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To describe it loosely, ULIP is a combination of an open-ended tax-saver and an insurance plan. ULIP is a unique; multiple benefits plan which combines the basic benefit of life insurance with good returns, tax benefits and accident insurance cover. The plan offers tax rebate on the amount invested under Section 88 of the Income Tax Act 1961 within the overall limit of Rs 70,000. It also offers free accident insurance cover up to Rs 50,000. The investment objective of the plan is primarily to provide returns through growth in NAV or through income distribution and reinvestment thereof in further units at NAV.
FEATURES
Traditionally, insurance has been considered an attractive tax-saving instrument, as well as a risk cover. The returns on investment in insurance products were attractive mainly because of tax breaks. Now, thanks a diminishing interest rates and a booming stock market, investors are looking to instruments like ULIPs for good returns coupled with risk cover. In fact, share of other financial products, as well as taking on traditional insurance products. 1. A multi-purpose tax saving plan with a choice of 10 years or 15 years duration. Open to any resident/non-resident Indians between the ages of 12 and 55 years for 10 year plan, and 12 and 50 years for a 15 year plan. Physically handicapped persons holding gainful employment can join the plan subject to lapse of five years from the date of event. 2. Sale of units will be at NAV while repurchase at 1.5 per cent discount to NAV which will be declared daily. The scheme is open for sale and repurchase throughout the year except during book closure. Repurchase at maturity will be at NAV prevailing on maturity date. 3. An investor can join for a minimum target amount of Rs 15,000 or up to the maximum target amount of Rs 2,00,000 for 10-year plan and Rs 1,99,500 for 15 year plan, either through one or more applications. Chosen target amount is required to be contributed in yearly or half-yearly installments over 10/15 years.
4. The plan invests primarily to provide returns through growth in the NAV. Out of the subscription every year, a small amount is paid to LIC towards premium for life cover and the balance amount is converted into equivalent number of units at the prevailing rate. 5. Plan provides life insurance cover up to the target amount. For female applicants without independent income it is restricted to a maximum of Rs 40,000. 6. Free accident insurance cover of Rs 50,000 irrespective of the target amount. 7. There is a guaranteed maturity bonus of five per cent of the target amount for a 10 year plan and 7.5 per cent for a 15 year plan. A member can continue beyond the 10/15 year period in which case he is entitled to accident insurance cover and a post maturity bonus of 0.5 per cent for every completed year provided he has not withdrawn any amount earlier. 8. No medical examination is required at the time of joining the plan. Investment can be made in ones spouses or childrens name. 9. Totally exempt from the levy of gift tax and wealth tax.
Prospective investors must, therefore, understand the structure of the ULIP, the factors that determine how good returns will be and the risks involved, and then figure out if they have the risk appetite, wheaher they can get better returns elsewhere and whether their horizon matches the long lock-ins. And they can then decide which plans offer the best rewards. ULIPs Investment amount Depends on your contribution; can be varied over the tenure of the Sum assured policy. Minimum contribution Expenses No upper limit; expenses are determined by the insurance company with IRDA approval five Minimum is decided premium is based on it High agent commissions. Can be as high as 35 percent in the first year TRADITIONAL MUTUAL FUNDS
PLANS Is fixed, depending Minimum investment on the sum assured amounts are determined you decide upon and fixed by the fund houses No life insurance,
though some funds have started offering it as a value-addition Sebi prescribes the upper limits. For instance, equity funds can charge a maximum of 2.5 percent P.A. There are also expenses linked to entry and/or
Very
high;
exit loads you Low and rigid; you High flexibility, have no control Low Low
but
Tax benefits
Section 80C benefits are available on entire contribution ceiling. On maturity, the proceeds are taxfree under section 10(10D)
Section 80C benefits are available on entire contribution subject to Rs 1 lakh the proceeds are taxfree under section 10(10D)
Section 80C benefits available only to investments in tax saving funds. Tax treatment of equity linked and debt oriented funds is different and needs to be understood with short-term and long-term capital gains tax as applicable. Quarterly disclosures are mandatory
Portfolio disclosure
No such facility
Assets allocation
quarterly basis Can switch across No such feature funds of cost with one switch per year free
3. Compare ULIPs of different insurance companies Compare products of the leading insurance companies. Enquire about the premium payments as ULIPs work on minimum premium basis as opposed to sum assured in the case of conventional insurance policies. Check the fund's performance over the past six months. Find out how the debt and equity schemes are performing and how steady the performance has been. Enquire about the charges you will have to pay. In ULIPs the costs involved are a big deciding factor. Ask about the top-up facility offered by ULIPs i.e. additional lump sum investments you can make to increase the savings portion of your policy. The companies give you the option to increase the premium amounts, thereby providing you with the opportunity to gainfully utilise surplus funds at your disposal. Enquire about the number of times you can make free switches (i.e. change the asset allocation of the money in your ULIP account) from one investment plan to another. Some insurance companies offer you free switches for a 2-year period while others do so only for 1 year. 4. Go for an experienced insurance advisor Select an advisor who is not only professional and informed, but also independent and unbiased. Also enquire whether he has serviced clients like you. When your agent recommends a ULIP of X company ask him a few productrelated questions to test him and also ask him why the other products should not be considered. Insurance advice at all times must be unbiased and independent and your agent must be willing to inform you about the pros and cons of buying a particular plan. His job should not just begin by filling the form and end after he deposits the cheque and gives you the receipt. He should keep a track of your plan and inform you
