NCRDs STERLING INSTITUTE OF MANAGEMENT

2009

WEALTH MANAGEMENT

SUBMITTED TO:-
PROF. KIRIT OZA

SUBMITTED BY:-
PRIYANKA ALEKAR 61
SNEHALATA GAIKWAD 73
DHAVAL LAGWANKAR 85
ANUPAMA SHETTY 106
 INDEX
SR.No. TOPIC

1. INTRODUCTION ON ULIP

2. VARIOUS ULIP CHARGES

3. TYPES OF FUNDS UNDER ULIPs

4. WHY ULIP?

5. How ULIP Works

6. Types of ULIPs

7. How to choose ULIP

8.
Traditional Products V/s Unit Linked

9.
ULIP vs MUTUAL FUND
 Acknowledgment

We personally would like to thank our professor

in charge Prof. KIRIT

KIRIT OZA sir for guiding us throughout the

project work.

Our professor has been a helping hand since the

inception till the completion of the project done.

UNIT LINKED INSURANCE PLANS

Unit linked insurance plan (ULIP) is a life insurance solution that provides the
client with the benefits of protection and flexibility in investment. It is a solution which
provides for life insurance where the policy value at any time varies according to the value of
the underlying assets at the time. The investment is denoted as unit and is represented by the
value that it has attained called as Net Asset Value (NAV).

ULIPs are a category of goal-based financial solutions that combine the safety of
insurance protection with wealth creation opportunities. In ULIPs, a part of the investment goes
towards providing a life cover. The residual portion of the ULIP is invested in a fund which in
turn invests in stocks or bonds; the value of investments alters with the performance of the
underlying fund opted by the customer.

Simply put, ULIPs are structured in such that the protection element and the savings
element are distinguishable, and hence managed according to your specific needs. In this way,
the ULIP plan offers unprecedented flexibility and transparency.

ULIPs came into play in 1960s and became very popular in Western Europe and
America. The reason that is attributed to the wide spread popularity of ULIP is because of the
transparency and the flexibility which it offers to the clients.

As time progressed the plans were also successfully mapped along with life insurance
needs to retirement planning .In today’s times ULIP provides solution for all the needs of a
client like insurance planning, financial needs, financial planning for children’s future and
retirement planning .
STRUCTURE OF ULIPs

ULIPs offered by different insurers have varying charge structures. Broadly the
different types of fees and charges are given below. However the insurers have the right to
revise or cancel the fees and charges over a period of time .

Premium Allocation charges

These charges are deducted upfront from the premium paid by the client.
These charges account for the initial expenses incurred by the company in issuing the policy-
eg. Cost of underwriting, medicals & expenses related to distributor fees. After these charges
are deducted the money gets invested in the chosen fund.

Policy administration charges

These charges are deducted on a monthly basis to recover the expenses
incurred by the insurer on servicing and maintaining the life insurance policy like
paperwork , work force etc.

Mortality charges
Mortality expenses are charged by life insurance companies for providing a
life cover to the individual. The expenses vary with the age and either the sum
assured or the sum-at-risk which is the difference between sum assured and fund
value of the insurance policy of an individual. Mortality charges are deducted on a
monthly basis.

Fund management charges
A portion of the ULIP premium, depending on the fund chosen, is
invested either in equities, bonds, g-secs or money market instruments. Sometimes it
is a combination of these. Managing these investments incurs a fund management
charge (FMC). The FMC varies from fund to fund even within the same insurance
company depending on the underlying assets in the fund. Usually a fund with higher
equity component will have a higher FMC

Surrender Charges

A surrender charge may be deducted for premature partial or full encashment of

units wherever applicable, as mentioned in the policy conditions.

Fund Switching Charge

Generally a limited number of fund switches may be allowed each year without
charge, with subsequent switches, subject to a charge. But now a days many insurers offer
fund switching free of cost.

Service Tax Deductions

Before allotment of the units the applicable service tax is deducted from the risk
portion of the premium.
TYPES OF FUNDS UNDER ULIPs

Most insurers offer a wide range of funds to suit one’s 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

General description Nature of investments Risk category

Equity Funds Primarily invested in Medium to High

company stocks with the
general aim of capital
appreciation

Income, Fixed Interest and Invested in corporate bonds, Medium

Bond Funds government securities and
other fixed income
instruments

Cash Funds Sometimes known as Money Low

Market Funds — invested in
cash, bank deposits and
money market instruments

Balanced Funds Combining equity investment Medium

with fixed interest
instruments
 WHY ULIP?

