapse and policy will be terminated
by paying the surrender value. However, if at least first 3 years premiums have been paid, then
the life cover would have to continue at the option of the client.
4. Surrender value
The surrender value would be payable only after completion of 3 policy years.

5. Top-ups
Insurance companies can accept top-ups only if the client has paid regular premiums till date. If
the top-up amount exceeds 25% of total basic regular premiums paid till date, then the client has
to be given a certain percentage of sum assured on the excess amount. Top-ups have a lock-in of
3 years (unless the top-up is made in the last 3 years of the policy).

6.Partial withdrawals
The client can make partial withdrawals only after 3 policy years.

7. Settlement
The client has the option to claim the amount accumulated in his account after maturity of the
term of the policy upto a maximum of 5 years. For instance, if the ULIP matures on January 1,
2007, the client has the option to claim the ULIP monies till as late as December 31, 2012.
However, life cover will not be available during the extended period.

8. Loans
No loans will be granted under the new ULIP.

9. Charges
The insurance company must state the ULIP charges explicitly. They must also give the method
of deduction of charges.

10. Benefit Illustrations

The client must necessarily sign on the sales benefit illustrations. These illustrations are shown to
the client by the agent to give him an idea about the returns on his policy. Agents are bound by
guidelines to show illustrations based on an optimistic estimate of 10% and a conservative
estimate of 6%. Now clients will have to sign on these illustrations, because agents were
violating these guidelines and projecting higher returns.
While what the IRDA has done is commendable, a lot more needs to be done. At Personalfn, we
have our own wish list with regards to ULIP portfolios:

1. Regular disclosure of detailed ULIP portfolios. This is a problem with the industry; for
all their talk on being just like (or even better than) mutual funds, ULIP portfolios are
nowhere near their mutual fund counterparts in frequency as well as in transparency.

2. On the same lines, other data points like portfolio turnover ratios need to be mentioned
clearly so clients have an idea on whether the fund manager is investing or punting.

3. ULIPs (especially the aggressive options) need to mention their investment mandate, is it
going to aim for aggressive capital appreciation or steady growth. In other words will it
be managed aggressively or conservatively? Will it invest in large caps, mid caps or
across both segments? Will it be managed with the growth style or the value style?

4. Exposure to a stock/sector in a ULIP portfolio must be defined. Diversified equity funds

have a limit to how much they can invest in a stock/sector. Investment guidelines for
ULIPs must also be crystallised. Our interaction with insurance companies indicates that
there is little clarity on this front; we believe that since ULIPs invest so heavily in
stockmarkets they must have very clear-cut investment guidelines.

ULIP may 'Slip' in September

(27-Aug-2010 )

Addressing their concerns over what is considered as a sea change in Unit-Linked Insurance
Plans (ULIPs) coming into effect from September 1, 2010, the private life insurers fear that sales
in September might come to a halt. At the same time, some agents are using this (change in
regulations) as a sales pitch for their existing high commission policies, which will be non-
compliant next month, by positioning them as a limited period offer.

In a recent clean-up drive enforced by IRDA to make ULIPs more investor friendly, the
insurance regulator has directed the insurers to reduce charges and consequently improve return
for policyholders. Secondly, it has attempted to distinguish ULIPs from mutual funds by forcing
insurers to incorporate life cover that is at least 10 times the premium. To sustain the lower
charges, insurers have been forced to halve commissions and cut expenses. What has made life
tougher for the insurers is that the existing products cannot be modified to make them compliant.
All insurers have been asked to file completely new products with fresh unique product
identification number from IRDA.
Reacting to this, CEO of a life company said, “We need a couple of weeks to get a completely
new product from approval stage to market as we have to get our systems updated, brochures
printed and agents trained”.

The regulations seek not only to redesign the product but also change the operational model as
the existing cost structures will be meaningless, cited another CEO of a private life company.

We believe that though the changes brought about by the IRDA were absolutely required, the
pace at which it has come up is the point of concern. Rather the IRDA should have come up with
changes in a phased manner giving detailed clarifications in order to smoothen the process of
change. This would also make investors comfortable in understanding such changes and their
impact.

Add more zip to your ULIP!

(14-Mar-2006 )

The past couple of years have seen ULIPs (unit linked insurance plans) emerge as
overwhelming favourites with individuals wanting to buy life cover complemented
by a flavour of equities. The Indian bourses too have played a part in fuelling the
demand for ULIPs. However, there is one important aspect, which we feel
individuals should consider before they commit their money to ULIPs from any life
insurance company.

Simply put, ULIPs are life insurance plans, which can invest a portion of their corpus in equities.
The percentage of investments in equities though differs across insurance companies. While
some companies have a mandate to invest upto 100% of their corpus in the ‘aggressive’
option, other insurance companies have a cap (like 35% of corpus for instance) on the
‘aggressive’ option. Given the edge equities can provide to your portfolio, the percentage
of equities in a ULIP can make a significant impact on the returns over the long term. An
illustration will help in understanding this better.