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on a regular basis. The key is to go for an advisor who will offer you value-added products. 5. Does your ULIP offer a minimum guarantee? In market linked product if your investment's downside can be protected, it would be a huge advantage. Find out if the ULIP you are considering offers a minimum guarantee and what costs have to be borne for the same. This will enable you to make an informed choice. Today, more individuals are open to using the ULIP-way to create wealth over the long term. Here we outline exactly how ULIPs can help you fulfill that responsibility. If you are between 25 and 35 years of age You are young, probably married and even have kids. If you are the sole breadwinner in the family, then you have quite a few responsibilities to fulfill right from planning for your child's education/marriage to planning for your own retirement to providing for the family in your absence. The last responsibility is the most critical and ironically it is the easiest and cheapest one of the lot to fulfill. At Personalfn, we have always been votaries of term insurance -- the cheapest way to get a life cover for yourself. Term insurance is also insurance in its 'purest' form, in other words there is no savings element in it, which ensures your premiums are very low. There is no better product to provide for your family in case of an eventuality and all individuals must consider taking a term plan. Term insurance of course takes a huge burden off your chest as also your wallet. But it still leaves you with a problem. If term insurance is only going to take care of the 'risk' element, who is going to take care of the 'savings' part.
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This is where ULIPs come in. Of course, that is not to say that ULIPs do not have an insurance element, they do, but it is limited largely to the earlier years and after a point they don the mantle of an investment product. So how can ULIPs help you save for child's education/marriage, planning for retirement and other investment-related objectives? ULIPs can do all this and more because they come with a lot of variety. Consider this; except for term insurance (because it does not make sense), just about every life insurance product has a ULIP option. So you have endowment ULIP, child plans ULIPs and pension ULIPs. As a matter of fact, there are some life insurance companies that only have ULIP products; they don't have traditional endowment, pension and child plans at all! What that tells you is that if you are willing to take on some risk, a ULIP can help you meet a lot of your financial objectives. If you are looking to set aside some money for your child's education, the 5%6% return on an endowment plan may not even take care of inflation, let alone provide for a medical or MBA degree. The return you earn on a child plan should not just counter inflation; it should be enough to cover the cost of education. And the way cost of education is spiralling, your insurance plan must work very hard. Given their equity component, ULIPs are ideally placed to fulfill this role. As we mentioned before, ULIPs are flexible; there are various options within a ULIP with the equity component varying right from 0% to 100%. This ensures that you are able to select an option that best suits your risk profile. Let us understand how ULIPs can be tailor-made to serve your financial planning needs. You are in the 25-35 years age bracket. Your most pressing financial objectives are providing for your child's future and your own retirement. ULIPs can help you achieve both. Although you can take a single endowment ULIP to achieve both objectives, we think it is more prudent to make a demarcation between the needs and take separate ULIPs dedicated to each objective. Opt for a ULIP child plan to provide for your child's higher education, marriage and seed capital for business to
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name a few needs. One way to handle this multi-faceted objective is to take a ULIP money-back plan. This way you get monies at regular intervals to address multiple needs. The other important plan that individuals must consider taking earlier on their lives is a pension plan. Building a corpus to face the rigours of retirement should be given the priority it deserves. Again, a long-term investment objective like retirement planning could do with equity 'push'. Here is where a ULIP pension plan can add value to your retirement portfolio. Likewise a ULIP endowment plan can help you meet investment objectives like buying property or setting up a business for instance. If you are between 35 and 45 years of age By the time you reach the 35-45 age brackets, some of your existing ULIPs are probably nearing maturity. For instance, if you had taken a ULIP child plan earlier on, it is likely to mature in this age bracket to coincide with the need (higher education/marriage) you had in mind at the time of taking the ULIP. However, if you married late or did not begin planning your finances at an early stage in your life, now is the time. If you haven't insured yourself as yet, go for a term insurance plan. The advantage of taking a term plan at a slightly advanced age is that you have a better idea of how your lifestyle is likely to pan out going forward. In terms of costs, term plans remain your cheapest option no matter when you take one. You can opt for some of the ULIPs we mentioned for individuals in the 25-35 years age bracket depending on your needs. Remember, unlike endowment, which gets really expensive at an advanced age, ULIPs because of the way they are structured, do not turn out that expensive. If you are over 45 years of age In this age bracket, it is likely that you are insured. However, you still need to review your insurance cover taking into consideration the changes in your lifestyle,
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income, needs and financial commitments. Beef up your insurance cover through a term plan. By this time, your ULIP pension plan will have matured. You can then opt for an annuity, immediate or deferred, depending on your requirements.