Flexibility to change your life cover: ULIPs give you the flexibility to choose your sum
assured (insurance cover) at the time of policy inception. Moreover, some ULIPs allow
you to increase your sum assured over the term of the plan. This is crucial as your
protection needs keep on changing with time .Typically, greater the financial liabilities
you have such as repayment of a home loan, greater will be your need for protection.

Flexibility to change premium amount: With ULIPs you can easily change premium
amount as most ULIPs provide you the option to increase or reduce premiums after a
certain period of time to match your premium paying capability. Another distinguishing
feature of ULIP is Top up which is an additional contribution over & above regular
premium so that if you receive extra money today you can invest the amount in your
policy & maximize your investment gains.

Flexibility to opt for a rider: ULIPs also enable you to customize the policy with
optional riders to enjoy additional protection. Riders are additional or supplementary
benefits that are bought along with the main insurance policy. Some of the commonly
offered riders by most insurance companies are critical illness benefit rider, accident &
disability benefit rider, waiver of premium rider etc. For ex. a critical illness rider cover
major critical illnesses like heart attack etc. In case of contracting any of the above illness,
the insurance company pays the insured amount.

Flexibility to choose your fund option: Most of the ULIPs come with an in - built range
of fund options to choose from –ranging from aggressive funds to conservative funds so
that you can decide to invest your money in line with your investment preferences and
needs. What’s more, ULIPs even come with the option of switching between different
fund options so that you are able to reap maximum benefits from your investments.
One of the key advantages that ULIPs offer is complete transparency which makes the working
of a ULIP abundantly clear to the investor. Thus, you are empowered to make informed
decisions on how to best use your ULIP.

Benefit Illustration
As a customer it is your right to ask for a sales benefit illustration. Sales benefit illustration
will help you understand how premium paid by you is utilized & what are the charges
deducted year by year, by the insurance company for the term of the plan . It will also
illustrate how your policy will grow in accordance with the choosen sum assured &
premium. In fact IRDA has mandated that all insurance companies use two scenarios with
6 % & 10 % return rate to depict future returns.

Brochures and key feature documents

While benefit Illustrations play a significant role in explaining the quantitative aspects of
ULIPs, it is also important for you to know the other features and benefits which the ULIP
offers. All insurance companies come out with brochures for prospective customers to go
through & understand the plan thoroughly. You should ask your insurance advisor to provide
brochure of the ULIP you intend to purchase.

Once a policy gets issued, your insurer will send you a key feature document capturing all the
essential features of the plan. This is to ensure complete comprehension of the plan purchased.
Free-look period
ULIPs also offer you a distinct feature that no other financial product offers as of now. It is
called Free-look period which is a 15 day window during which you can close the policy & get
paid back the entire premium less charge borne by company in issuing the policy in case you
are unhappy with the product.

Net Asset Value

It is critical that you monitor the performance of your policy on a regular basis. This will help
you ascertain whether you are on right financial track or not. To help you do so all life
insurance companies publish the NAV of different fund options on their website on a daily
basis so that you can track the performance of your policy on a regular basis. This will also
help you make informed decisions when it comes to comparing fund performances.
 Everyone needs to save for their important life goals. One of the prudent ways to
do so is by investing in ULIPs which are long-term systematic investment options designed to
address key financial goals. ULIPs help you cultivate a disciplined savings pattern which
ensures that the money being set aside will go towards the fulfillment of the specific objective.
In the absence of such a focused approach, there is a high possibility of savings towards one
objective getting utilized for an immediate short-term requirement, thus jeopardizing the long-
term goal. ULIPs are a potent safeguard against such a tendency.