Let us take an example of an individual wanting to invest a sum of Rs 100 (as premium) each
year in ULIPs. His investment tenure is 30 years. He has two options to consider- one which
offers him a maximum of 35% exposure to equities and the remaining 65% in debt instruments.
The other option offers him 100% exposure to equities. Let us also assume that he is expecting a
10% growth year-on-year CAGR (compounded annual growth rate) from the equity component
and a 7% growth CAGR from the debt component.

The individual is assumed to have a high-risk appetite and hence, he decides to invest his entire
corpus in the aggressive option throughout the tenure.

The power of equities

ULIP from Company A ULIP from Company B

Amount invested(Rs) 100 100

Equity exposure (%) 35 100

Amt receivable on maturity from equity (Rs) 6,333 18,094

Debt exposure per annum (%) 65 0

Amt receivable on maturity from debt (Rs) 6,570 0

Total amt. receivable on maturity (Rs) 12,903 18,094

CAGR on equities is assumed to be 10% and on debt to be 7%. Tenure is 30 years.

As can be seen from the table, if a sum of Rs 35 is invested each year (out of the Rs 100 paid as
premium) in equities for a period of 30 years and the rate of returns is assumed to be 10%
CAGR, then the individual stands to gain Rs 6,333 on maturity. Also assuming that the
remaining Rs 65 is invested in debt instruments for the same period and this yields 7% CAGR,
the maturity amount works out to Rs 6,570. The total amount that the individual stands to receive
on maturity is Rs 12,903.

As opposed to this, if the individual were to invest the entire amount of Rs 100 in equities, other
variables remaining the same, the returns amount to Rs 18,094. Which is approximately 40%
higher than the returns that the individual would have received had his investments been
‘limited’ to a 35% equity exposure!

So what does this mean for an individual who wants to invest in ULIPs? To begin with, several
studies have shown that equities tend to outperform other asset classes like bonds and gsecs over
the long term. It therefore makes sense for the risk-taking individual to invest a sizable portion of
his corpus in equities. Therefore it also follows that a ‘maximum 35%’ equity exposure
will not be able to power the individual’s portfolio returns like a 100% equity exposure
would, other parameters (tenure, expected returns, premium amount) remaining the same. Add to
this the fact that the 100% equity ULIP option also allows the individual to shift his money to
debt in varying proportions (which range from 0%-100%), and one has a potent combination.

Of course, the return figures will change with a change in the assumptions considered above. For
example, had we assumed a 15% return on equity without changing the other parameters, then
the difference in returns between the 35% equity option and 100% equity option would be 107%!
Conversely, if we compare a 35:65 (equity: debt) portfolio versus a 70:30 (equity: debt) portfolio
without changing the other parameters, then the difference in returns would have been
approximately 22%.

Of course, it goes without saying that many factors other than the equity exposure affect ULIP
returns. For example, expenses and the quality of fund management are two very important
factors that need to be evaluated before taking the plunge into ULIPs. Individuals therefore need
to bear in mind that a ULIP needs to be evaluated on various parameters before zeroing in on a
particular life insurance company.

5 steps to selecting the right ULIP

(10-Aug-2004 )

Unit Linked Insurance Plans (ULIPs) were seen as a “wonder product” that
simultaneously fulfilled an individual’s needs for investment and insurance.
However the recent downswings in the markets have forced investors to do a
rethink. Very often it was poor selection that was responsible for the investors’
woes. We present a 5-step strategy for investing in ULIPs.

1. Understand the concept of ULIPs

Try to do as much homework as possible before investing in an ULIP. This way you will know
what you are getting into and won’t be faced with unpleasant surprises at a later stage. Our
experience suggests that many a time people do not realise what they are getting into (in fact we
have been approached by several people who wanted to cancel the ULIPs they had been coerced
into taking by unscrupulous agents). Gather information on ULIPs, the various options available
and understand their working. Read the literature available on ULIPs on the websites and
brochures circulated by insurance companies.

2. Focus on your requirement 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 play an important role in the plan you choose. So if
you have a high risk appetite, go in for a more aggressive investment option and vice-a-versa.
Opting for a plan that is lop-sided in favour of equities when you are a risk-averse individual
might spell disaster for you (this is true in most cases currently).

3. Compare ULIPs of different insurance companies

Compare products of the leading insurance companies. Enquire about the premium payments as
ULIPs work on minimum premium basis as opposed to sum assured in the case of conventional
insurance policies. Check the fund’s performance over the past six months. Find out how the
debt and equity schemes are performing and how steady the performance has been. Enquire
about the charges you will have to pay. In ULIPs the costs involved are a big deciding factor.
Ask about the top-up facility offered by ULIPs i.e. additional lump sum investments you can
make to increase the savings portion of your policy. The companies give you the option to
increase the premium amounts, thereby providing you with the opportunity to gainfully utilise
surplus funds at your disposal.