FLEXIBILITY
Traditional insurance products give you little room for maneuvering; its a one-size-fits-all approach. On other hand, ULIPs allow you to park funds into different fund options depending on your risk appetite. And if your approach to risk changes, you have freedom to switch to another fund option that comes with more or less risk. A good strategy would be at opt for an equity heavy investment fund in your early years, reducing the equity exposure as you age and shifting to a debt heavy fund towards retirement. Another advantage of investing in ULIPs is that they allow you to make periodic top-ups to your regular premium contribution rather than retain the surplus in low interest bank accounts. Though there is a cost associated with the top-up, this can work well if you have high disposable money to invest in these plans. It also lets you time the market (provided you are well-versed in stock market trends). Even better, you can skip paying premium occasionally if youre stuck for cash, & plan will adjust the premium amount from the NAVs to ensure your policy does not lapse & your risk cover remains intact. And, of course, theres liquidity. Since ULIPs are NAV based, once the threeyear lock-in period is over, the units can be sold any day. Unlike the money-back type of endowment plans, where the inflows & outflows year are fixed, ULIPs allow you to decide when to withdraw the investments made. For instance, in a 20year policy, you can opt to receive set sums in year 10 & year 17, & allow the rest to accrue in the fund.
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CLARIFICATION OF ULIPS
6 Points To Note Since ULIPs offer a lot of flexibility, you need to keep some points in mind to optimize the benefits associated with them.
ULIP child plans/pension plans and even term insurance for most individuals. When you opt for these plans it is important you do this after taking your insurance consultant into confidence. He is the one who is going to help you with the numbers, so you need to tell him exactly what you are looking for in an insurance plan.
Remember there is an insurance cover associated with ULIPs. Since it is also likely that you have other insurance plans like term and/or endowment, it is important you have a clear idea of exactly how much your insurance cover is worth after considering all your insurance plans. This number will prove helpful when you review your insurance cover at regular intervals.
Likewise, ULIPs also have an investment element. You are likely to have investments in mutual funds, stocks, bonds and fixed deposits as well. You need to add up the market value of all these investments while calculating your investment worth. This number will prove useful when you wish to beef up your investments in a particular asset.
ULIPs derive their 'power to perform' from equities. When you have a lot of aggressive ULIPs in your portfolio it means that you are overweight on equities. Add to this your investments in stocks and equity funds, and your exposure to equities increases even further. To temper your equity exposure, it is generally advisable to opt for conservative/balanced ULIPs (maximum 50% equity exposure).
Even if you are a high-risk investor, you must gradually shift your assets to a conservative ULIP option as your age advances. Financial prudence dictates that risk reduces as age increases; this needs to reflect in all your investments including ULIPs.
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Like with all investments, it is prudent to diversify your ULIP investments. This is necessary due to several reasons with financial prudence being the most important reason. Varying flexibility levels in ULIPs across insurance companies is another factor that should make you opt for a ULIP from more than one insurance company. Varying level of expenses in ULIPs is another reason to opt for ULIPs across insurance companies to keep expenses on the lower side. What should you do now? Ensure that the equity component is in line with your risk appetite. If it is not, make amends now. Do not wait for the markets to correct upwards. Do not get carried away by fancy projections made by unscrupulous sales agents. Focus on your requirement and risk profile. At any rate give the aggressive 100% equity plans a miss. Understand the cost of taking a ULIP. Sometimes a pure life insurance and mutual fund combination may turn out to be more cost effective.
