Академический Документы
Профессиональный Документы
Культура Документы
CONTENTS
1. Introduction 1.
2. Types Of Insurance 2.
3. LIC 4.
4. ULIP 5.
Introduction to Insurance
What is insurance –
The business of insurance is related to the economic value of the assets.
Every asset has a value. The asset would have been created through the
efforts of the owner. Every asset is expected to last for a certain period of
time during which it will perform. After that benefit will not be available.
None of them will last forever. The owner of is aware of this and so he
can manage the affairs and ensure by the end, the substitute is available.
Thus he makes sure value or income is not lost. However the asset may
get lost earlier. An accident or some unfortunate event may destroy it or
make it non-functional. In that case the owner and those deriving benefits
there from, would be deprived from the benefit and the planned
substitute would not have been ready. This is an adverse or an unpleasant
situation. Insurance is a mechanism to reduce such situation.
Life insurance
A person, who may have made arrangements for the needs, after his
retirement would also need insurance. This is because the arrangements
would have been made on the basis of some expectations like, likely to
live for another 15 years, or that children will look after him. If any of
the expectations do not become true, the original arrangement would
become inadequate and there would be difficulties. Living too long can
be as much a problem as dying too young. Both are the risks, which
need to be safeguarded against.
IRDA (Insurance regulatory and development authority), 1999 is an act
governing life insurance and ULIP.
ULIP
ULIP stands for Unit Linked Insurance Plan. It provides for life
insurance where the policy value at any time varies according to the
value of the underlying assets at the time. ULIP is life insurance solution
that provides for the benefits of protection and flexibility in investment.
The investment is denoted as units and is represented by the value that it
has attained called as Net Asset Value (NAV).
ULIP came into play in the 1960s and is popular in many countries in the
word. The reason that is attributed to the wide spread popularity of ULIP
is because of the transparency and the flexibility which it offers.
As times progressed the plans were also successfully mapped along with
life insurance need to retirement planning. In today’s times, ULIP
provides solutions for insurance planning, financial needs, financial
If the inclination to invest in stock market still persists but are still
skeptical, try via Unit Linked Insurance Plan (ULIP) route. It provides
cushion to those who are risk averse. ULIPs offer insurance protection
along with the option to invest in the stock market. The best part of
investing in stocks via ULIPs is that you can choose the funds suiting
your risk profile.
If you know that a particular fund is at its high and is performing well,
with the switch over option you can move to that fund. You can do that
when the fund in which you have invested is performing poorly or you
feel the returns are high in some other fund. The funds offered by ULIPs
Mihir Asher / MBA / Semester II “ Unit Link Insurance Plan (ULIP)”
Business Environment 8.
give the investors an exposure to both high and low equity investments.
Based on your risk profile, make your pick.
Suppose that you buy a ULIP when you are 30 years old. The sum
assured is Rs 5 lakh and the term is 20 years. The premium that you will
pay over a period of 20 years will work out to around Rs 25,000 to Rs
30,000 depending on the company you choose.
In a term policy, your premium will remain fixed throughout the term of
the policy. So that means, if you opt to invest in a mutual fund and buy a
term policy, the amount of investment and cost of insurance will not
change over a period of time. For a similar example as above, if the 30
year old were to take a term insurance policy for Rs 5 lakh, he would end
up paying anywhere between Rs 40,000 to Rs 50,000 as insurance
premium.
mutual fund would again recover the same costs from your investment
portion.
Flexibility
A ULIP will give you flexibility of increasing your life cover, while
maintaining the same premium. This is done by simply reducing your
investment allocation. So suppose you have a risk cover of Rs 5 lakh and
would like to increase it to Rs 6 lakh, you can still continue to pay the
same amount of premium. The only difference would be that the amount
deducted towards the risk cover would be more and therefore, the
amount invested would be less.
Says Puneet Nanda of ICICI Pru. Life Insurance, “The reason why
ULIPs have become popular is because they offer huge amount of
flexibility during the course of the policy. You can vary your mix
between protection and savings or within savings, your fund mix.”
If you have a term policy and would like to increase your life cover, your
only option would be to buy another term policy. This would mean
paying administration charges all over again.
There’s more to the flexibility. With a ULIP you don’t have fear that
your policy will lapse if you were unable to pay your premium. The cost
of insurance will be taken out of your existing investment to keep the
policy going. But if you fail to pay premium on your term policy, it will
lapse.
Expenses
the two products are different and ideally you should have both in your
portfolio.
The client’s age is 38 years and he wants a life insurance cover for
Rs 5,000,000. He has an above-average risk appetite.
The premium paying term however is only ten years and the actual
premium he will have to pay per annum is approximately Rs
894,000.
