Understanding ULIPS Introduction ULIP is an abbreviation for Unit Linked Insurance Policy which is a combination of life insurance and

a market linked investment product. Therefore, it provides you life cover as well as capital appreciation. The allocated (invested) portions of the premiums after deducting all the charges and premium for risk cover policies chosen by all investors are pooled together to form a fund and units are allocated from this fund as per your invested amount.

Guaranteed returns? ULIPs were originally meant to channelize savings to create wealth in the long term. But many ULIPs are today being sold as a tax saving and guaranteed return product with promises like this You invest Rs X and we will double the money in 5 years. It is often accompanied by attractive graphs and charts showing you how your money will grow. As an investor, you must understand that the charts are usually based on some assumptions. Similarly the returns during good times are highlighted but same is not shown to you for the periods when the fund didnt perform well. IRDA makes it mandatory for every insurer to provide an illustration to accompany every ULIP sold. This illustration should project returns assuming 6 and 10 per cent annualised returns and take the signature of the policy holder on the same. Investors should be aware that the returns may or may not materialize. Moreover the actual returns will be net of charges and expenses. As a thumb rule, the net return is between 5.5 to 6% if the plan annualised return is 10% over a period of 10 years. The net return is higher for a period beyond 10 years.

Types of Funds offered Most insurers offer a wide range of funds to suit ones investment objectives, risk profile and time horizons. Different funds have different risk profiles. The potential for returns also varies from fund to fund. The following are some of the common types of funds available along with an indication of their risk characteristics.

Charges and fees* ULIPs offered by different insurers have varying charge structures. Broadly, the different types of fees and charges are given below. As per IRDA (Insurance Regulatory Development Authority) norms, insurers have the right to revise fees and charges over a period of time. 1. Premium Allocation Charge - This is a percentage of the premium appropriated towards charges before allocating the units under the policy. This charge normally includes initial and renewal expenses apart from commission expenses.

M m F These are fees levied for management of the fund(s) and are deducted before 3. F arriving at the Net Asset Value (NAV). 4. P li y/ mi i i These are the fees for administration of the plan and levied by cancellation of units. This could be flat throughout the policy term or vary at a pre-determined rate. 5. S A surrender charge may be deducted for premature partial or full encashment of units herever applicable, as mentioned in the policy conditions.

.F Swi i Generally a limited number of fund switches may be allowed each year without charge, with subsequent switches, subject to a charge. 7. S vi T x D i portion of the premium.

Before allotment of the units the applicable service tax is deducted from the risk

It should be noted that the portion of the premium after deducting for all charges and premium for risk cover is utili ed for purchasing units. However, the quantum of premium used to purchase units varies from product to product. What it m ans as an investment pti n? The charges and various other expenses are front loaded i.e. high in initial years. Over a long period of time they IPs make sense only if you plan to stay invested for -15 years or more. arketing agents even out. Thus often try to sell IPs as three-year products for tax saving purpose and suggest you withdraw the proceeds at the end of three years. That is a sure shot way to lose money as you will end up paying all the charges but not reap the benefits of appreciation. ee L k Peri

As per I A, the policyholder can seek refund of premiums if he disagrees with the terms and conditions of the k i ). The policyholder shall be refunded policy, within 15 days of receipt of the policy document (F the fund value including charges levied through cancellation of units subject to deduction of expenses towards medical examination, stamp duty and proportionate risk premium for the period of cover. Swit hing facility SWITCH option provides for shifting the investments in a policy from one fund to another provided the feature is available in the product. any policies give you multiple fund options and you can decide your allocation according to the market conditions. Switch should be used intelligently to protect your investments during turbulent times by making a switch to safer debt funds and during boom time you should switch to more of equity funds. You need to be aware of the fund options provided by the policy before you sign up. Exit pti ns If all the premiums have not been paid for at least 3 years continuously, the insurance cover ceases to exist. You will be paid the surrender value in that case. The tax benefits cease to exist when an individual wants to get out of a IP before three years i.e. any contribution made towards the policy during the financial year is not eligible for a deduction under section 8 C; On top of this deductions that have already been taken in the previous years would be added back as the income of the individual in that particular year of policy termination. Under the premi m holiday feat re, most ULIPs continue running if premium payment is stopped after the first three years, with the charges being deducted from the fund value through the term. While you may stop premium payments after three years and keep a ULIP going, the contract between you and the insurer will be terminated when, after deduction of charges, the fund value becomes equal to or less than one years premium. So, you need to keep an eye on the fund value if you exercise the option of stopping premiums after three years.