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The life insurance industry should also be proactive in educating individuals about life insurance. This is especially so in case of ULIPs where individuals definitely need to be informed about the risk-return proposition that ULIPs offer. Although one might argue that the insurance agent is supposed to play that role, the current state of affairs suggest otherwise. An issue worth contemplating is the so-called 'financial consultants' who sell, not a basket of financial products but only life insurance. How can one be qualified to be a 'financial consultant' without having the right credentials and with just one product at his disposal? No doubt there is a certification course that needs to be cleared. But simply clearing the IRDA exam doesn't make anyone a financial consultant. Financial planning requires a lot more grey cells and experience. We, at Personal finance, have come across clients who after buying a ULIP wound needed it in the first place given that they already have many other marketlinked investments like stocks and mutual funds. The feeling they take home is that they did not really 'require' a ULIP but were 'sold' one. What they really needed was a simple term insurance policy. The IRDA was also concerned about the fact that were the markets to fall at the time of maturity of a ULIP, a sizable amount of the corpus of the individual could get wiped out. To address this issue, it plans to come out with certain guidelines, which might allow investors in ULIPs to stay invested beyond the stipulated maturity date so as to recoup losses. All we are saying is that individuals should be wary of the risks associated with a market-linked product like ULIPs before investing in them. The investment should be in line with their risk profiles and long-term financial planning objectives.
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performance of his fund. Besides all the advantages they offer to the customers, unitlinked plans also lead to an efficient utilisation of capital. Unit-linked products are exempted from tax and they provide life insurance. Investors welcome these products as they provide capital appreciation even as the yields on government securities have fallen below 6 per cent, which has made the insurers slash payouts. According to the IRDA, a company offering unit linked plans must give the investor an option to choose among debt, balanced and equity funds. If you opt for a unit-linked endowment policy, you can choose to invest your premiums in debt, balanced or equity plans. If you choose a debt plan, the majority of your premiums will get invested in debt securities like gilts and bonds. If you choose equity, then a major portion of your premiums will be invested in the equity market. The plan you choose would depend on your risk profile and your investment need. The ideal time to buy a unit-linked plan is when one can expect long-term growth ahead. This is especially so if one also believes that current market values (stock valuations) are relatively low. So if you are opting for a 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 one approaches retirement the quantum of returns should be subordinated to capital preservation. At this stage, investing in a plan that has an equity tilt may not be a good idea. 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 market. Even if one views insurance as a long-term commitment, investments based on performance over such a short time span may not be appropriate.
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TRANSPARENCY
Compared to traditional insurance plans, ULIPs score high when it comes to informing customers about costs & fund investments. In traditional plans, charges are invariably not disclosed. But ULIPs disclose upfront the expenses that go into them. The mortality expense that goes towards insuring your life is disclosed as you sign the policy, incanting the insurance cost. You are also informed how much goes as expenses (commission & administrative charges) & how much of the premium amount is invested. The ULIP also informs you about the charges involved in switching between fund options; you get one free switch a year & have to pay for any more. And though it is not a mandatory requirement, ULIPs make it a point to keep policyholders aware of the fund portfolio, & sends out statements every quarter. This keeps you informed about the fund strategy & you can use this information when switching between funds.
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Add More Zip To Your ULIP! The past couple of years have seen ULIPs (unit linked insurance plans) emerge as overwhelming favourites with individuals wanting to buy life cover complemented by a flavour of equities. The Indian bourses too have played a part in fuelling the demand for ULIPs. However, there is one important aspect, which we feel individuals should consider before they commit their money to ULIPs from any life insurance company. Simply put, ULIPs are life insurance plans, which can invest a portion of their corpus in equities. The percentage of investments in equities though differs across insurance companies. While some companies have a mandate to invest upto 100% of their corpus in the aggressive option, other insurance companies have a cap (like 35% of corpus for instance) on the aggressive option. Given the edge equities can provide to your portfolio, the percentage of equities in a ULIP can make a significant impact on the returns over the long term. An illustration will help in understanding this better. Let us take an example of an individual wanting to invest a sum of Rs 100 (as premium) each year in ULIPs. His investment tenure is 30 years. He has two options to consider- one which offers him a maximum of 35% exposure to equities and the remaining 65% in debt instruments. The other option offers him 100% exposure to equities. Let us also assume that he is expecting a 10% growth year-on-year CAGR (compounded annual growth rate) from the equity component and a 7% growth CAGR from the debt component. The individual is assumed to have a high-risk appetite and hence, he decides to invest his entire corpus in the aggressive option throughout the tenure.