ULIPs are an efficient tax saving instrument too .The tax benefits that you can avail in case you
invest in ULIPs are described below:

Life insurance plans are eligible for deduction under Sec. 80C
Pension plans are eligible for a deduction under Sec. 80CCC
Health insurance plans and critical illness riders are eligible for deduction under Sec. 80D
The maturity proceeds or withdrawals of life insurance policies are exempt under Sec
10(10D), subject to norms prescribed in that section
 How ULIP Works

As we know Premium money collected from the client has the following components

Expenses

Mortality

Investment

Example-

Step 1

Client pays annual premium of Rs.20,000

Deduct 40% as Premium Allocation Charge - Rs.8,000

Deduct Rs.200 per month as fixed monthly administration expense

Deduct Rs.100 on the first month as mortality charge

Balance Rs.11,700 is used to purchase units as per investment choice of the customer

Step 2

Investment Fund (Rs.11,700) is used to buy units based upon NAV Values of the fund
on that Day

If NAV is Rs.10 on that day then Rs.11,700/10 = 1170 units are purchased

Step 3

For the first month the units are cancelled and amount deducted to pay for the risk cover
and expenses, this is 1/12th of the annual amount so calculated

Every month the required no. of units are cancelled to cover mortality charges and fixed
monthly administration expenses

Suppose in the second month the NAV is 12, 16.6666 units cancelled at Rs.12/-, to
generate Rs.200/- so 963.3334 Units Remain

This is repeated every month till end of the year

Step 4- Second year

 Client pays renewal annual premium of Rs.20,000

 Deduct 20% as 2nd year Premium Allocation Charge - Rs.4,000

 Deduct Rs.200 per month as fixed monthly administration expenses

Deduct Rs.80 on the first month of the second yr. as mortality charge

 Suppose in the second year beginning the NAV is Rs.14 Per Unit, so Rs.13,720/14 =
980 Units are purchased

 So total units= units at end of first year + 980 units

Types of ULIPs

RETIREMENT

Retirement is the end of active employment and brings with it the cessation of regular income.
Today an increasing number of people have stated planning for their retirement for below
mentioned reasons

Almost 96% of the working population has no formal provisions for retirement

With the growing nuclearisation of family structure, traditional support system of the
younger earning members – is no longer available

Developments in the healthcare space has lead to an increase in life expectancy

Cost of living is increasing at an alarming rate

Pension plans from insurance companies ensure that regular, disciplined savings in such
plans can accumulate over a period of time to provide a steady income post-retirement.
Usually all retirement plans have two distinctive phases

The accumulation phase when you are saving and investing during your earning years to
build up a retirement corpus

And

The withdrawal phase when you actually reap the benefits of your investment as your
annuity payouts begin.

In a typical pension plan you have the flexibility to make a lump sum payment or a regular
contribution every year during your earning years. Your money is then invested in funds of
your choice. You can opt to receive the annuity at any time after vesting age (age at which you
become eligible for pension chosen by you at the inception of the plan).

Most of the Unit linked pension plans also come with a wide range of annuity options which
gives you choice in structuring the post-retirement benefit pay-outs. Also at the time of vesting
you can make a lump sum tax-exempted withdrawal of up to 33 per cent of the accumulated
corpus.

In a retirement plan, the earlier you begin the greater you gain post retirement due to the power
of compounding.

Let us take an example of Gaurav & Hari. Both of them want to retire at the age of 60. Gaurav
starts investing Rs. 10,000 every year from the age of 25 till the time that he retires. In all, he
would have invested Rs. 350,000. If his investments were to earn 7% return every year, at the
time of his retirement, Gaurav will have a retirement corpus of Rs. 13, 82,368.

Now, Hari starts investing 10 years later (i.e. at the age of 35) and in order to make up for the
lost time, invests Rs.15,000 every year (which is 50% more than Gaurav’s annual investment).
So, by the time of his retirement, he would have invested Rs. 3,75,000. And assuming the same
annual return of 7%, he will end up with a retirement corpus of Rs 9, 48,735.
 WEALTH
Wealth Creation ULIPs can be primarily classified as

 Single premium - Regular premium plan :

Depending upon you needs & premium paying capacity you can either opt for a
single premium plan where you need to pay premium only once during the term of entire policy
or regular premium plans where you can premium at a frequency chosen by you depending
upon your convenience

 Guarantee plans – Non guarantee plans:

Today there are wealth creation ULIPS which also offer guaranteed benefit.
These plans are ideal insurance-cum-investment option for customers who want to enjoy the
potentially higher returns (over the long term) of a market linked instrument, but without taking
any market risk. On the other hand non guarantee plans comes with an in - built range of fund
options to choose from –ranging from aggressive funds (Primarily invested in equities with the
general aim of capital appreciation) to conservative funds (invested in cash, bank deposits and
money market instruments with aim of capital preservation) so that you can decide to invest
your money in line with your market outlook, time horizon and your investment preferences
and needs.

