You are on page 1of 19

ULIPs vs.

Conventional life insurance plans

1. Potential for better returns:
Under IRDA guidelines, traditional plans have to invest at least 85% in debt instruments which results in low returns. On the other hand, Ulips invest in market linked instruments with varying debt and equity proportions and if you wish you can even choose 100% equity option.

2. Greater transparency
Unlike Ulips, in a traditional life insurance policy youre not aware of how your money is invested, where it is invested and what is the value of your investment.

ULIPs vs. Conventional life insurance plans

3. Flexibility in investment
a. Flexibility to invest the money the way you want b. Flexibility to change the fund allocation c. Flexibility to invest more via top-Ups d. Flexibility to skip premium

4. Flexibility in insurance coverage 5. Higher Liquidity (Better exit options)

What are ULIPs?

Unit-linked insurance policies or ULIPs are contemporary life insurance policies that offer investment benefits along with life cover. It is similar to traditional life insurance policies such as endowment, money-back and wholelife, but with one major difference. Unlike traditional policies, in ULIPS investment risks are borne by policyholder and not with the insurance company.

What are ULIPs?

What is Net Asset Value (NAV)? NAV or Net Asset Value is the value of each unit of the fund on a given day. The NAV of each fund is displayed on the website of the respective insurers. What is a Unit ? Smallest measures of investment.

Types of ULIPs
Endowment Pension/Annuity Capital Guaranteed Highest NAV

What are the different types of ULIP funds

Different types of funds that ULIP offers are
Equity/growth/risk Funds (high risk) Balanced Funds (medium to high risk) Income/secured Funds (low risk) Cash/Bond Funds (no risk)

Nomenclature and percentage of investment in debt and equity may be different.

What are the Charges, fees and deductions in a ULIP?

ULIP charges differ with insurers. However the

structure for charges and fees remains the same. The different types of fees and charges are Premium Allocation Charge Mortality Charges Fund Management Charges Policy/ Administration Charges Surrender Charges Fund Switching Charge Guarantee charges Miscellaneous charges Service Tax Deductions

Different Charges Under ULIPs...

Allocation charges Simply they are commission charges for agents, marketing and advertising expenses etc.

Insurance companies may use different nomenclatures like loading/ upfront charges/ premium allocation etc.
If we compare with mutual funds they use the words like loading/ upfront charges etc.

Different Charges Under ULIPs...

Insurance Charges like Mortality, Accident Benefit, Critical Illness Etc Charges for above said are more or less same. However defined benefits of Accident and Critical Illness may vary from company to company and product to product.

Different Charges Under ULIPs...

Monthly flat fee/ Policy Administration charges These are administrative charges like sending unit statements , notices to the policy holders. They are charged equal to all policy holders. Thus they are less for bigger investors as proportion to their investments. Again they vary from company to company and product to product.

Different Charges Under ULIPs

Fund management expenses

As per basic concept of ULIP policy holder pays a certain amount as premium to purchase a policy. Insurance companies deduct their expenses like allocation charges, insurance coverage, administrative expenses, flat fee etc. Balance moneys go for investments in a portfolio consisting of debt instruments and equity market in a proportion decided by policy holder at the inception of contract. To manage the fund insurance companies like mutual fund companies charges fund management expenses or Asset management expenses.

Different Charges Under ULIPs

Fund management expenses (cont) There are 4-5 options for policy holder to choose. When customer asks for safe funds like our Bond option then insurance company charges less. If customer asks for higher equity option like growth then companies charge more as lot of research and portfolio churning is required for same. Again they vary from company to company and product to product. Presently they are 0.5-2% of invested amount. As a precaution companies have the option to increase/ decrease the expenses.

Different Charges Under ULIPs

Switch over charges

Various types of funds are offered by Insurance companies, with low to higher investments in share market. Policy holder has to choose one.
However most insurance companies allow policy holder to switch from one fund to another. Again while comparing this facility varies from one Insurance company to another and one product to another.

Different Charges Under ULIPs...

Surrender / Withdrawal Every ULIP plan allows Policy holder to close the insurance contract before its defined maturity date. Surrender means some deductions for early closing. Withdrawal is close of contract without any penalties imposed. Again these conditions vary from product to product and company to company.

Different Charges Under ULIPs...

Partial Withdrawals Under this option Policy Holder is allowed to surrender some portion of his investments in Insurance Companies either at fixed term or as per choice of Customer. Some restrictions are imposed for maintaining a minimum balance. Again these restriction vary from company to company and product to product.

Recent Changes in the ULIPs

Lock in period increased to 5 years from the existing 3 years Compulsory risk cover other than pension/annuity products Pension or annuity products must offer a minimum guaranteed return of 4.5% p.a. or as specified by IRDA from time to time, on the maturity date. Mortality and or health cover could be offered along with the pension/annuity products as riders. In case of maturity/surrender of these products , maximum of one-third of the accumulated value can be had as lump sum amount and the rest of the amount will have to be used to purchase an annuity product .

Recent Changes in the ULIPs

Cap on Charges: The reduction in yield for policies with term less than or equal to 10 years cannot exceed 3% at maturity and for terms above 10 years, it cannot exceed 2.25%. Loan amount :Similarly, the maximum loan amount under any ULIP policy is capped at 40% of the NAV where equity is more than 60% and at 50% of N NAV where debt is more than 60% of the total investment. Option to policyholder on discontinuance of the policy: The regulations allow grace period of 15(for monthly mode)/30 days (for other modes) for payment of premium. After this grace period, insurer has to send a notice to the policyholder within 15 days for (1) reviving the policy or (2) exercising complete withdrawal from the policy without any risk cover. If no option is exercised within 30 days, option (2) is deemed to have been exercised. The policy remains in force till this period. In the case of option (2), the fund value of the discontinued policy will accumulate at a minimum interest rate of 3.5% in the discontinued policy fund and will be refunded after the lock-in period.

Recent Changes in the ULIPs

Surrender Charges and lapsed policies Premiums up to Rs. 25000/-, the charges are capped at 20%, 15%, 10% & 5% respectively for the 1st, 2nd, 3rd and 4th policy year with maximum limits of Rs.3000/-, Rs.2000/-, Rs.1500/- & Rs.1000/-. For annualized premiums above Rs. 25,000 these caps are at 6%, 4%, 3% & 2% with maximum limits of Rs.6000/-, Rs.5000/-, Rs.4000/- & Rs.2000/- . There will be no charge from the 5th policy year.

How to compare ULIPs

All the charges deductible under the policy Deductions on premature surrender . Features and benefits and their cost. Limitations and exclusions. Lapsation and its consequences. Other disclosures. Investment Patterns NAV declaration Difference between Gross and Net Yield