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CAGR on equities is assumed to be 10% and on debt to be 7%. Tenure is 30 years. As can be seen from the table, if a sum of Rs 35 is invested each year (out of the Rs 100 paid as premium) in equities for a period of 30 years and the rate of returns is assumed to be 10% CAGR, then the individual stands to gain Rs 6,333 on maturity. Also assuming that the remaining Rs 65 is invested in debt instruments for the same period and this yields 7% CAGR, the maturity amount works out to Rs 6,570. The total amount that the individual stands to receive on maturity is Rs 12,903. As opposed to this, if the individual were to invest the entire amount of Rs 100 in equities, other variables remaining the same, the returns amount to Rs 18,094. Which is approximately 40% higher than the returns that the individual would have received had his investments been limited to a 35% equity exposure! So what does this mean for an individual who wants to invest in ULIPs? To begin with, several studies have shown that equities tend to outperform other asset classes like bonds and government securities over the long term. It therefore makes sense for the risk-taking individual to invest a sizable portion of his corpus in equities. Therefore it also follows that a maximum 35% equity exposure will not be able to power the individuals portfolio returns like a 100% equity exposure would, other
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parameters (tenure, expected returns, premium amount) remaining the same. Add to this the fact that the 100% equity ULIP option also allows the individual to shift his money to debt in varying proportions (which range from 0%-100%), and one has a potent combination. Of course, the return figures will change with a change in the assumptions considered above. For example, had we assumed a 15% return on equity without changing the other parameters, then the difference in returns between the 35% equity option and 100% equity option would be 107%! Conversely, if we compare a 35:65 (equity: debt) portfolio versus a 70:30 (equity: debt) portfolio without changing the other parameters, then the difference in returns would have been approximately 22%. Of course, it goes without saying that many factors other than the equity exposure affect ULIP returns. For example, expenses and the quality of fund management are two very important factors that need to be evaluated before taking the plunge into ULIPs. Individuals therefore need to bear in mind that a ULIP needs to be evaluated on various parameters before zeroing in on a particular life insurance company.
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ASSEST ALLOCATION Funds collected under the plan after paying the insurance premium shall generally be invested in -- not less than 60 per cent in debt instruments with low to medium risk profile and not more than 40 per cent in equities and equity related instruments. For e.g.
ASSET MANAGEMENT COMPANY PVT. LTD. SCHEME: UTI Unit Linked Insurance Plan
PROVISIONAL AND UNAUDITED PORTFOLIO DISCLOSURE AS OF 31/03/2006 (Market value in Lacs)
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Recently, the Insurance Regulatory and Development Authority has come out with certain guidelines for ULIPs. It has proposed a compulsory 3-year lock-in period for ULIPs. In other words, individuals will not be allowed to withdraw any money from their ULIP 'account' for the first 3 years. The primary intention behind this is to preserve the identity of life insurance (and therefore ULIPs) as a long-term savings option. The IRDA has also specified that the minimum tenure for ULIP policies be 5 years and that a ULIP have a 'sum assured' and not be totally linked to the markets. In addition, the IRDA has also proposed that life insurance agents be given separate training for selling ULIPs as ULIPs demanded better understanding than that currently prevalent in the industry. The guidelines will be effective from June 2006. These guidelines by way of 'restructuring' the product, will help in protecting the interests of individuals and also go a long way in curbing the malpractices currently prevalent in the life insurance industry. Term plans still not being 'sold' Term plans are the purest form of life insurance available. Despite a term plan being a must in every individual's portfolio, they continue to remain poor cousins to savings based plans (life insurance with a maturity benefit). Blame the many unscrupulous agents for this. Individuals need to ensure that their financial portfolio consists of a term plan, which will help the overall long-term financial planning cause. Endowment plans still being 'bought' Individuals continue to be 'enticed' by endowment plans for the maturity benefits and the 'safety' that they provide. While such plans do have an insurance element, the returns that they offer hardly manage to beat inflation, leave alone help individuals plan their finances effectively.
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We do believe that from a long-term perspective, individuals need to look at other more efficient means of savings like tax saving mutual funds or ULIPs. However, as always, the same should be in line with their asset allocation and risk appetite. Pension funds on the anvil? The interest rate offered on EPF has been brought down from 9.50% to 8.50%. The EPF being long-term savings, the rate cut has made the need for the setting up of pension funds even more acute. While the process of putting up the pension fund regulatory and development authority (PFRDA) has been initialized, the pace needs to pick up so that individuals can park their pension monies with a body, which will make their money work harder for them as compared to the earlier scenario. Strategies for 2006 A term plan is life insurance in its purest form. Individuals should buy a term plan before considering other types of life insurance. This becomes necessary in light of the fact that such plans offer the much-needed insurance cover at a low cost. Come June 2006 and ULIPs will emerge in a more transparent and unambiguous form due to the changes proposed by the IRDA. Having said that, insurance seekers on their part need to gain a better understanding of ULIPs and find out how well it fits into their financial planning exercise. We could also see more options being introduced in the pension funds segment. This can give a boost to retirement planning and help individuals plan effectively for their retirement.
