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A unit linked insurance policy is one in which the customer is provided with a life
insurance cover and the premium paid is invested in either debt or equity products or a
combination of the two. In other words, it enables the buyer to secure some protection for
his family in the event of his untimely death and at the same time provides him an
opportunity to earn a return on his premium paid. In the event of the insured person's
untimely death, his nominees would normally receive an amount that is the higher of the
sum assured (insurance cover) or the value of the units (investments).However, there are
some schemes in which the policyholder receives the sum assured plus the value of the
investments.
Every insurance company has four to five ULIPs with varying investment options,
charges and conditions for withdrawals and surrender. Moreover, schemes have been
tailored to suit different customer profiles and, in that sense, offer a great deal of choice.
The advantage of ULIP is that since the investments are made for long periods, the
Just as in the case of mutual funds, buyers who are risk averse can buy into debt schemes
while those who have an appetite for risk can opt for balanced or equity schemes.
However, the charges paid in these schemes in terms of the entry load, administrative
fees, underwriting fees, buying and selling charges and asset management charges are
fairly high and vary from insurer to insurer in the quantum as also in the manner in which
Tax benefits
The premiums paid for ULIPs are eligible for tax rebates under section 80 which allows a
a maximum of Rs. 1,00,000 premiums paid for taxable income below Rs 8,50,000 and
Proceeds from ULIPs are tax-free under section 10(10D) unlike those from a mutual fund
Key features
Premiums paid can be single, regular or variable. The payment period too can be regular
or variable. The risk cover (insurance cover) can be increased or decreased.As in all
insurance policies, the risk charge (mortality rate) varies with age. However, for an
individual the risk charge is always based on the age of the policyholder in the year of
commencement of the policy. These charges are normally deducted on a monthly basis
from the unit value. For instance, if there is an increase in the value of units due to
market conditions, the sum at risk (sum assured less the value of investments) reduces
and so the risk charges are lower. The maturity benefit is not typically a fixed amount and
Investments can be made in gilt funds (government securities), balanced funds (part debt,
part equity), money-market funds; growth funds (equities) or bonds (corporate bonds).
The policyholder can switch between schemes (for instance, balanced to debt or gilt to
equity). The investment risk is transferred to the policyholder.The maturity benefit is the
net asset value of the units. The value would be high or low depending on the market
conditions during the period of the policy and the performance of the fund manager.
Thus there is no capital protection on maturity unless the scheme specially provides for it.
There could be policies that allow the policyholder to remain invested beyond the
maturity period in the event of the maturity value not being satisfactory.
First-year charges: Usually, a minimum of 15 per cent. However, high premiums attract
lower charges and vice versa. Charges can be as high as 70 per cent if the scheme affords
a lot of flexibility. Subsequent charges: Usually lower than first-year charges. However,
some insurers charge higher fees in the initial years and lower them significantly in the
subsequent years.
Administration charges: This ranges between Rs 15 per month to Rs 60 per month and
is levied by cancellation of units and also depends on the nature of the scheme.
Asset management fees: Fund management charges vary from 0.6 per cent to 0.75 per
cent for a money market fund, and around 1.5 per cent for an equity-oriented scheme.
Fund management expenses and the brokerage are built into the daily net asset value.
Switching charges: Some insurers allow four free switches in every year but link it to a
minimum amount. Others allow just one free switch in each year and charge Rs 100 for
Top-ups: Usually attracts 1 per cent of the top-up amount. Top-up normally goes directly
into your investment account (units) unless you specifically ask for an increase in the risk
cover.
Surrender value of units: Insurers levy certain charges if the policy is surrendered
prematurely. This levy varies between insurers and could be around 75 per cent in the
first year, 60 per cent in the second year, 40 per cent in the third year and nil after the
fourth year.
