UNIT LINKED INSURANCE PLANS (ULIP)

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

ULIP provides multiple benefits to the consumer as listed below; Life protection Investment and Savings Flexibility Adjustable Life Cover Investment Options Transparency Options to take additional cover against Death due to accident, Disability, Critical Illness, Surgeries. Liquidity Tax planning

Thus ULIP has addressed and overcome several concerns that customers had about life insurance - liquidity, flexibility and transparency. Traditionally, the savings element of insurance has been opaque, giving policyholders no control over asset allocation, no transparency, no flexibility to match one's lifestyle, inexplicable returns and an expensive, complicated exit. ULIPs, by separating the two parts within the same product, and managing them independently, offer insurance buyers a product mix that satisfies the dual needs of protection and investment with higher flexibility and transparency. In short, ULIPs are structured such that the protection (insurance) element and the savings element (capital appreciation) can be distinguished and hence managed according to one's specific needs.

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ILLUSTRATION : To understand how a ULIP meets the multiple needs of protection of both health and life; and savings in the same policy, let us take the example of a 35-year-old man with 2 young children. With a premium of, say, Rs 30,000 p.a. he can start with a sum assured of Rs 6 lakh, for which the life insurer would set aside a nominal amount of the premium to cover it. The balance will be invested in a fund of his choice, possibly a balanced or growth option. As the children grow, the person might want to increase the level of protection, which could be done by liquidating some of the units to pay for a risk premium. On the other hand, if he gets a significant raise, he could increase the savings element in the policy by topping it up.

The chart below shows how one product can meet multiple needs at different life stages. Integrated Financial Planning Recently Married, Kids going Higher studies for Children married, no with kids to school, child, marriage independent, kids college nearing the golden years Reasonable protection, still high on asset creation Higher protection, still high on asset creation but steadier options, increase savings for child Increase death benefit; choose balanced option for asset creation. Choose riders for enhanced protection. Use top-ups to increase your accumulation Higher Protection, high on asset creation but steadier options, liquidity for education expenses Withdrawal from the account for the education expenses of the child Lump sum money for education, marriage. Facility to stop premium for 2-3 yrs for these extra expenses Safe accumulation for the golden yrs. Considerably lower life insurance as the dependencies have decreased Decrease the death benefitreduce it to the minimum possible. Choose the income investment option. Topups form the accumulation (with reduced expenses) for the golden yrs cash accumulation

Starting a job, Single individual Your Need Low protection, high asset creation and accumulation

Flexibility

Choose low death benefit, choose growth/balanced option for asset creation

Increase death benefit, choose growth/balanced option for asset creation

Withdrawal from the account for higher education/marriage expenses of the child. Premium holiday-to stop premium for a period without lapsing the policy

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HOW TO CHOOSE A ULIP FROM ACROSS DIFFERENT SCHEMES? Following are the few steps one can follow in choosing a ULIP so as to ensure that the product or scheme works well according to your needs. Understand the concept of ULIPs thoroughly: Do as much homework as possible before investing in an ULIP. This will make you know about the benefits and structure of the product and you will not be faced with unpleasant surprises at a later stage. Read the literature available on ULIPs on the Web sites and brochures circulated by insurance companies. Focus on your requirement and risk profile: Identify a plan that is best suited for you (in terms of your risk appetite). Your risk appetite should play an important role in the plan you choose. If you have a high-risk appetite, go in for a more aggressive investment option (ie select an option that invest higher percentage in equities) and vice-a-versa. Understand the peculiarities of the schemes: Understand the various fund options available to you and the fund management philosophy and objectives of each of them. Most ULIP products offer additional features such as top-up premiums, free switch over between various schemes, increase or decrease in protection levels, premium holidays, etc. Thoroughly understand the terms and conditions of each product. Examine the performance of scheme: Compare the performance of the scheme with benchmark indices like BSE Sensex or Nifty for the past two or three years to get a better idea about the performance. Look at how easily you can access information about your NAV when you need it. Thoroughly understand the flexibility, reporting and redemption conditions. 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, mortality charges and spreads, and that too, not only in the first year but also through the term of the policy. It might seem confusing at first, but a company provided benefit illustration should help make this clearer. Some companies levy a spread between the buy and sell rates of the units, which can significantly reduce the value of the investment over the long-term. Know about the Company: Last but not least, insure with a brand you can trust to honour its commitment and service you according to your requirements. Most of the Insurers are trusted global brands with strong domestic partners. But still, investors may look in to that also and go along with trusted brands. Compare ULIP products of different insurance companies : Compare products of different insurance companies in terms of premium payments (work on minimum premium basis as opposed to sum assured in the case of conventional insurance policies), Cost structure, performance of the scheme (equity as well as debt schemes), additional facilities like top-up premium and free switch over between schemes, flexibility in terms of increasing or decreasing protection, reporting structure (how easy to know your performance) and flexibility in redemption.

Copyright (c) 2007 Argus Equity Research Pvt Ltd. All rights reserved. www.argus-research.in , mail@argus-research.in

Having taken a ULIP, its important that you do follow-up on a regular basis, though not as frequently as you would do in the case of a stock or mutual fund as ULIP is a long-term investment. Check once a quarter to see how your fund is performing, and consider a switch if there is a change in the level of risk you are willing to take or in your personal market view. Check the performance of your ULIP in the few weeks or months before a planned withdrawal or top-up. All financial products have a certain amount of risk and charges, be it a mutual fund, property, or even a bank deposit. It would be unrealistic to assume that the features and benefits of a ULIP come at no cost.

Note: This document is prepared by Argus Equity Research Private Limited solely for the purpose of education. This should not be treated as a recommendation to invest in ULIPs or any other similar schemes or products.

Copyright (c) 2007 Argus Equity Research Pvt Ltd. All rights reserved. www.argus-research.in , mail@argus-research.in