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MAKING ULIPS WORK FOR YOU Simply putting your money in ULIPs will fetch you decent enough returns and will, of course, provide life cover. But is that enough? You can get far better investment tool, and it can add much ore value to your portfolio if you take a few proactive steps. Heres a five-step guide to help you make most of your ULIP.
Financial planning: Theres no doubt that ULIPs can help you meet many of your financial objectives. This is why almost all insurance plans childrens plans, endowment, money-back and retirement are offered on the ULIP platform, the flexibility of partial withdrawals, premium holiday and switching between fund options all go towards helping you achieve your financial goals. Unlike preset money-back dates that conventional plans offer, ULIPs are structured to let you withdraw when you need the funds most.
Switching option:Most insurers offer one free annual switch across funds. If you time this right, you can gain a whole lot more than if you switch blindly. A savvy investor will opt for a higher equity exposure when the markets are performing well and shift to balance or debt fund when there is a dip in the stock market.
Fund strategy:It a well know fact that equities as an asset class outperform all other investment instruments so in the, early years of your ULIP term preferably stick to equity-heavy fund options and make the best earnings on it. As your risk appetite changes with age and you want to move to a lower risk option, you can migrate your money to safer havens after having made a killing.
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Top-ups:Its one of the biggest advantages of ULIPs-the option to top-up your premium just make sure the top-up falls within sections 80C guidelines in contribution and section 10(10D) on maturity also, time your top-up; if you top-up from the second year onwards, the expense ratio is much smaller what this strategy lets you do is to lower your expense outgo on the early year(when they relatively very high) and lets you divert more of your over all premium pay outs to the investment component over the subsequent years.
Tenures:The heavy front loading of expenses act acts as a disincentive for early withdrawals on the fund accumulation. For instance, over three- or five year tenure, unit linked plan compare poorly with equity funds on pre-tax returns. The maturity benefits that get you the tax benefits under section 10(10D) work will on polices with the long tenure. Also, unlike mutual funds, unit-linked plans dont face redemption pressure; a fund manager for a unit-linked product can, therefore, perform better in the long run.
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ULIPs: Simplification the need of the hour? A leading Mumbai business daily recently reported that the IRDA (Insurance Regulatory and Development Authority) plans to standardise life insurance policies. Amongst the various issues that the regulatory authority would like to tackle/standardise is the product literature and the proposal forms. Given the number of life insurance companies in the fray and the plethora of insurance plans on offer, this has come as a welcome move for individuals. The IRDAs primary aim behind this move is to make life simpler for individuals interested in buying life insurance. As things stand today, the product literature for life insurance products differs across companies. This makes it difficult for individuals to compare insurance plans offered by various companies. It also queers the pitch for individuals wanting to analyse insurance plans given the fact that all the insurance companies proclaim their product to be the best offering maximum value and maximum returns in their category. Often this claim is made on the basis of partial information. Standardising the product literature for insurance products will go a long way in helping individuals arrive at an informed decision by being able to compare products across a standard set of parameters. That apart, the IRDA has also made it clear that though it cannot stop insurance agents from mis-selling life insurance, should there be a complaint, it will hold the insurance company responsible for mis-selling done by its agents. This will certainly be in the interests of individuals in case of any mis-selling related issues. In addition, this will also prove to be a deterrent for the insurance company, which will take extra precaution in educating its agents and the end-users of the product. However, although the IRDA is doing its bit to simplify insurance products for individuals, we also feel that it can take up a few other issues as well which are crying for attention. The first issue concerns ULIPs (unit linked insurance plans) portfolios. Some life insurance companies do not declare their ULIP portfolios at all i.e. the portfolios are not available for free viewing. ULIPs primarily function like an investment with a life cover thrown in. It therefore becomes important that individuals know where their monies are being invested. For instance, most mutual funds declare