2. M li y These e harges t rovi e for the ost of i surance coverage under the lan. charges depend on number of factors such as age, amount of coverage, state of health etc

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Is not a pure investment tool, as pitched by most of the sellers Should not be taken if insurance need is not there, in which case you should go for only mutual funds Is expensive as compared to a combination of term insurance and mutual funds, which can serve your purpose better Should be taken for a long term only Should be taken with a high sum assured.

ULIP VS MUTUAL FUND

investor to invest into equity. But how do we decide which one should we go for. Though it is very easy to decide, people tend to confuse themselves most of the time. This article talks about some points that you need to consider while deciding which option we want to take. Mutual Fund are pure investments. ULIP are combination of Insurance and Investment.

First question that we need to answer while buying ULIP is o I need to buy insurance?

2) If something happens to the person, Is there someone who can be in a financial crisis? If the answer to the above two question is yes, I NEE TO BUY INSURANCE.

Now let us compare ULIP and MF based on certain well known facts:

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ULIPs provide you with insurance cover. MFs dont provide you with insurance cover. A point in favor of ULIPs. But let me tell you that you dont get this insurance cover for free. Mortality charges (i.e. the price you pay for the insurance cover) gets ducted from your investment. Also incase of a lapse of the policy you are not covered and the money is pocketed by the insurer. The lapse raito is nearly 17% which is quite high.

2)

ULIPs generally come with a huge entry load. For different schemes, this can vary between 5 to 4 % of the first years premium. This has now been distributed over the lockin period. Thus making it more customer

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oes the person seeking insurance have any financial liabilities?

Unit inks Insurance Plan (ULIP) and

utual Fund (MF) are the two most preferred options for a part time

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IP is a hybrid plan, provides the qualities of both insurance and mutual funds Gives you tax benefits under section 8 C Gives you the flexibility to chose your premium as well as risk cover Gives you the flexibility to stop premium payments if so desired or needed

friendly now. MFs do not have any entry load. Here MFs have a huge advantage. If we consider a conservative market return of about 10-15% you may get a ero percent return in the first year in case of ULIPs.

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ULIPs generally come with a maturity of 5 to 20 years. That whatever money you put in, most of it will be locked-in till the maturity which is now atleast 5 years. Tax saving MF (Popularly called as Equity Linked Saving Scheme or ELSS) come with a lock-in period of 3 years. Other MFs dont have a lock-in period. Again MFs have advantage over ULIPs. ULIPs do allow you to take money out prematurely but they also put penalties on you for doing that.

4)

ULIPs would generally make you pay at least first three premiums. MFs dont have any compulsion on future investments. If you have invested in a MF this year, and in the next year you dont have enough income or money to do investments you can decide not to make any investmets. Also if you notice that the MF that you invested in is not giving good returns as compared to some other Funds scheme, you can decide to invest in some other MF.

Both the ELSS and ULIP come under 80C and can save you tax. Returns in the both form of investments are tax free. )M k

ULIPs give you both moderate and aggressive exposure to equity market ebt and Liquid MF let invest with low risk, but dont give you tax benefit.

ULIPs need not be aggressive in equity exposure. That is ULIPs need not keep more that 0% of their funds in equity market. ULIPS also allow to change your equity market exposure. Thus it can help you time the market and still give you tax savings. If a MF has a less than 0% exposure to equilty market the returns from it are not tax free. Thus you dont get to take a conservative stand on returns. 7) Fl xibili y f im

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ULIP will get redeemed on maturing. Premature redemption is allowed with some penalty which has now been reduced. But ULIPs are more flexible in terms of the premiums paid since you cn vary the premium paid and also switch from a high rish equity plan to a lower risk debt plan without charge thus helping to balance risk. This is not allowed in case of mutual funds. In MF Premature redemption is not allowed. For a open ended scheme one can redeem the MF anytime after maturiry This is mainly useful if the market is down at the maturity time of the investment. In case of ELSS you can wait till the market comes up again and then redeem them. ULIP scheme wont allow you to wait.