Enquire about the number of times you can make free switches (i.e. change the asset allocation
of the money in your ULIP account) from one investment plan to another. Some insurance
companies offer you free switches for a 2-Yr period while others do so only for 1 year.

4. Go for an experienced insurance advisor

Select an advisor who is not only professional and informed, but also independent and unbiased.
Also enquire whether he has serviced clients like you. When your agent recommends a ULIP of
X company ask him a few product-related questions to test him and also ask him why the other
products should not be considered.

Insurance advice at all times must be unbiased and independent and your agent must be willing
to inform you about the pros and cons of buying a particular plan. His job should not just begin
by filling the form and end after he deposits the cheque and gives you the receipt. He should
keep a track of your plan and inform you on a regular basis. The key is to go for an advisor who
will offer you value-added products.

5. Does your ULIP offer a minimum guarantee?

In market linked product if your investment’s downside can be protected, it would 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 will enable you to make an informed choice.

ULIP charges capped at 3%

Impact

After Mutual Funds, it is the turn of ULIPs (Unit Linked Insurance Plans) to face the music from the

regulatory body. Insurance Regulatory and Development Authority (IRDA) has issued a circular

stating that the charges on ULIPs will be capped at 3% from October 1, 2009. The difference between

the gross and the net yield to investors should not exceed 3% incase of insurance contracts less than

and equal to 10 years, of which fund management charges shall not exceed 1.50%. For contracts

more than 10 years the difference should not exceed 2.25%, of which the fund management charges

shall not exceed 1.25%.

Lets understand what this means. Consider, you have invested Rs 50,000 per year for 10 years in a

ULIP. Assuming it generates a return of 10% CAGR and the overall expenses for 10 years is 3%
CAGR; then the maturity value of your investment would be Rs 739,180. At present, the overall

expenses of these plans work out to 3.75%-4.00% on an average. This results in maturity value of Rs

698,582. With the cap of 3% your invested amount will rise by Rs 40,598.

Gross Yield Overall Net Yield Maturity

Expenses in CAGR Value
in CAGR in CAGR (%) (%) (Rs in lakhs)
(%)
From Oct 1, 10 3 7 739,180.00
2009
Current 10 4 6 698,582.00
Total 40,598.00
Savings

(Gross Yield - Overall expenses = Net Yield)

A Step in the right direction!

Such steps taken by regulatory bodies like SEBI and IRDA will encourage investors to invest their
money as they will pay lower expenses and this will result in higher returns.

Having second thoughts about your ULIP?

(31-Jul-2008 )

The turbulence in equity markets has impacted more investors than one would have initially
thought. The hardest hit are those who invest directly in the stock markets (i.e. direct equities).
Then there are investors who aim at diluting the risk of investing directly in equities by routing
their investments through mutual funds. Expectedly, this category of investors has also felt the
heat from the stock market turbulence. There is yet another category of investors to rival both
these categories in terms of equity investments i.e. ULIP (unit linked insurance plan) investors.

If too many visitors haven’t given a thought to the fact that ULIP investors have considerable
investments in equities, it’s largely because ULIPs are a mixture of insurance and investments,
and sold under varying (marketing) guises depending on the situation.

However, there are investors who are fully aware of the fact that ULIPs are facing the heat as
much as other equity-linked investments. There is more than a fair chance that these are the
investors who have invested in ULIPs (especially in the aggressive option that invests heavily in
equities) and often without truly appreciating the ULIPs’ market-linked nature.

What are ULIPs

Simply put, ULIPs combine the benefits of an insurance policy and a market-linked investment.
A certain proportion of the premium paid is invested in market-linked instruments like equities
and bonds (in line with the stated mandate) and the balance is used to provide for the expenses
incurred on providing the investor with an insurance cover. Investments in ULIPs are eligible for
tax benefit under Section 80C.

The story so far with ULIPs

ULIPs were launched at an opportune time when stock markets had just taken off. Being market-
linked, they were major beneficiaries of the secular rise in stock markets. The buoyant stock
markets coupled with attractive sales commissions on ULIPs played key roles in the rampant
mis-selling of ULIPs. Consequently, many investors ended up buying ULIPs for all the wrong
reasons. Just as worryingly, a lot of investors chose the aggressive (and riskier) option in a bid to
clock higher returns.

Why ULIPs investors are shocked now

Of the three categories we mentioned earlier – stock investors, equity fund investors and ULIP
investors; the latter are most stunned by the sudden turn of events (read market downturn). This
is mainly because stocks and equity funds have been in existence for several years; as a result,
investors have seen a cycle and know what a downturn can do to their portfolios. On the
contrary, most ULIP investors unfortunately do not know what it is to be in a downturn and are
very worried to see a huge hole in their ULIP investments. Add to this the fact that many
investors have invested in ULIPs for their children’s education (child ULIPs) or retirement
(pension ULIPs) and one can better understand their anxiety.