The client has also been advised by his agent to consider investing his
premiums in the ‘Aggressive’ (as has been defined by the insurance
with a 65% debt component) product in his portfolio. Instead what his
portfolio needed was a higher equity component; this would not only
‘balance’ his portfolio but also ensure that the portfolio reflects his true
risk profile.
It was also relevant that the client invest in equities since he was
considering his investments from a long-term (over 30 years) horizon.
This could be achieved by investing in equity-oriented mutual funds.
Mutual funds can offer several benefits:
Several studies have shown that over the long term, equities give a
higher return vis-à-vis fixed income instruments like bonds and
government securities. And given that the client’s investment
horizon is of over 30 years, this is an ideal time frame to reap the
rewards of investing in equities. Also, over a 30-Yr period, a 100%
equity mutual fund is better geared to outperform a ULIP portfolio
with a 65% debt component.
As can be seen, term plans combined with mutual funds have the
potential to add considerable value to an investor’s portfolio. In our view
individuals should first ensure that they are adequately covered by opting
for a term plan. Then they can either opt for ULIPs for the investment
component or as we have shown, they can consider mutual funds.
Mutual fund investors have the option of either making lump sum
investments or investing using the systematic investment plan (SIP) route
which entails commitments over longer time horizons. The minimum
investment amounts are laid out by the fund house.
ULIP investors also have the choice of investing in a lump sum (single
premium) or using the conventional route, i.e. making premium
payments on an annual, half-yearly, quarterly or monthly basis. In
ULIPs, determining the premium paid is often the starting point for the
investment activity.
ULIP investors also have the flexibility to alter the premium amounts
during the policy's tenure. For example an individual with access to
surplus funds can enhance the contribution thereby ensuring that his
surplus funds are gainfully invested; conversely an individual faced with
a liquidity crunch has the option of paying a lower amount (the
difference being adjusted in the accumulated value of his ULIP). The
freedom to modify premium payments at one's convenience clearly gives
ULIP investors an edge over their mutual fund counterparts.
2. Expenses
Similarly funds also charge their investors entry and exit loads (in most
cases, either is applicable). Entry loads are charged at the timing of
making an investment while the exit load is charged at the time of sale.
3. Portfolio Disclosure
As was stated earlier, offerings in both the mutual funds segment and
ULIPs segment are largely comparable. For example plans that invest
their entire corpus in equities (diversified equity funds), a 60:40
allotment in equity and debt instruments (balanced funds) and those
investing only in debt instruments (debt funds) can be found in both
ULIPs and mutual funds.
On the other hand most insurance companies permit their ULIP inventors
to shift investments across various plans/asset classes either at a nominal
or no cost (usually, a couple of switches are allowed free of charge every
year and a cost has to be borne for additional switches).
Effectively the ULIP investor is given the option to invest across asset
classes as per his convenience in a cost-effective manner.
This can prove to be very useful for investors, for example in a bull
market when the ULIP investor's equity component has appreciated, he
5. Tax Benefits
Despite the seemingly similar structures evidently both mutual funds and
ULIPs have their unique set of advantages to offer. As always, it is vital
Unit linked insurance plans have caught the fancy of individuals over the
past few years. In fact, most individuals opting for life insurance now go
in for ULIPs as opposed to term plans or endowment plans. Therefore, it
becomes important for individuals to understand what to look for in a
ULIP before finalising one. I outline 5 parameters that ULIPs need to be
evaluated upon before individuals zero-in on a unit-linked product.
High returns
Maturity bonus
Safety of capital
Life protection
Flexibility
Investment Options
Transparency
Disability
Critical Illness
Surgeries
Liquidity
Tax planning
Even as ULIPs are selling like hot cakes, one common doubt in most
people’s mind is why they cannot buy a mutual fund and top it up with a
term insurance policy instead of buying a ULIP? There are a number of
matters to consider here – the cost of life insurance, the reason for
investment, the investment horizon and so on. Similarly ULIP investors
have the option of investing across various schemes similar to the ones
found in the mutual funds domain, i.e. diversified equity funds, balanced
funds and debt funds to name a few. Generally speaking, ULIPs can be
termed as mutual fund schemes with an insurance component.
Ever since unit-linked insurance plans (ULIPs) made their debut, they
have become a subject of much discussion and debate. On the one hand,
they were a trifle too complicated for individuals not yet exposed to the
stock markets; on the other hand, they were much-maligned because of
the 'unusually high' costs.
Today, more individuals are open to using the ULIP-way to create wealth
over the long term. Here we outline exactly how ULIPs can help you
fulfill that responsibility.
You are young, probably married and even have kids. If you are the sole
breadwinner in the family, then you have quite a few responsibilities to
fulfill right from planning for your child's education/marriage to planning
for your own retirement to providing for the family in your absence.