 Life Stage based – Non life Stage based:

Life Stage based Ulips factor in the fact that your priorities differ at different
life stages & hence distribute your money across equity & debt. Here the initial allocation is
decided as per your age since age is a significant indicator of risk appetite. Such a strategy
ensures that the asset allocation at all times is in sync with your age and changing financial
needs
 CHILDREN’S EDUCATION
One of the most important responsibilities you have as a parent is to ensure that
your child gets the best possible education that can be provided. Apart from conventional
schooling, it becomes important to expose your child to different activities such as dance,
painting and sports training for holistic development. As a parent, you want to ensure that their
development is not hampered either due to rising costs or unforeseen circumstances.

HEALTH

Today there are ULIPs that offer money at key milestones of your child's
education thus ensuring that your child’s education continues unhampered even if something
unfortunate happens to you. While, the death of a parent is an irreparable emotional loss, child
education plans safeguard the child against the financial ramifications of the death of a
parent.When you are young and working you save for various goals like marriage, education,
retirement etc. but saving for health care is never considered or left for later. During these years
we have various sources of income or savings on which we can rely for health emergencies.

But with increasing cost of healthcare, proportion of this spend is increasing at

an alarming pace. This is forcing families to borrow or sell assets to meet expenses during
medical emergencies. And during old age health care expenses increase due to health
deterioration because of age and higher incidence of chronic illness. Thus it is important for
you to invest in health insurance today so that tomorrow you are fully prepared to meet rising
healthcare expenses, which would be incurred during old age, with the right health insurance
plan.

Health ULIP is a recent innovation from the health insurance industry. In a

health ULIP part of your premiums are allocated for investment designed specifically to build a
health fund to meet future health related expenses. It aims to create a health savings kitty by
investing in a long term flexible savings plan with multiple fund options. The health fund thus
created allows you to claim for health related expenses of any kind and also fund your future
health insurance charges. You can also avail of tax benefit on premium paid u/s 80D.
 How to choose ULIP which is BEST for you?

The wide range of ULIPs available in the market might make it difficult for a consumer to
choose the correct ULIP. However if you were to follow a few simple steps choosing the right
ULIP can be a smooth process.

⇒ Understand the concept of ULIPs thoroughly

Do your homework well and read as much as you can about ULIPs as you can before
investing. Read the literature available on ULIPs on the web sites and brochures
circulated by insurance companies. This will help you know the benefits and structure
of the ULIP.

⇒ Focus on your requirements and risk profile

Identify a plan that is best suited for you keeping in mind your risk appetite. In case you
have a high-risk appetite, opt for a more aggressive fund option (an option that invests
higher percentage in equities) and vice versa.

⇒ Understand the peculiarities of the plan

Understand all the charges levied on the product over its tenure, not just the initial
charges. A complete charge structure would include the initial charges, the fixed
administrative charges, fund management charges and mortality charges.

⇒ Examine the performance of the plan

Compare the performance of the plan with benchmark indices like BSE Sensex or Nifty
in the past two or three years to get a better idea about the performance. Ensure that you
can easily get information about your NAV when you need it. Thoroughly understand
 the flexibility and redemption conditions of an ULIP.

⇒ Understand the charges levied on the product

Understand all the charges levied on the product over its tenure, not just the initial
charges. A complete charge structure would include the initial charges, the fixed
administrative charges, the fund management charges and mortality charges. You not
only need to understand the charges in the first year but also through the term of the
policy.

⇒ Compare ULIP products of different insurance companies

Compare products of different insurance companies in terms of premium payments,

cost structure, performance of the scheme (equity as well as debt schemes), additional
facilities such as top-up premium and free switch between different fund options,
flexibility in terms of increasing or decreasing protection, reporting structure and
flexibility in redemption.

⇒ Know about the Company

Last but not least, insure with a brand you can trust to honor its commitment and service
in accordance to your requirements
Traditional Products V/s Unit Linked
INSURANCE V/S MUTUAL FUNDS

Both these instruments are designed to serve different purposes and are not
comparable. A unit-linked plan from an insurance company is an insurance policy designed to
pay a lump sum on maturity or on death if earlier. Premium paid under these plans is eligible
for tax deduction under Section 88 of the Income Tax Act. On the other hand, mutual funds are
investment avenues to participate in the growth of financial markets and do not provide any tax
deduction (except ELSS and pension funds).