Double whammy
Expectedly, ULIP investors want to know if they should continue with their policies. Their
nervousness can be traced to two reasons in particular. One, the expenses on ULIPs (which can
be quite steep, but were overlooked in the rally), are beginning to pinch the investor now. Two,
with markets in a decline, investors are not sure if they should be investing in equities at this
stage.

It’s not surprising therefore, to find investors complaining that their ULIPs have fallen to such
levels that do not even cover the premiums paid so far. This is a result of the cumulative impact
of high ULIP costs and market volatility.

What investors must do now

Case 1:
Investors who have opted for a ULIP with a clearly defined investment objective (retirement,
child’s education, among others), have a long-enough investment tenure (at least 10 years) and
can take on the risk involved must stay the course and remain invested in the ULIP; of course,
the underlying assumption is that the ULIP is a well-managed one.

To find out more about the latter, investors would do well to study the portfolios of their ULIPs
and find out if the investment style is in line with the stated mandate. Also, investors should
compare the performance of their ULIPs with that of their benchmarks and similar offerings
from other insurance companies. The insurance advisor/insurance company can help investors in
procuring the required information. The fact remains that over the long-term, if carefully
selected, equities can add considerably to the investor’s portfolio. But for that he must be
prepared for the intermittent volatility like the one at present.

Case 2:
Investors who do not belong to the above category will find themselves in a rather unenviable
situation. Clearly, investors must shoulder part of the blame for investing in a ULIP without
conducting due diligence. They have probably opted for a ULIP either because they were
projected attractive returns or merely for the tax benefit or for some other lesser objective. Such
investors must take a call on whether they should continue the ULIP. While the instinctive
reaction could be to exit the ULIP, we recommend that they should not make a hasty decision.
Instead, they must interact with the insurance advisor and explore all available options; also
soliciting information about the surrender value will help in making a decision. The key lies in
minimising the damage.

If you are wondering why the insurance advisor features prominently in both the options, the
reasons are obvious. A life insurance policy can be tailor-made to the individual’s needs. The
individual’s age, premium amount, tenure of policy among other details are unique to him. The
insurance advisor designs a policy based on these inputs and the individual opts for the policy
based on his advisor’s recommendation. The insurance advisor, as a ‘representative’ of the life
insurance company, has a responsibility towards his client in terms of addressing his concerns
with regards to the policy both before and after the sale.

What does your ULIP portfolio reveal?

(22-Jun-2006 )
The popularity of unit linked insurance plans (ULIPs) has increased considerably over the past
few years. Not surprisingly, this has coincided with the attractive returns posted by the stock
markets over this period. ULIPs, being market-linked, mirror to a large extent, the gains/losses of
the stock markets. That is why it’s important for investors to evaluate a ULIP portfolio
objectively before considering investing in it.

ULIPs have been marketed as instruments that basically are ‘a mutual fund and more’. In this
note we evaluate the portfolios of some leading ULIP plans on offer today by applying
yardsticks that we apply to portfolios of mutual fund schemes. Of course, there is no denying that
ULIPs are inherently different from mutual funds as they offer a life cover also. Nevertheless, in
our view, such a study will help individuals select ULIPs that suit their profile and needs better.

For our evaluation, we have considered the Aggressive ULIP plans from four life insurance
companies whose portfolios were available to us (as on March 31, 2006). We would have liked
to include more insurers, but lack of data and inconsistency in presentation of data forced our
hand on that front.

ULIP snapshot

HDFC Growth ICICI Pru Kotak Guaranteed Aviva Growth

(Unit Linked Maximiser Growth (Safe Invest. (LifeSaver)
endowment (Regular) Plan/ Flexi Plan)
& Child plan)

Upper limit for equity investments (%) 100 100 80 85

Percentage of assets in equity 100.26 94.76 62.22 80.81

(most aggressive option)** (%)

Benchmark BSE 100 BSE 100 S&P CNX Nifty NA*

Performance of Benchmark (%)** 66.62 66.62 64.56 -

1-year NAV Appreciation (%)** 86.72 68.15 49.20 61.07

Fund Management Charges-FMC (%) 0.80 1.50 1.50 1.00

Administration charges Rs 180 pa Rs 720 pa 2%-7% of Rs 779 pa

premium***

Minimum Premium (Rs) 10,000 18,000 10,000 3,500

 Minimum Additional Premium (Rs) 5,000 5,000 10,000 10,000

Buy-Sell Spread (%) - - 0.58 5.00

* Not Available; ** As on March 31, 2006; *** Please refer to the article for further details.
For the purpose of our study, we have considered the most aggressive plans with the regular premium option
from the
said insurers. In case of HDFC, the most aggressive ULIP 'Growth' option is compulsorily invested in 100%
equities.
For other Aggressive ULIPs, the investment mandate is flexible.

1. Allocation to Equities
The allocation to equities differs across the four companies under study. True to its investment
mandate, HDFC Standard Life (HDFCSL) had invested 100.0% of its corpus in equities. Kotak
Life Insurance (KLI) had invested 62.2% of its corpus in equities against a mandate to invest
upto 80.0% of its assets in equities. The other two companies, ICICI PruLife and Aviva, have
adhered to the limits set out for them with 94.8% (mandated to invest upto100% in equities) and
80.8% (mandated to invest upto 85%) respectively.

