CHAPTER 1:An Introduction to Ulip plans

ULIPS What is ULIP? ULIP stands for Unit Linked Insurance Plans. As we know that insurance is for protecting our life from the any uncertain events like death or accident. The purpose of the normal insurance plan is just protecting the life but not ensuring any savings for the future. Many people wanted plan which gives protection also gives the returns for their investment. So, insurance companies come up with the ULIP plan where the premium about is invested in the share market and returns better income on the maturity period.

PLATFORMS OF LIFE INSURANCE U N I T L I N K E D INSURANCE PLANS World over, insurance come in different forms and shapes, although the generic names may find similar, the difference in product features makes one wonder about the basis on which these products are designed .With insurance market opened up, Indian customer has suddenly found himself in a market place where he is bombarded with a lot of jargon as well as marketing gimmicks with a very little knowledge of what is happening. This module is aimed at clarifying these underlying concept sand simplifying the different products available in the market. We have many products like Endowment, Whole life, Money back etc. All these products are based on following basic platforms or structures viz.

Traditional Life Universal Life or Unit Linked Policies

3.1 TRADITIONAL LIFE AN OVERVIEW The basic and widely used form of design is known as Traditional Life Platform. It is based on the concept of sharing. Each of the policy holder contributes his contribution (premium) into the common large fund is managed by the company on behalf of the policy holders .A d m i n i s t r a t i o n o f t h a t c o m m o n f u n d i n t h e i n t e r e s t o f e v e r yb o d y w a s entrusted to the insurance company . It was the responsibility of the company to administer schemes for benefit of the policy holders. Policy holders played a very passive roll. In the course of time, the same concept of sharing and a common fund was extended to different areas like saving, investment etc.

A Unit Link Insurance Policy (ULIP) 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 w o r d s , i t e n a b l e s t h e b u ye r t o s e c u r e s o m e p r o t e c t i o n f o r h i s f a m i l y i n t h e 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 or the value of the units (investments). To put it simply, ULIP attempts to fulfill investment needs of an investor with protection/insurance needs of an insurance seeker. It saves the investor/insurance-seeker the hassles of managing and tracking a portfolio or products. More importantly ULIPs offer investors the opportunity to select a product which matches their risk profile.

Unit Linked Insurance Plans came into play in the 1960s and became very popular in Western Europe and Americas. In India The first unit linked Insurance Plan, popularly known as ULIP Unit Linked Insurance Plan in India was brought out by Unit Trust Of India in the year 1971 by entering into a group insurance arrangement with LIC o provide for life cover to the investors, while UTI ,as a mutual was taking care of investing the unit holders money in the capital market and giving them a fair return. S u b s e q u e n t l y i n t h e ye a r 1 9 8 9 , a n o t h e r U n i t L i n k e d P r o d u c t w a s l a u n c h e d b y the LIC Mutual Fund called by the nam e of DHANARAKSHA which was more or less on the line of ULIP of UTI .Thereafter LIC itself came out with a Unit Linked Insurance Product known by name BIMA PLUS i n t h e ye a r 2 0 0 1 - 0 2 . . Presently a number of private life insurance companies have launched Unit Linked Insurance Products with a variety of new features. TYPES OF ULIP

There are various unit linked insurance plans available in the market. However, the key ones are pension, children, group and capital guarantee plans.

The pension plans come with two variations with and without life cover and are meant for people who want to generate returns for their sunset years. The children plans, on the other hand,

are aimed at taking care of their educational and other needs...Apart from unit-linked plans for individuals; group unit linked plans are also available in the market. The Group linked plans are basically designed for employers who want to offer certain benefits for their employees such as gratuity, superannuation and leave encashment.

The other important category of ULIPs is capital guarantee plans. The plan promises the policyholder that at least the premium paid will be returned at maturity. But the guaranteed amount is payable only when the policy's maturity value is below the total premium paid by the individual till maturity. However, the guarantee is not provided on the actual premium paid but only on that portion of the premium that is net of expenses (mortality, sales and marketing, administration). How ULIPs work

ULIPs work on the lines of mutual funds. The premium paid by the client(less any charge) is used to buy units in various funds (aggressive, balanced or conservative) floated by the insurance companies. Units are bought according to the plan chosen by the policyholder. On every additional premium, more units are allotted to his fund. The policyholder can also switch among the funds as and when he desires. While some companies allow any number of free switches to the policyholder, some restrict the number to just three or four. If the number is exceeded, a certain charge is levied. Individuals can also make additional investments (besides premium) from time to time to increase the savings component in their plan. This facility is termed "topup". The money parked in a ULIP plan is returned either on the insured's death or in the event of maturity of the policy. In case of the insured person's untimely death, the amount that the beneficiary is paid is the higher of the sum assured (insurance cover) or the value of the units(investments). However, some schemes pay the sum assured plus the prevailing value of the investments. ULIP - KEY FEATURES

Premiums paid can be single, regular or variable. The payment period too can be regular or variable. The risk cover can be increased or decreased. As in all insurance policies, the risk charge (mortality rate) varies with age. The maturity benefit is not typically a fixed amount and the maturity period can be advanced or extended.

Investments can be made in gilt funds, balanced funds, money market funds, growth funds or bonds. The policyholder can switch between schemes, for instance, balanced to debt or gilt to equity, etc. The maturity benefit is the net asset value of the units. The costs in ULIP are higher because there is a life insurance component in it as well, in addition to the investment component. Insurance companies have the discretion to decide on their investment portfolios. Being transparent the policyholder gets the entire episode on the performance of his fund. ULIP products are exempted from tax and they provide life insurance. Provides capital appreciation. Investor gets an option to choose among debt, balanced and equity funds.

USP of ULIPS Insurance cover plus savings

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.

Multiple investment options ULIPS offer a lot more variety than traditional life insurance plans. So there are multiple options at the individuals disposal. ULIPS generally come in three broad variants:

Aggressive ULIPS (which can typically invest 80%-100% inequities, 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.

Flexibility The flexibility with which individuals can switch between the ULIP variantsto capitalise on investment opportunities across the equity and debtmarkets is what distinguishes it from other instruments. Some insurance companies allow a certain number of free switches. 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.With an SIP, individuals invest their monies regularly over time intervals of a month/quarter and dont have to worry about timing the stock markets.

HURDLES OF ULIP

NO STANDARDIZATION

All the costs are levied in ways that do not lend to Standardization. If one company calculates administration cost by a formula, another levies a flat rate. If one company allows a range of the sum assured (SA), another allows only a multiple of the premium. There was also the problem of a varying cost structure with age.