Fund performance: You could check out the performance of similar schemes (balanced
Look at NAV performance over a period of at least two to three years. This can only give
you some indication about the credibility of the fund manager because past performance
Since insurance is a product, which entails a long-term commitment on the part of the
insurer, it is important not to go only by the features or the cost advantages of schemes
initial years' expenses the longer it takes for the policy to outperform its peers with low
Retire unhurt
Pension plans are essentially tailored to meet old age financial requirements. But there
First of all, contribution to pension funds upto Rs 10,000 is eligible for tax deduction
under section 80CCC. In other words, your pension contribution will get deducted from
So if you are in the top tax bracket, liable to pay to a 30.6 per cent tax, then your tax
All life insurance companies offer pension products - both conventional and unit-linked.
In both cases you pay a certain premium amount for a specified length of time.
Usually, the minimum entry age is 18 years and the maximum age is 60 years. You can
choose to pay the premium for five to 30 years. When the policy matures, you receive
For the remaining, you can buy annuities either from the existing insurer or any other
insurer.
While in a conventional scheme, your money is managed through the insurer's pooled
investment account and you are entitled to bonuses every year, in a ULIP you receive the
aggressive scheme with high allocation to equities. Pension policy imposes huge
Most pension plans provides for four annuity options - (1) annuity for life, (2) annuity
payable for a chosen term and for life thereafter, (3) annuity for life with return of
purchase price on death to the beneficiary and (4) annuity for life to you and then to your
spouse with return of purchase price to the beneficiary on death of last survivor - which
can be exercised at any time within six months of the vesting date or the date on which
you are eligible for pension. Schemes allow postponements of vesting age and also early
retirement.
Sara is a thirty-year old who wants a product that will give him market-linked returns as
well as a life cover. He wants to invest Rs 50,000 a year for 10 years in an equity-based
scheme. Based on this premium, the sum assured works out to Rs 532,000, the exact
Based on the current NAV of the plan that Sara chooses to invest in, he is allotted units in
the scheme. Then, units equivalent to the charges are deducted from his portfolio.
The charges in the first year include a 14 per cent sales charge, an administration charge
(7 per cent for the first Rs 20,000 and 3 per cent for the remaining Rs 30,000) and
Besides, mortality charges or the charges for the life cover are also deducted. For the
remaining nine years a 3.5 per cent sales charge and an administrative charge of 4 per
cent (for the first Rs 20,000 and 2 per cent for the remaining Rs 30,000) are levied in
Fund management fee of 1.5 per cent (equity) and brokerage are also charged. This cost
On maturity - that is, after 10 years - Sara would receive the sum assured of Rs 532,000
Assuming the growth rate in the market value of the units to be 6 per cent per annum Sara
would receive Rs 581,500; assuming the growth rate in the market value of the units to be
In case of Sara's untimely death at the end of the ninth year, his beneficiaries would
receive the sum assured of Rs 532,000 or the market value of the units whichever is
higher. Assuming the growth rate in the market value of units is 6 per cent per annum, the
ninth year would be Rs 621,900. Hence, the beneficiaries would get Rs 621,900.
THE equity market, when it is all abuzz, has the magical quality of morphing into a
honeycomb. Investors swarm it, lured by the prospect of high returns. It is no different
now.
Investors — those that deployed funds directly or through the mutual funds route — have
had a rich harvest of honey. Another class of investors that has reason to smile is the one
enable investors track the performance of their net asset values everyday.
dailies are par for the course, it is not uncommon to see hoardings announcing the
exercise some discretion. A look at how suitable the unit-linked plans are from an
The high-decibel advertising campaigns may lead investors to believe that the returns
generated over the past few months are sustainable. Nothing could be farther from the
truth. To draw a parallel, similar advertisements were put out by mutual funds during the
heady days of the market in the mid-1990s. For instance, campaigns with such punchlines
as "100 per cent return in 10 months" were common. Investors who entered such funds
Suitability of options
Unit-linked insurance plans usually offer three schemes: One oriented towards debt and
money-market instruments, another with a tilt towards equities, and a third that seeks to
If one opts for the plan that invests primarily in equity, the buzzing market could lead to
windfall returns. However, should the buzz die down, investors could be left stung.
If one invests in a unit-linked pension plan early on, say 25, one can afford to take the
risk associated with equities, at least in the plan's initial stages. However, as approaches
stage, investing in a plan that has an equity tilt may not be a good idea.