In terms of market capitalisations, we have observed that the ULIPs under review invest
predominantly in large cap companies. However, Aviva is an exception; it invests liberally in
mid caps. This can be gauged from the fact that close to half of its equity portfolio (i.e.
approximately 42%) is invested in midcap companies. This may not be the most prudent feature
of a ULIP that is investing individuals’ insurance monies. Investors would do well to appreciate
that mid cap stocks typically tend to be high risk – high return investment propositions vis-à-vis
their large cap peers.

All four insurers under review have invested in line with their investment mandates. However, it
is apparent that investment mandates for the Aggressive ULIP plans vary significantly across
insurers. On one hand, you have a HDFCSL, which is necessarily invested upto 100.0% in
equities, while on the other hand there is a KLI that can invest upto 80.0% in equities. Another
insurer – Birla Sun Life Insurance Company (whose portfolio for the ‘Flexi Save Plus
endowment plan’ we failed to acquire) can invest only upto 35.0% of assets in equities in its
Aggressive ULIP plan. This kind of disparity in “similar-natured” ULIP offerings from various
insurers underscores the need for investors to make an informed decision while buying ULIPs.

Opt for a plan that suits your risk profile and expectation of return over the life of the policy.

2. Top 10 Stocks
At Personalfn, we have always maintained that a diversified stock portfolio should hold no more
than 40.0% of its assets in the top ten stocks. This helps the portfolio counter turbulence in stock
markets more effectively. Concentrated stock portfolios can be sitting ducks during stock market
volatility and their wayward performance can be very upsetting for investors.

With respect to holdings in the top 10 stocks, HDFCSL is well diversified. It holds 42.7% of its
assets in its top 10 stocks. However, in terms of number of stocks held, it remains the most
concentrated with a total of 34 stocks in its portfolio.

ICICI PruLife had the most concentrated portfolio with 50.4% in its top 10 stocks. The total
number of stocks it held (51 stocks) was the highest in its peer group.

KLI comes across as the most diversified ULIP portfolio with only 25.7% of its total holdings in
the top 10 stocks. Likewise, Aviva with an allocation of 28.0% is well diversified. Given that
KLI and Aviva have an equity cap in the 80%-85% range, their top 10 stock holdings are very
well diversified.

One problem we faced while evaluating portfolios is lack of relevant data points. For instance,
something as relevant and important as the net assets/corpus was not mentioned for all ULIPs.
As a matter of fact, apart from ICICI PruLife no other ULIP had this information.

3. Sectoral Allocation
In terms of sectoral allocation, ICICI PruLife emerges as the most concentrated one with 65.0%
of its assets in the top 5 sectors. So too is the case with HDFCSL which holds 64.2% of its assets
in 5 sectors.

Both Aviva and KLI fare better as compared to HDFCSL and ICICI PruLife with 41.6% and
30.6% of assets in the top 5 sectors respectively. Again, this comparison has to be seen in light of
the lower equity allocation for both these insurers.

Like with stock allocations, we believe that sectoral concentration can expose a portfolio to
above-average volatility. While such a strategy can help the ULIP clock attractive returns during
a market rally, it is likely to expose investors to higher volatility when the markets witness a
downturn.

With respect to the concentration in the portfolios, insurance seekers need to appreciate that
insurance companies invest monies from a very long-term perspective; they are able to therefore
take, say a 10-year call or a 20-year call on a company or a sector. Since their inflows are
committed and ‘locked in’ they are able to invest with greater freedom and also not excessively
worry about near term volatility.

4. Fund Management Charges (FMC)

Charges play an important role while calculating the returns on a portfolio - higher the charges,
lower is the value of the investments. Over the long term (over 15 years), charges have the
potential to significantly impact the returns generated by the ULIP portfolio.

HDFCSL with an FMC of 0.80% surfaces as the most cost effective ULIP. ICICI PruLife (FMC
1.50%) fails to redeem itself on this front. KLI (FMC 1.50%) and Aviva (FMC 1.00%) with
additional expenses in the form of a buy-sell spread fare poorly compared to the others alongside
it. Simply put, the buy-sell spread is the difference between the buying price and the selling price
at which the life insurance company buys and sells its units.

In addition to FMC, ULIPs also levy administration charges. Here too, HDFCSL with charges of
Rs 180 per annum (pa) emerges as the clear leader. ICICI PruLife (Rs 720 pa) and Aviva (Rs
779 pa) fare poorly on this front. For KLI, the administration charges are levied as a percentage
of the annual premium- for the first year, the charges are 7% for premium upto Rs 20,000 pa and
3% for that portion of premium exceeding Rs 20,000 pa. Second year onwards, these charges
drop to 4% (for premium upto Rs 20,000 pa) and 2% (for premium exceeding Rs 20,000 pa).
KLI too fails to impress on this parameter.