The last responsibility is the most critical and ironically it is the easiest
and cheapest one of the lot to fulfill. At Personal fn, we have always
been votaries of term insurance -- the cheapest way to get a life cover for
you.
Term insurance is also insurance in its 'purest' form, in other words there
is no savings element in it, which ensures your premiums are very low.
There is no better product to provide for your family in case of an
eventuality and all individuals must consider taking a term plan.
Term insurance of course takes a huge burden off your chest as also your
wallet. But it still leaves you with a problem. If term insurance is only
going to take care of the 'risk' element, who is going to take care of the
'savings' part.
This is where ULIPs come in. Of course, that is not to say that ULIPs do
not have an insurance element, they do, but it is limited largely to the
earlier years and after a point they don the mantle of an investment
product.
So how can ULIPs help you save for child's education/marriage, planning
for retirement and other investment-related objectives? ULIPs can do all
this and more because they come with a lot of variety.
Consider this; except for term insurance (because it does not make
sense), just about every life insurance product has a ULIP option. So you
have endowment ULIP, child plan ULIPs and pension ULIPs. As a
matter of fact, there are some life insurance companies that only have
ULIP products; they don't have traditional endowment, pension and child
plans at all!
What that tells you is that if you are willing to take on some risk, a ULIP
can help you meet a lot of your financial objectives.
If you are looking to set aside some money for your child's education, the
5%-6% return on an endowment plan may not even take care of inflation,
let alone provide for a medical or MBA degree. The return you earn on a
child plan should not just counter inflation, it should be enough to cover
the cost of education.
And the way cost of education is spiralling, your insurance plan must
work very hard. Given their equity component, ULIPs are ideally placed
to fulfill this role.
You are in the 25-35 years age bracket. Your most pressing financial
objectives are providing for your child's future and your own retirement.
ULIPs can help you achieve both. Although you can take a single
endowment ULIP to achieve both objectives, we think it is more prudent
to make a demarcation between the needs and take separate ULIPs
dedicated to each objective.
Opt for a ULIP child plan to provide for your child's higher education,
marriage and seed capital for business to name a few needs. One way to
handle this multi-faceted objective is to take a ULIP money-back plan.
This way you get monies at regular intervals to address multiple needs.
The other important plan that individuals must consider taking earlier on
their lives is a pension plan. Building a corpus to face the rigours of
retirement should be given the priority it deserves.
By the time you reach the 35-45 age bracket, some of your existing
ULIPs are probably nearing maturity. For instance, if you had taken a
ULIP child plan earlier on, it is likely to mature in this age bracket to
coincide with the need (higher education/marriage) you had in mind at
the time of taking the ULIP.
However, if you married late or did not begin planning your finances at
an early stage in your life, now is the time. If you haven't insured
yourself as yet, go for a term insurance plan.
The advantage of taking a term plan at a slightly advanced age is that you
have a better idea of how your lifestyle is likely to pan out going
forward. In terms of costs, term plans remain your cheapest option no
matter when you take one.
You can opt for some of the ULIPs we mentioned for individuals in the
25-35 years age bracket depending on your needs. Remember, unlike
endowment, which gets really expensive at an advanced age, ULIPs
because of the way they are structured, do not turn out that expensive.
In this age bracket, it is likely that you are insured. However, you still
need to review your insurance cover taking into consideration the
changes in your lifestyle, income, needs and financial commitments.
Beef up your insurance cover through a term plan.
By this time, your ULIP pension plan will have matured. You can then
opt for an annuity, immediate or deferred, depending on your
requirements.
More importantly, it will ensure that you are not faced with any
unpleasant surprises at a later stage. Our experience suggests that
investors on most occasions fail to realise what they are getting into and
unscrupulous agents should get a lot of 'credit' for the same.
Identify a plan that is best suited for you (in terms of allocation of money
between equity and debt instruments). Your risk appetite should be the
deciding criterion in choosing the plan.
Opting for a plan that is lop-sided in favour of equities, only with the
objective of clocking attractive returns can and does spell disaster in
most cases.
Compare the ULIPs' performance i.e. find out how the debt, equity and
balanced schemes are performing; also study the portfolios of various
plans. Expenses are a significant factor in ULIPs; hence an assessment
on this parameter is warranted as well.
Enquire about the top-up facility offered by ULIPs i.e. additional lump
sum investments which can be made to enhance the policy's savings
portion. This option enables policyholders to increase the premium
amounts, thereby providing presenting an opportunity to gainfully invest
any surplus funds available.
Find out about the number of times you can make free switches (i.e.
change the asset allocation of your ULIP account) from one investment
plan to another. Some insurance companies offer multiple free switches
every year while others do so only after the completion of a stipulated
period.
Select an advisor who is not only conversant with the functioning of debt
and equity markets, but also independent and unbiased. Ask for
references of clients he has serviced earlier and cross-check his service
standards.