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their portfolio at least once a month. The same is also made available on the company websites. Though some insurance companies diligently declare their ULIP holdings on their websites (e.g. ICICI Prudential, HDFC Standard Life, Kotak Mahindra Old Mutual), many refrain from doing so. The IRDA should look into this matter and frame suitable guidelines for ULIP portfolio disclosure norms. Another relevant issue in our view is the simplification/standardisation of ULIP expenses. As an example, a certain life insurance company incurs 27% as expenses in each of its first two years of operation, while it falls to 1% after that. Monthly administration expenses of Rs 15 are incurred in addition to the annual expenses. Compare this with another life insurance company whose charges are 19% in the first year, 4% from years 2 to 5, 2% from years 6 to 10 and 1% thereafter. Monthly administration expenses of Rs 60 are levied in addition to the abovementioned charges. And the differences continue as we compare expenses across insurance companies. What the individual would really be interested in knowing is what are my ULIP expenses per annum on an average in a particular ULIP policy? While the expenses may differ across companies, what we are more concerned about is whether individuals will be able to compare charges across companies. In their current avatar, it really would need an expert to demystify ULIP expenses from across companies. The IRDA should look into this matter and simplify things from where they stand today
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IRDA GUIDELINES
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ULIP, which constitute nearly 90 per cent of new life insurance policies sold by private insurers, are by nature investment vehicles that come with a small insurance cover. A large part of a ULIP `premium' is divided into units and invested in equities and debt instruments, the mix varying according to each policy-holders' risk appetite. The units are akin to mutual fund units and the investor can redeem them at maturity at net asset value. However, since the maturity date is predetermined, ULIP act more like a closed-ended fund. Since most of the premium is channeled to investments, the risk to the insurer is substantially low compared to pure term assurance. Their capital requirement also comes down because they need not put up large solvency reserves.
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TAX BREAKS
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TAX BREAKS
This is one area where traditional plans & ULIPs are on a par with each other. You get section 80c benefit, subject to maximum limit of Rs 1lakh; regardless of weather you buy a traditional insurance product or a ULIP. In both cases, the proceeds on maturity are tax-free under section 10(1od). Given the way the stock market is booming, its little wonder that policyholders are flocking to ULIPs. However, remember that the Bull Run may not be sustainable in the long run. Care must be taken to weigh your risk appetite, investment objectives & personal financial plan before leaping in to ULIPs.
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CASE STUDIES
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IS UNIT-LINKED LIFE INSURANCE FOR YOU? Unit-linked life insurance offers the interesting option of combining protection and tax advantages of life insurance with the attractive prospects of investing in equities. A unit-linked plan works on a minimum premium basis and not on a sum assured one. You decide the amount you can contribute at regular intervals. ULIP offers you insurance cover till your insurance needs are fulfilled, beyond that it becomes an investment avenue. How they compare? To explain how ULIP works we will compare HDFC ULIP Endowment plan with HDFC Endowment plan. Premium In case of: ULIP, you pay a minimum premium of Rs 10,000 per annum irrespective of age and term of the policy. Premiums levels can be either reduced or increased if premiums have been paid regularly for three years and the unit fund value is at least Rs 15,000. The flexibility of increasing premium contributions in an existing account helps policyholders manage their cash flows. In normal/traditional endowment plans the premium is calculated on the basis of age and the term and the amount you pay, as premium remains the same for the full term. The minimum premium is Rs 1,500 annually. Sum assured The sum assured depends on your age and the cover you take in case of ULIP. Depending on your age at entry, you may choose between 3 levels of cover - low, medium or high. In the traditional plan, the sum assured is calculated by age and term of the policy to which premium factor is applied.
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Top-ups Apart from your regular contributions, in case of ULIP, you can also make additional payments to increase the savings component. These top-ups do not affect the sum assured. Normal endowment policy does not offer you these benefits. Investment You choose the fund where you want to invest your money. HDFC offers a choice of five funds - liquid, defensive, secure managed, secure defensive and growth. The Liquid Fund is the least risky with investments in bank deposits and short-term money market instruments. Growth Fund is the riskiest with an investment of up to 100% in equities. In traditional insurance plans your money is invested keeping in view the IRDA specification i.e. minimum 85% in debt with the balance in equities. Charges? As is the case with unit-linked plans, this plan, too, imposes charges, on both the funds invested by the policyholder and by cancellation of units. These charges vary depending on the kind of premium payment option chosen (single or regular). Other charges include a fund management charge of 0.80% of the fund value per annum, apart from a flat fee of Rs 15 per month deducted by cancellation of units In case of ULIP, for the first 2 years the investment content rate is 73% of the premium and for the remaining years 99%. Risk cover charges (for death sum assured, critical illness, and accidental death) are charged for cancelling units on each monthly charge date, based on the person's age at that time. In traditional plans, the charges are not disclosed. There is an annual fee of Rs 150 for regular premium policies and Rs 300 for single premium ones. Returns In case of ULIP, in an eventuality you receive the sum assured or fund value whichever is higher and on maturity the fund value. In normal endowment plan, in either case you receive the same benefit i.e. the sum assured and vested bonus.