5. Policy Returns
HDFCSL with a return of 86.7% for FY06 (financial year ending March 2006), towers head and
shoulders over the competition. It has also managed to outperform its benchmark, the BSE 100
(up 66.2%), by a wide margin. Such a performance is not surprising given that the policy invests
its entire corpus in equities vis-à-vis peers. ICICI PruLife too fared well on this front with 68.2%
returns over FY06, although it just about managed to outperform its benchmark, (BSE 100).

Kotak with 49.2% returns over the said period fared poorly as compared to its peers as well as its
benchmark, the S&P CNX Nifty (up 64.6%). One reason for the under-performance could be the
‘controlled’ equity exposure (62.2% as on March 31, 2006) as compared to its mandate (upto
80%). Aviva (61.1%) managed to post reasonable returns vis-à-vis peers. Despite our best
efforts, we failed to solicit information about the policy’s benchmark from the insurance
company.

Our evaluation of ULIP portfolios throws up some interesting learnings:

1.The quality of data and its presentation need to improve significantly, if investors, both
existing and potential, are to be able to study portfolios and make intelligent decisions.

2.ULIP portfolios need to be disclosed regularly. The reason you are seeing only four ULIP
portfolios is because others either don’t disclose it or disclose it only ‘selectively’.

3. By and large ULIP portfolios are well diversified in terms of stock allocations, however we
would like to see more diversification at the sectoral level. As we have learnt with mutual funds,
one without the other is of little use during a market downturn like the one we are witnessing at
present.

The ULIP GAME: IRDA 1, SEBI 0

Impact

The two-month long tussle between the two regulators - Securities and
Exchange Board of India (SEBI) and Insurance Regulatory and Development Authority (IRDA), finally
came to an end as the Government settled the tussle by issuing an ordinance, which ruled that Unit
Linked Insurance Products (ULIPs) will be regulated by IRDA.

The Law Ministry issued an ordinance amending the RBI Act 1934, Insurance Act 1938, SEBI Act 1992
and Securities Contract Regulations Act 1956 thus clarifying that life insurance business will include any
ULIP or scripts or any such instruments.

As per a senior IRDA official, the Finance Ministry has asked the IRDA to take the following steps, while
ruling the matter in their favour:

• Increase in life cover - Increase the life cover to 10 times of premium

paid, as against the present practice of 5 times of premium paid
• Minimum Life cover - Set the minimum life cover for ULIPs to Rs 1
lakh
• Minimum guarantee - Offering in minimum guarantee at maturity,
alike pension products

Reacting to this ruling, IRDA Chairman, Mr. J. Hari Narayan said, "We will revise the
guidelines for ULIPs to make it attractive for investors. Insurers will also be given
more time to redesign these products".
 We think that although the ruling is in favour of IRDA, the capital market regulator -
SEBI has been successful in making its point that ULIPs have a very low element of
insurance cover. We also think that such regulations may also make ULIPs attractive
for investors as it is aimed to encourage long-term savings and help policyholders
build a nest egg to cater to their needs, as they grow old.

IRDA gave a facelift to the structure of ULIPs

Impact
The Insurance Regulatory and Development Authority (IRDA) introduced sweeping changes to the
structure of Unit-linked Insurance Plans (ULIPs). Accordingly, with effect from September 1, 2010, ULIPs
will offer the following:

• A minimum guaranteed annual return of 4.5% on pension plans

• A 10-times increase in the minimum risk cover
• Even distribution of charges across the increased lock-in period (5 years)
• A ceiling on net and gross yields
• Mortality or health cover
• Risk cover on top-up premiums

It is not a coincidence, that these new guidelines came almost immediately after the Government issued
an Ordinance to clarify that ULIP’s will continue to be regulated by IRDA, thus putting to rest, a fairly
ugly and unnecessary public spat between IRDA and SEBI on turf issues. In our earlier issues, we had
always maintained that, when the dust settles on the jurisdiction issue, investors will gain from a more
investor friendly ULIPs being introduced.

But now it appears that the insurance industry is not too happy with the changes. . Kamesh Goyal,
Country Manager & CEO of Bajaj Allianz Life Insurance said, “The capping of expenses guideline has been
made very stringent. Small regular premium policies will become unviable; thus, a large proportion of
people who were paying premium of less than Rs 15,000 or so a year will suffer. Second, the commission
structure can’t sustain an agent’s income; the agency channel will suffer badly. I hope we don’t land in a
situation where a product is very good but no one is willing to sell it”.

We believe the guidelines framed by IRDA, are a step towards making ULIPs an attractive insurance-cum-
investment proposition. We also feel that the above guidelines may compel insurance companies to slash
commission rates for agents; which would be detrimental for insurance agents, but benefit policy holders
in the long-term.

Two issues on which there is silence are:

1. How will the new avatar for ULIP be treated from a taxability perspective? Now and also
when the DTC is introduced, supposedly in 2011?
2. Will there be two versions of ULIPs – pre September 2010 and post September 2010,
with different features and different tax treatments?
… And the confusion continues!!!!