Mihir Asher / MBA / Semester II “ Unit Link Insurance Plan (ULIP)”
Business Environment 34.
When your agent recommends a ULIP from a given company, put forth
some product-related questions to test him and also ask him why the
products from other insurers should not be considered.
Cases of ULIPs being mis-sold never cease to amaze us. One such case
involved a 55-Yr old client who was sold a Rs 500,000 pa premium
ULIP by a private sector bank.
Experts review
1. To begin with, she was not explained what ULIPs are all about; this is
not surprising since a lot of clients we know have bought ULIPs without
appreciating how they can contribute to their investment/insurance
objectives. Given that she was not very well versed even with the basics
of investment and insurance, we believe selling her a Rs 500,000 ULIP
amounted to professional misconduct of the highest order and coming
from a reputed bank, this is even more alarming.
2. Now selling a ULIP to someone who does not need it is one thing, and
selling her a Rs 500,000 ULIP is another thing that ranks as even more
atrocious. We fail to understand how a Rs 500,000 ULIP could be of any
assistance to a 55-Yr old lady, who has no source of income and who is
just looking to remain invested in a low risk avenue that provides a
regular income until she turns 60 years when her father's sizeable
inheritance will come her way.
It is apparent from our client's details that she did not qualify on the
tenure parameter to justify a ULIP. With a 5-Yr time frame before she
inherited her father's wealth, she just did not have the minimum number
of years necessary to wipe out the heavy initial expenses on the ULIP.
ULIPs incur high expenses (sometimes as high as 60 per cent of the
premiums) in the initial years; so an investor is not going to earn a
(significant) return on the ULIP in the initial years until the high
expenses are recovered. Performance of stock markets (in the case of
equity-heavy ULIPs) play a critical role in recovering the expenses, but
at the time of opting for a ULIP there is no way to ascertain how stock
markets are going to fare over the short-to-medium term (don't believe
your agent if he claims to know better, he is lying).
longer than 5 years (i.e. until she turned 60 years old). She simply needed
a one-time low-risk interval investment (providing an income) that would
serve her well over 5-Yr tenure. And since she was not in a position to
pay the premium even in the second year, effectively she lost out on her
capital as well. Not to mention that there was no monthly income being
generated by the product!
regular income; after 5 years she would inherit her father's money. Also
it was abundantly clear to us from our interaction with the client that she
had a lower risk appetite. In view of these two points, we would have
recommended that:
2. A structured mutual fund product would have been suitable for the
client. These mutual funds are predominantly invested in debt to provide
capital preservation; the smaller equity component (usually 15-20 per
cent of assets) provides for capital appreciation. These funds, although
not capital-guaranteed investments, offer low-risk investors the
opportunity to clock higher returns than debt funds at marginally higher
risk. Again, she could opt for the dividend option.
Has the recent performance of the stock market left you with a regretful
feeling for not being a part of the soaring market? Do you have a flavour
for the market but also want some wise investment at the same time? If
yes, then Unit Linked Insurance Plans (ULIP) is the answer.
However the best part of having an investment plan is that you can
switch from one fund to another, which you find less risky. For example
if Mr. Patil has invested in growth fund and has found that the
investment in this particular fund is going to fall then he does have the
choice of switching over to another fund which he finds safer, it could be
a growth, balanced or any other fund. For example if you choose LIC’s
‘Jeevan Plus', the policyholder has to choose any one from the four
funds, which are Bond, Secured, Balanced and Growth funds. Within a
given policy year, four switches are allowed free of charge. After the
completion of one year, Rs.100 is charged for per switching of the fund.
Two factors considered responsible for the advent of ULIPs are firstly-
the entry of private insurance companies in the insurance sector and the
second factor being the decline of assured returns on endowment plans.
The performance of stock market especially in the last few months has
made ULIPS all the more popular. It is the only option that lets you to be
a part of the stock market and at the same time offers insurance cover. It
is like the best of two things clubbed into one. And honestly things
couldn’t get any better when we bring its other features into the
limelight.
Investment plans are particularly for those looking for security with an
inclination for the share market. To make it easier to choose, LIC offers
‘Future Plus’ and ‘Jeevan Plus’ which are unit linked plans.
products till then and customers, both existing and new, can continue to
enjoy the benefits of these products and have no reason to feel
concerned.
To reiterate, our objective is to remove complexity in all unit linked
products and ensure comparison across ULIP’s of all companies. The
existing/new customers who have purchased these products need not
worry under any circumstances as policyholder interests will be protected
by the insurers and the Authority.
Since ULIPs offer a lot of flexibility, you need to keep some points in
mind to optimize the benefits associated with them.
Bibliography
www.moneycontrol.com
www.irda.org
www.personalfn.com
Newspapers
Economic Times
Times Of India
Thank you,