You are on page 1of 58

VIVEK COLLEGE OF COMMERCE

CHAPTER 1 EVOLUTION OF ULIP


Life Insurance

Life insurance is a contract between you and a life insurance company, which provides your beneficiary with a pre -determined amount in the event of your death during the contract term. The primary purpose of life insurance is therefore protection of the family today, insurance is also seen as a tool to plan effectively for your future years, your retirement, and also for your children's future needs. Today, the market offers insurance plans that not just cover your life and but at the same time grow your wealth too.
Need for life insurance?

If you have dependants and financial responsibilities towards them, you certainly need insurance. Having a family means dependants; this in turn means financial commitments. Financial commitments come in the form of loans, children's education, medical expenses, etc. Imagine what would happen if you were to lose your life suddenly or become disabled and unable to earn. Being insured in a situation li ke this is a necessity. When you insure your life, in effect what you are doing is insuring your earning capacity. This guarantees that your dependants will be able to continue living without financial hardships even in the event of your demise.
How much does life insurance cost?
UNIT LINKED INSURANCE POLICY

VIVEK COLLEGE OF COMMERCE

In order to buy a life insurance policy, you must pay a certain amount as premium to the life insurance company. The amount of premium payable depends upon the type of the policy, term of the policy contract, the sum assured and your age. You could pay these premiums monthly/half yearly/annually or as a single premium.
Are there any advantages of buying insurance at an early age?

Yes. The premium that you pay on your insurance policy is mainly dependent upon two things your age and the tenure of the policy. The younger you are the lower is your insurance premium. At a younger age, you would be physically sound and may not be suffering from illness and this would entitle you to a lower premium on the policy. Therefore it is advisable to buy insurance at an early age to reduce the cost of insurance.

What is term insurance?

Term insurance, also known as pure life cover, is the cheapest and simplest form of insurance. Under this insurance policy, against payment of regular premium, the insurer agrees to pay your beneficiaries the sum assured in the event of your premature death. However, if you survive till the end of the policy term, nothing is payable to you. This policy has no savings component and the premiums you pay are purel y a cost to buy you life cover. This is suitable for you if:

You are looking for a low-cost life cover without any savings

benefits attached.
y

You are at that stage in life where insurance cover is vital but you

cannot afford high premium payment due to low income.

UNIT LINKED INSURANCE POLICY

VIVEK COLLEGE OF COMMERCE

What is the difference between term and whole life insurance?

Term plans are the purest and cheapest form of insurance where benefits are payable only on the death of the policy holder within the term. Whole life plans are a special type of term assurance wherein the term of the policy is whole of the life. So it follows that benefits under the policy are payable only on death of the policy holder.
What is a ULIP?

ULIP is an abbreviation for unit-linked insurance policy. A ULIP is a life insurance policy that provides a combination of risk cover and investment as opposed to conventional insurance plans that only provide risk cover. The advantage of ULIPs is that they distinguish clearly between these two benefits and the costs attached to t hem which allow a customer to manage the product according to his/her unique needs.

What are different types of ULIPs?

Today ULIPs are available to meet different financial objectives of the customer at various life-stages, be it wealth creation, child education or retirement planning. ULIPs can also be classified as single -premium ULIPs where you pay a premium only once in the lifetime of the policy and regular premium ULIPs where you pay premiums monthly, half yearly or yearly.

Why do people invest in ULIP?

People invest in life insurance owing to a few key reasons, mainly

UNIT LINKED INSURANCE POLICY

VIVEK COLLEGE OF COMMERCE

 

Insurance creates financial provisions for the deceased's

dependants. Insurance provides for the policyholder's old age after his earning

power diminishes. After all, interest rates may fall and invested holdings may lose value and stop gaining dividends, but the value of an insurance policy once set, never reduces.  Insurance also provide a legally authorized way to reduce the

incidence of Income Tax. With a view to promote savings and increase awareness regarding insurance, the government has provided certain benefits through the Income Tax Act for taxpayers if they choose to opt for life insurance policies. If you plan for your future in a prudent manner, you can maximize the returns on your insurance portfolio. 

Under Section 10(l0A) (iii) of the Income Tax Act, any payment

received by way of commutations of pension out of the Jeevan Suraksha annuity plans is exempt from tax  Under Section 10(10D), any sum received under a Life Insurance

policy (not being a Key Man policy) is also exempt from taxation. But it is wise to remember that Pensions received from Annuity plans are not exempted from Income Tax.  Section 80 CCC provides a deduction of up to Rs.10,000/- to an

individual assessee for any amount paid or deposited to effect or keeping in force any annuity plan of LIC for receiving pension from the fund referred in sections 10 (23AAB). Presently LIC's Jeevan Suraksha plan is one such plan using such benefit. ULIPs are structured such that the protection (insurance) element and the savings element can be distinguished and hence managed according to
UNIT LINKED INSURANCE POLICY

VIVEK COLLEGE OF COMMERCE

your specific needs. ULIPs have gained high acceptance due to the attractive features they offer. These include:
Flexibility y y y

The flexibility to choose the sum assured. The flexibility to choose the premium amount. The option to change level of premium /sum assured even after the

plan has started.


y

The flexibility to change the asset allocation by switching between

funds.