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Thus, According to my opinion 1) If you wish to take a agressive exposure to equity market, go ahead any buy MF. ULIP wont be able to give you similar returns. 2) If you think you are not diciplined enough to make regular investments and need a whip to make you invest, invest in ULIP. 3) If you want to take a low exposure to equity market and still get tax free returns, invest in ULIP but make sure that fund you are invested is conservative fund. 4) If you want Insurance cover and also good return on investment. I would suggest that you invest in MFs and take a term plan.

BAJAJ ALLIANZ SHIELD PLUS WHY NOT TO INVEST Bajaj Allianz Shield Plus is a single premium fixed-term unit linked plan. Let us see, point by point, what your insurance agent will tell you and what he wont.

1.

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What your agent wont tell you is 100% allocation is only applicable if you pay a premium of 2,50,000 or more. For a premium of less than 50,000 there is a premium allocation charge of 1.5% and for premium of between 50,000 and 2,49,999 it is 1%. 2. T i

What your agent wont tell you is that, if you take a sum assured of less than 5 times the premium, your investment will not be entirely eligible for tax rebate under 80C and returns will also not be tax free. 3. T i

What your agent wont tell you is that this guarantee is on the unit price and not on investment. That mean if you bought the units for Rs 10 you are guaranteed to get a price of Rs 17 per unit on maturity. They do not indicate that the mortality and other charges will be charged by cancellation of units and these canceled units are not available on maturity. Also it is important to note that 170% return over a span of 10 years is equal to about 5.4% interest in a bank account. 4. Other thing that your agent wont tell you is that the plan has policy

for the first 5 years and 1.15% from there on. Paying this administration charges will reduce your investment by 17%. T New

e f ULIPS

Unit-linked insurance products or ULIPs are perhaps the most widely discussed and written about financial products in recent times, and not all for the right reasons. First, there was the battle over who would regulate them, and then came a series of regulatory changes to reform the product. The changes over the past few months have come one at a time, but in rapid succession. They have far-reaching implications for investors who are considering ULIPs. Here is a look at all the recent changes in the ULIP structure and their implications for investors. espite all the changes announced, these products still have a long way to go on transparency and disclosures relating to their investments. Though insurance is only incidental to ULIPs and the investment component is the key to returns, many insurance companies are unwilling to divulge adequate details on the historical portfolios and investment strategies of the ULIPs they manage.

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Changes to costs Cap on recurring charges: Their high expense structure has been a bone of contention with ULIPs. The IRDA has sought to remedy this in two ways. First, it fixed caps on the overall costs that can be charged to ULIP investors under two slabs, one for a tenor of up to 10 years and another for tenors of 10 years and above. It specified that the net reduction in yield (return) to investors from a ULIP should not be more than 3 percentage points for terms up to 10 years and 2.25 percentage points for ULIPs of 10 years or more, effectively capping the total expenses insurers may charge their investors. Then, this was modified, based on the experience of policies lapsing in the initial years. The difference between the gross and net yield for ULIP-holders is now capped at 4 per cent from the end of fifth year, and this cap progressively declines to 3 per cent by the tenth year. This will mean a lower cost structure for investors, even if they seek exit from ULIPs after the fifth year. For instance, if you invest for five years in a ULIP that earns a 10 per cent gross return, if you withdraw after the lock-in period, the net yield would drop by four percentage points to per cent. These changes are effective from July 1, 2010. Surrender charges trimmed: One of the key features that curtailed the liquidity aspect of ULIPs was the high surrender charge levied by insurers for premature closure. If policy-holders stopped paying premiums after two years, the surrender charges would amount to as much as 30-40 per cent of the first year premium. The surrender charges would thus reduce your overall returns substantially. IRDA has now introduced limits on surrender charges to rationalise them. If the policy is surrendered in the first year, the charge would be 20 per cent of first year premium or Rs 3,000, whichever is lower, for an investment amount up to Rs 25,000. For an investment above Rs 25,000, the charge would be six per cent of the premium subject to a maximum of Rs ,000. The surrender charge progressively reduces to Rs 1,000 in case of former or Rs 2,000 in the latter, if the policy is surrendered in the fourth year. As per the new guidelines, there would be no surrender charges from the fifth year. The implication of this is that investors wishing to exit a ULIP after the five-year lock in would not suffer any additional surrender charges, only the overall expenses mandated by the IRDA. Commission: The high commissions paid to insurance agents have been often highlighted by critics of ULIPs. The IRDAs new regulations seek to address this through the cap on overall charges and also through disclosure requirements. With effect from this month, the advisors commission in a ULIP will be automatically disclosed in the benefit illustration (the document that spells out the various charges deducted from the unit-holders premium and quantifies the net yield to the customer). It is now mandatory for the advisor to take the signature of the investor on this document. Increase in mortality: The insurance component in a ULIP is usually quite small; however, IRDA has now sought to raise this component by specifying that ULIPs should carry a life cover for a minimum ten times of their annual premium (this was five times earlier). Changes and liquidity Extended lock-in period: All investments in ULIPs carry a three-year lock-in period. This will be increased to a five years from September 1, 2010. This will clearly weed out the mis-selling of ULIPs as short-term products to investors. Given the buoyant equity market investors are often persuaded by their advisors to invest in ULIPs on the premise that these are three-year products. With funds locked up for five years, only investors serious about building a long-term investment portfolio would consider buying ULIPs. Incidentally, ULIPs should be bought only that way, because of their front-ended expense structure.