For a unit-linked insurance plan, providing life cover is the most important function;
returns are just an added benefit, which gets magnified, given the tax rebates. Though unit-
linked plans offer transparency in returns in terms of net asset value and flexibility in
investment options in debt, equity or a mix of both, these advantages remain secondary.
Whereas for a mutual fund, the main objective is to provide returns.

Moreover, unit-linked plans are not as liquid as mutual funds. There is a lock-in of
three years. Even if one redeems after three years, you would be at a loss because of higher
initial administrative charges. For example, the upfront charges for the first two premium
amounts are as high as 20-27 per cent. Then there is an annual management fee of 0.8-1.25 per
cent and a flat fee of Rs 15-20 per month. Finally, there is a deduction for risk cover. This goes
towards contribution to the sum assured or the life insurance cover, which is based on mortality
rates as calculated by actuaries. Though mutual funds too have entry and exit loads (maximum
2 per cent) and expenses (maximum 2.5 per cent), these costs are lower than unit-linked plans.
MFs Vs Unit-linked Plans: A Comparison

Equity Mutual funds Equity-linked Insurance Plans

Initial load/ administrative 20-27% of premium for the initial
0-2%
charges few years
Annual expenses/ adm. 1.0-2.5% (including A flat charge of Rs 180-240 per
Charges mgmt. fee) year
Management fee 0.8-1.5% 0.80-1.25%
Life cover Nil Yes
Lock-in Nil 3 years

From your perspective, consider unit-linked plans only if you want insurance cover
and not as an investment avenue to participate in the equity or debt market. If you want an
exposure to the stock or bond market, mutual funds are better investment avenues. Don't go by
the performance of these unit-linked products. Both unit-linked plans and mutual funds invest
in the same financial markets. If the equity market is doing well, both equity-linked insurance
plans and equity mutual funds will do well. But as an investment tool, you would be better off
investing in mutual funds rather than unit-linked plans due to high fees charged by insurance
companies. However, one has to forego that for the life cover that they offer. Thus, by design,
unit-linked plans and mutual funds are not comparable and are meant to suit different
objectives

As competition hots up between insurance companies and mutual funds, both are
finding innovative ways of getting business. First it was insurance companies who launched
ULIP plans to snatch away business from mutual funds by promising returns and risk cover end
assured customer that his/her long term goals would be achieved even if he/she was not there to
contribute. He/she would be convinced that his loved ones will not be put to hardships after
he/she was no more. Although the unsuspecting client is never made aware of the high cost of
ULIPs.
 Mutual funds could not keep quiet for long and see their business snatched under their
nose by insurance companies.

MFs came up with the novel idea of offering capital growth along with free insurance
cover (there is maximum cover cap) with no medicals and disclosures to be made as demanded
by insurance companies. The insurance premium to be completely born by the asset
management company (AMC).

Mutual funds offer cover for unpaid installments of a systematic investment plan
(SIP). If the term of SIP is 10 years and if investor dies after 3 yrs then 7 yrs unpaid SIP is risk
cover. Risk cover ends as soon as the SIP stops or any withdrawal is made from investment. A
fund house has come out with new plan which offers cover (100 times the monthly SIP
amount) through out the tenure of the SIP provided at least 3 years of installments have been
paid. The cover reduces from the original value to the fund value of SIP installments paid.

One would wonder how come MF have become so generous and offering free risk
cover when there is no free lunch. Through these plans, MFs are committing investors to pay
for long periods. The tenure of such plans is age 55 minus current age. If an investor is 30 yrs
old he has to pay for 25 years to avail of risk benefit. In this manner, MFs have ensured that in
case they have to pay death benefit, the customer will pay regularly pay for 25 years, thus
ensuring regular cash flows, Part of this additional business generated can be parked in safe
instruments to pay for insurance payouts.

One needs to be very sure of his/her paying capacity for such long periods because no partial
withdrawals or switchovers are allowed. If either of these is done, the risk cover ends. It means one
can not use his money in case of emergency. In my opinion term plans along with MF investments
(where there is no long term commitment) are still the better choice.