Fund management style
Considering that unit-linked plans are relatively new launches, their short history does
not permit an assessment of how they will perform in different phases of the stock
What has happened over the past few months is that such plans have participated in the
broad-based rally in the market to deliver high returns. However, these returns are
For instance, mutual funds posted spectacular returns in the mid-1990s and their net asset
values (NAVs) zoomed. When the buzz died down, the erosion in value was equally
swift. Quite a few funds have managed to recover from their battered NAV levels.
Bluechip and Prima, now from the Franklin Templeton stable and then part of Kothari
Pioneer, have recovered considerably to post annual returns of 25 per cent and 20 per
cent respectively over a 10-year period. And this has been achieved on an asset base that
base, and emerge unscathed is a reflection of the quality of fund management. And the
evidence is inadequate to pass judgment on how they will stack up when the going gets
tough.
Till such time they prove that they can deliver the goods under tough market conditions,
investors will be better off opting for plans that invest primarily in debt, which have
Market timing
To maximise returns even during such bullish phases, it is imperative that investors time
their entry and exit from the markets. As far as stocks go, returns tend to be compressed
over a short timeframe. (To illustrate, the Sensex has put on 60 per cent in a span of six
months this year.) Staying put too long in a unit-linked insurance plan that focusses on
equity may deplete returns if market mood turns negative. This implies that investors
should deftly switch between schemes within a plan to get the biggest bang for their
buck. For instance, investors who want to lock in to the gains on the equity portfolio can
Charges aplenty
Various charges are levied on such plans. They either lead to a deduction from the
investment amount that is brought in or are adjusted by liquidation of units. In both cases,
returns are affected. Typically, charges are high in the initial two years before they taper
This would mean that the effective amount available in the first two years would be 80
per cent of what has been invested. Thereafter the investible surplus is higher.
In the current bull run, the high returns mask the charges levied. But if returns drop to
One also needs to consider the deduction that will be made if one opts for life cover. If it
charges.
This is in contrast to what one pays in a pure term plan under which premiums are fixed
on the basis of the mortality risk at the time of purchasing the plan.
Course of action
PROVIDING life cover is the most important function of insurance; providing returns is
just an added advantage of such plans, which gets magnified, given the tax rebates.
Steer clear of opting for life cover under the unit-linked plans; settle for a pure term
plan instead, which will offer you a high amount of cover for a relatively lower premium
outgo.
Investors can look at the debt-based plans as the tax breaks could magnify returns.
Over the long-term they could offer superior returns compared to debt funds offered by
mutual fund houses, assuming that the tax breaks are in place.
For those who seek a partial exposure to equity in their portfolio, a combination of a pure
term policy and an investment in mutual fund schemes, such as Prima, Bluechip, HDFC
Equity, HDFC Tax Saver, and Templeton India Growth Fund, is a superior option to the
the equity option in unit-linked plans, despite the risk of a short track record.
Balanced funds as a class have not performed well in the Indian context, with only
two schemes ( HDFC Prudence and US-95) having a good long-term track record.
boring. However, when the markets start tanking, such strategies ensure that you are not
MUMBAI: Insurance policy holders who have chosen to take the stock market route to
protect their life have begun feeling the heat of the falling sensex.
Net asset values (NAVs) of most equity oriented insurance policies (ULIPs) have fallen
between 10-26%, since the sensex touched a record high of May 11.
Unlike conventional insurance policies, ULIP schemes are life assurance policies where
proceeds are linked to units in an investment fund, which is invested in debt or equity
instruments.
In these schemes, the insured party also has the option to choose the exposure he wants in
equity or debt. In the last few months, biting into the stock market euphoria, many retail
investors chose ULIPs as their insurance vehicle despite risks associated with stocks.
Obviously, schemes with a higher equity component would have fallen more than those
with higher debt exposure. Schemes like the Om Kotak Aggressive has seen a 26% drop
Similarly, Bajaj Allianz's Unit Gain Equity Plus, Premium Equity Gain have seen a
SBI Life's Horizon Equity has seen a 23.7% reduction in NAVs. Surprisingly, despite this