ULIPs: Does the marriage work?

(14-Jun-2004 )

This article written by Personalfn was carried by Business India in the May 24, 2004
issue with the title ‘Lip Service’.

Unit-linked insurance plans (ULIPs) have become something of a rage with their 'promise' of
market-linked returns combined with the dual benefit of insuring your life from eventualities.

To put it simply, ULIPs attempt to fulfill investment needs of an investor with

protection/insurance needs of an insurance seeker. ULIPs work on the premise that there is class
of investors who regularly invest their savings in products like fixed deposits (FDs), coupon-
bearing bonds, debt funds, diversified equity funds and stocks. There is another class of
individuals who take insurance to provide for their family in case of an eventuality. So typically
both these categories of individuals (which also overlap to a large extent) have a portfolio of
investments as well as life insurance. ULIP as a product combines both these products
(investments and life insurance) into a single product. This saves the investor/insurance-seeker
the hassles of managing and tracking a portfolio of products.

Novel and noble as it appears, investor/insurance-seekers rarely understand the cost implications
of the marriage between investments and life insurance. To be sure, it is intricate and not
everyone is able to unravel it. Abhishek Bhatia (Head – Marketing ICICI Prudential Life
Insurance) explains, ‘Unit-linked products are designed to put control in the hands of the
customer. While some customers are comfortable with this, there are others who require some
more explanation about the features. This is provided by the insurance agent. All the charges are
clearly disclosed in the product brochures that are given to customers. Moreover, customers get a
benefit illustration, which clearly illustrates the up-front, investment and mortality charges that
are levied on the premium, and shows how the monies will grow over time, under a certain set of
assumptions.’

In this backdrop let’s understand the costs of owning a ULIP. For illustration purpose, we
have taken ULIPs of ICICI Prudential and HDFC Standard Life, two leading private insurers.
Investors need to understand that this should only give them an indicative idea about the costs
associated with a ULIP as different insurers have varying cost structures.

We will start with the investment costs. Since ULIPs manage a portfolio of investments for
clients, they incur a cost known as the fund management cost. This is similar to a mutual fund
that incurs costs on managing the equity and debt portfolio for investors. In this regard, ICICI
Prudential ULIP has a three-tier cost structure.
 PruICICI’s fund management costs

Plan Fund management cost

PruICICI Growth 1.30%

PruICICI Balanced 1.30%

Compare this to Prudential ICICI’s Growth Plan’s expense ratio (2.3% as on March 31,
2003). The expense ratio typically includes fund management fees, brokerage and custodial fees,
marketing/advertising fees.

ICICI Pru’s fund management costs

Plan Fund management cost

ICICI Pru ULIP (Equity) 1.50%

ICICI Pru ULIP (Balanced) 1.00%

ICICI Pru ULIP (Debt) 0.75%

(Please note that fund management costs are indicative)

Likewise PruICICI Balanced Fund’s expense ratio is also 2.30%. If one had to isolate fund
management costs it would be in the region of 1.00% plus about 0.30% in terms of the share
brokerage and custodial fees, which adds upto 1.30% (the balance 1.00% is accounted for by
marketing, administration costs). This is how it would work for a fund house as large as
PruICICI. So ICICI Pru’s ULIP (equity plan) is more expensive than PruICICI Growth Plan
while ICICI Pru’s ULIP (balanced plan) is more economical than the PruICICI Balanced
Plan.

Unlike ICICI Pru’s ULIP which has a graded fund management fee structure, HDFC
Standard Life’s ULIP has a flat fund management fee of 0.80% of net assets regardless of the
plan one chooses (there are five of them).

Let us see how HDFC Standard Life’s ULIP compares with HDFC Mutual Fund schemes in
terms of fund management costs. The flagship equity fund – HDFC Equity Fund’s fund
management expenses (indicative) works out to 1.30% given the size of HDFC Mutual Fund –
likewise for HDFC Prudence Fund (the flagship balanced fund). So HDFC Standard Life’s
ULIP (0.80%) stands cheaper than both HDFC Equity Fund and HDFC Prudence Fund.

However, investors need to note that while ULIPs are more economical on fund management
costs, this can be attributed to the fact we have not factored in the marketing costs of ULIPs.
Remember we have isolated the fund management costs of a mutual fund to segregate it from the
marketing costs. With a ULIP, the costs are significantly higher because there is a life insurance
component in it as well, in addition to the investment component.
For instance, with HDFC Standard Life ULIP, in the first and second years, 27% of the premium
constitutes ULIP charges. So if you have taken a Rs 10,000 ULIP from HDFC Standard Life
(which is the minimum amount to start with), Rs 2,700 in the first and second years each will be
set aside to meet ULIP charges. Only Rs 7,300 will be invested in the first and second years
each. From the third year onwards, only 1% of the premium will be charged to the ULIP, which
means Rs 9,900 will be the amount invested.