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In case you stop paying premiums? If this is in the first 3 years then in case of ULIP, on cancellation of the policy before paying regular premium for 3 years, there is a charge of 25% of the outstanding premiums due during this 3-year period. In case of normal endowment the policy lapses and nothing is paid back If you stop paying premiums after 3 years, in ULIP you have the option to make policy paid up, provided the policy has accumulated sufficient policy value. At present this amount is Rs 15,000. If the fund value of a paid up policy falls below Rs 15,000 then the policy is cancelled and the fund value is returned to you. The risk cover continues for the sum assured even though the policy has reached the paid up status. In traditional plan the policy becomes a paid up policy. Medicals In both the plans the norms for medicals are similar i.e. medicals are compulsory.
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ICICI PRUDENTIAL LIFE INSURANCE LAUNCHES PRODUCT STRUCTURED ALONG NEW ULIP GUIDELINES ICICI Prudential Life Insurance Company, Indias No. 1 private life insurance company, has become the first life insurer in India to introduce a single premium product LifeLink Super - which is structured along the new ULIP guidelines that were issued by IRDA in December 2005. LifeLink Super will open with a New Fund Series that allocates units to customers at an NAV of Rs 10 per unit on the opening day - March 13, 2006. The new ULIP guidelines have created a level field for the structure of single premium products. With LifeLink Super, the company believes that they have a product that can compete with the single premium products available in the market, without diluting the concept of life insurance as a long-term instrument for protection and wealth creation. The new product -LifeLink Super has a minimum term of 5 years. The product has embedded options to choose between 2 levels of Sum Assured (125% or 500%). For e.g, if an individual chooses to pay Rs. 50,000, his sum assured will be either Rs. 62,500 (125%) or Rs. 2,50,000 (500%). There are four fund options- equity, balanced, debt, and money markets & cash and the policy holder can shift between funds, four times a year for free. LifeLink Super is targeted at individuals who want to invest a lumpsum and earn returns over the long-term, without the pressure of regular future payouts, and is likely to find great appeal amongst sportsmen, artists, freelancers, and those who want to invest windfall profits and bonus. It can be purchased by anyone between the ages of 0-65 years. Those aged 44 years or less pay a single premium of atleast Rs 25,000 and those 45 years and above pay a single premium of atleast Rs 50,000.
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TATA AIG LIFE INSURANCE LAUNCHES ULIP SUPERANNUATION Tata AIG Life Insurance Company Ltd launched its unit-linked insurance plans (ULIP) for superannuation and gratuity schemes in the city, making it the first private life insurance entity offering both traditional and ULIP products in the country. Tata AIG Life has entered into agreements with Franklin Templeton Investments (India) for their non-discretionary investment advisory services and AIG Global Investment Group for their investment advisory services, the company said in a release on Monday. The ULIP superannuation scheme provides individual members the flexibility to decide on the allocation of their money based on their risk appetite. In case of the ULIP gratuity scheme, the employer or trustee has the flexibility to decide the ratio of investment. Tata AIG Life managing director Ian J Watts said: "we are delighted to announce that corporates and institutions can now benefit from our ULIP as they can invest for their superannuation and gratuity schemes. We are encouraged by our early success, with millions being invested in this business by some of the big names in the corporate world." Earlier this month, Tata AIG Life Insurance Company had launched its ULIP `Invest Assure' - a unit linked insurance plan for individuals. Tata AIG Life is extending three of its ULIP - equity, income and liquid funds to corporates and institutions for investments of superannuation and gratuity schemes.
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All the basic features such as target amount and tax concessions would remain with changes in certain operational aspects after the scheme becomes SEBIcompliant. The SEBI regulations prohibit investments in certain instruments such as term deposits. ``UTI has already started implementing the changes as fresh investments under the scheme are made keeping in view the SEBI regulations,'' Mr. Daga said. ULIP, CRTS and CCCF and US-64, which were launched before SEBI came into being and its mutual funds regulations were framed, are being converted to bring them in conformity to the SEBI regulations.
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LIC plans four or five new products in the current fiscal, and 50-60 more satellite offices this fiscal, in addition to the existing 25.
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