Investors should also be conservative in deciding their premia as they are committed to the investment for several years at a time. If they fail to pay the renewal premium and discontinue the policy in the first five years, no payment will be made till expiry of the lock-in period. Hence investors not sure of a regular income should set their premium conservatively. For excess income, one can always add on single-premium policies. This ensure that you will not surrender the policy within five years. If a ULIP is prematurely discontinued, your fund value on the date (after adjusting for surrender charges) will earn minimum of 3.5 per cent interest during the remaining lock-in period. Liquidity: Even while extending the lock-in period on ULIPs the regulator has sought to improve their liquidity by introducing norms for loans against ULIPs. In any ULIP where the equity accounts for more than 0 per cent of total portfolio, investors can be granted loans not exceeding 40 per cent of the investments net asset value (NAV). Where debt accounts for more than 0 per cent of the portfolio, the loan can be upto 50 per cent of NAV. Returns: While the above changes to ULIP costs may help improve effective returns to investors, the IRDA has also laid out special provisions for pension products fashioned as ULIPs. As per the new regulation, a unit-linked pension plan should carry a minimum guaranteed return of 4.5 per cent a year if all premiums are paid. Such ULIPs will also carry a longer lock-in period than others and no partial withdrawal will be allowed during the accumulation period. However, on vesting date, policyholders can commute (choose to receive as lump-sum) up to one-third of the accumulated value of the fund to his credit. Pension policy holders should ensure that they pay premium till the maturity period. In the event of discontinuation, the policyholder would be entitled for a lump-sum refund of not more than one-third of the fund value, while the remaining amount would be used to purchase annuity to ensure pension payments. You will pay tax for the pension received for your respective slab and it will bring down the net yield on the product. How ULIPs performed All the above measures may help lift the effective returns to investors from ULIP products. But how have equityoriented ULIPs performed so far? Details on ULIP performance or portfolios are not as easy to come by as those for mutual funds. However, an analysis of equity-oriented ULIPs (80-100 per cent invested in stocks) shows that over a one-year period, 56 of 62 schemes managed to outperformed such indices as BSE Sensex, CNX Nifty and BSE 100. Over a three-year period, 21 of 28 schemes, and for a five-year period 9 out of 13 schemes, comfortably edged past BSE Sensex. Over three- and five-year periods, the category average clocked compounded annual returns of 10 per cent and 22.7 per cent respectively, against the 5.5 per cent and 19.2 per cent recorded by the BSE Sensex (Nifty returns are 6.3 per cent and 18.1 per cent). However, investors should note that their effective returns from ULIPs may be 3-4 percentage points lower than the NAV-based return (as ULIP expenses are adjusted based on the unit balance and not the NAV).