So should investors opt for ULIPs?

First and foremost, investors need to understand that a ULIP is a bundled product of their
investments and their insurance proceeds. So if you have a ULIP invested in equities, you are
exposing your life insurance monies as well as your investable surplus to the vagaries of equity
markets. While it is fine and even sensible to let your investable assets get an equity flavour, the
same cannot be said about your life insurance monies, which to a large extent should be sacred.
The volatility in equity markets can disturb the calmest of minds and the last thing you want to
see is your nest egg being eroded by the latest slide in equity markets. Abhishek Bhatia
elaborates, ‘A ULIP policyholder has the option to invest in a variety of funds, depending on
his risk profile. If one does not have the appetite to invest in equity, they can choose a debt or
balanced fund.’

However, the structure of a ULIP takes care of quite a bit of the uncertainty in the markets.
Insurance companies understand the need to give insurance-seekers the flexibility to rethink their
investment strategy in view of market histrionics. There is an option for the insurance-seeker to
switch to another plan with a lower or zero equity component to stem the loss in a falling equity
market. Abhishek points out, ‘The switch option allows customers to switch between fund
options, thereby making adjustments to any perceived risks.’ ICICI Pru allows policyholders
to make this switch four times a year at no cost, with Rs 100 at every additional switch after that.
HDFC Standard Life allows policyholders to make as many switches as they like. However, for
investors to make the right switch they need to track markets actively and be well-informed,
which is actually the job of the investment advisor/consultant.

ULIPs are suitable for individuals who are already adequately insured and are reasonably well-
informed and savvy to take active investment decisions by using the ‘switch option’ that is
provided to a ULIP policyholder. Also policyholders with regular endowment plans who are not
satisfied with the 4-6% returns can consider taking a ULIP with a lower equity component. It is
best if insurance-seekers tread the middle path and choose balanced plans (with about 50-60%
equity component). Ideally they need to avoid taking the aggressive 100% equity ULIP, which
could needlessly expose their assets to market volatility. So if insurances-seekers/investors play
their cards right, they can make this marriage work.

Buying ULIPs? Read this first

(30-May-2006 )
Unit linked insurance plans (ULIPs) 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. We outline
four parameters that ULIPs need to be evaluated upon before individuals zero-in on
a unit-linked product.

1. Investment mandate
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 is unlike saving-based plans like endowment plans, which invest pre-
dominantly in specified debt instruments like bonds and government securities (gsecs). 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.

 Click here to understand how a ULIP’s equity component makes a difference

However, ULIPs with a higher equity component can prove to be very volatile customers during
stockmarket turbulence. So investors have to be sure that their risk appetite coincides with that of
the ULIP. For this, make a note of the maximum equity allocation the ULIP can take on.

There are several options within a ULIP. You can select the option that best fits in with your risk
profile and helps you achieve your investment objective. If you are an aggressive investor you
can go for a ULIP with the maximum equity allocation – this varies from insurer to insurer but
is usually in the range of 70%-100% of assets. If you are a conservative investor then you can
opt for a ULIP option that has a smaller equity allocation of about 20%.

2. ULIP expenses
A lot has been written about ULIP expenses in the past. At the cost of sounding repetitive, ULIP
expenses do make a difference to the returns. This gets more evident over the long run. Expenses
take a toll on the returns by way of reducing the amount, which gets invested. A lower amount
will yield lower returns.

ULIP expenses are broadly classified into annual expenses (excluding fund management
charges- FMC) and fund management charges. The annual expenses are deducted from the
premium amount and hence, that part of the premium which is net of annual expenses is
invested. While annual expenses are high in the initial years, they even out in the long run
(typically 15 years and above).

 Click here to understand how ULIP expenses affect returns

FMC on the other hand, is levied on the corpus till date. A higher FMC therefore means a
reduction in the corpus that can generate returns going forward. FMC therefore makes a sizable
difference to the returns in the long run.
3. Miscellaneous features
ULIPs offerings also differ across companies in terms of the flexibility offered across various
parameters. For example, the minimum premium for one insurance company is Rs 10,000 while
for another, it is Rs 18,000. Also, some insurance companies let individuals alter their equity:
debt allocation 5 times a year at no additional cost while other companies allow alteration only
twice during the year (without additional costs). The charge on top-ups also differs- a certain
insurance company invests 99% of the top-up amount (1% is deducted as top-up charges) while
another company deducts 2.50% as top-up charges, investing the remaining 97.50%. Such
differences need to be considered before individuals zero-in on a ULIP product.

4. Focusing on your asset allocation

Individuals also need to stick to their asset allocation plan at all times. It has been noticed that
ULIPs are often bought by individuals without having an understanding of the value that they
bring to their financial portfolio. If their current asset allocation is skewed towards equities (i.e.
mutual funds/ stocks), then what the individual may really need is a term/endowment plan.
Conversely, if the portfolio is debt-heavy, then the individual can consider investing in a ULIP
with a significant equity allocation.