Transparency

The charges in the plan and net amount invested are known to the customer. The convenience of tracking ones investment performance on a daily basis.
Liquidity

The option of withdrawing money after a few years (comfort required in case of exigency).
Fund Options 1. A choice of funds (ranging from equity, debt, cash or a combination). 2. Option to choose your fund mix based on desired asset allocation

UNIT LINKED INSURANCE POLICY

VIVEK COLLEGE OF COMMERCE

CHAPTER 2 INTRODUCTION OF ULIP

Unit Linked Insurance Plan (ULIP) provides for life insurance where

the policy value at any time varies according to the value of the underlying assets at the time. 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). ULIP came into play in the 1960s and is popular in many countries in the world. The reason that is attributed to the wide spread popularity of ULI P is because of the transparency and the flexibility which it offers. As times progressed the plans were also successfully mapped along with life insurance need to retirement planning. In today's times, ULIP provides solutions for insurance planning, financial needs, and many types of financial planning including childrens marriage planning. Unit Linked Insurance Plan - is a financial product that offers you life insurance as well as an investment like a mutual fund. Part of the premium you pay goes towards the sum assured (amount you get in a life insurance policy) and the balance will be invested in whichever investments you desire - equity, fixed-return or a mixture of both. In India investments in ULIP are covered under Section 80C of IT Act. In a ULIP, the invested amount of the premiums after deducting for all the charges and premium for risk cover under all policies in a particular fund as chosen by the policy holders are pooled together to form a Unit
UNIT LINKED INSURANCE POLICY

VIVEK COLLEGE OF COMMERCE

fund. A Unit is the component of the Fund in a Unit Linked Insurance Policy. The returns in a ULIP depend upon the performance of the fund in the capital market. ULIP investors have the option of investing across various schemes, i.e, diversified equity funds, balanced funds, debt funds etc. It is important to remember that in a ULIP, the investment risk is generally borne by the investor. In a ULIP, investors have the choice of investing in a lump sum (single premium) or making premium payments on an annual, half -yearly, quarterly or monthly basis. Investors also have the flexibility to alter the premium amounts during the policy's tenure. For example, if an individual has surplus funds, he can enhance the contribution in ULIP. Conversely an individual faced with a liquidity crunch has the option of paying a lower amount (the difference being adjusted in the accumulated value of his ULIP). ULIP investors can shift their investments across various plans/asset classes (diversified equity funds, balanced funds, debt funds) either at a nominal or no cost.

ULIPs
A unit linked insurance policy 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 words, it enables the buyer to secure some protection for his family in the 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 (insurance cover) or the value of the units (investments). However, there
UNIT LINKED INSURANCE POLICY

VIVEK COLLEGE OF COMMERCE

are some schemes in which the policyholder receives the sum assured plus the value of the investments. Every insurance company has four to five ULIPs with varying investment options, charges and conditions for withdrawals and surrender. Moreover, schemes have been tailored to suit different customer profiles and, in that sense, offer a great deal of choice. The advantage of ULIP is that since the investments are made for long periods, the chances of earning a decent return are high. Just as in the case of mutual funds, buyers who are risk averse can buy into debt schemes while those who have an appetite for risk can opt for balanced or equity schemes. However, the charges paid in these schemes in terms of the entry load, administrative fees, underwriting fees, buying and selling charges and asset management charges are fairly high and vary from insurer to insurer in the quantum as also in the manner in which they are charged.
Tax benefits

The premiums paid for ULIPs are eligible for tax rebates under section 88 which allows a tax rebate of 20 per cent of premiums paid for taxable income below Rs 150,000 and 15 per cent for income between Rs 150,000 and Rs 500,000. Proceeds from ULIPs are tax-free under section 10(10D) unlike those from a mutual fund which attract capital gains ta x.
Key features

Premiums paid can be single, regular or variable. The payment period too can be regular or variable. The risk cover (insurance cover) can be increased or decreased.
UNIT LINKED INSURANCE POLICY

VIVEK COLLEGE OF COMMERCE

As in all insurance policies, the risk charge (mortality rate) varies with age. However, for an individual the risk charge is always based on the age of the policyholder in the year of commencement of the policy. These charges are normally deducted on a monthly basis from the unit value. For instance, if there is an increase in the value of units due to market conditions, the sum at risk (sum assured less the value of investments) reduces and so the risk charges are lower. The maturity benefit is not typically a fixed amount and the maturity period can be advanced (early withdrawal) or extended. Investments can be made in gilt funds (government securities), balanced funds (part debt, part equity), money-market funds; growth funds (equities) or bonds (corporate bonds). The policyholder can switch between schemes (for instance, balanced to debt or gilt to equity). The investment risk is transferred to the policyholder. The maturity benefit is the net asset value of the units. The value would be high or low depending on the market conditions during the period of the policy and the performance o f the fund manager. Thus there s no capital protection on maturity unless the scheme specially provides for it. There could be policies that allow the policyholder to remain invested beyond the maturity period in the event of the maturity value not being satisfactory.

UNIT LINKED INSURANCE POLICY

VIVEK COLLEGE OF COMMERCE

CHAPTER 3 ADVANTAGES OF UNIT-LINKED INSURANCE POLICIES:


 A combination of protection and tax advantage, unit -linked

policies dominate a huge chunk of the portfolio of the private insurers. The annual premium contributes over 70% to the premium income.  In the event of death during the life of the policy, the sum assured

or value of the policy fund whichever is higher is paid to the nominees.  There is a lot of flexibility in these plans with falling interest

rates. So an investor can adjust his risk profile according to his choice. The risk element is transferred to the investor and the insurance company enjoys the capital and solvency.  The client is aware of the "no guarantee" era and he plans his

investment judiciously.  The client enjoys transparency, by way of returns on the equity

markets simultaneously enjoying the benefits of life cover.  It's tax-free, unlike a mutual fund or any other investment, where

the gains are taxed.  The client also has an option of restructuring his investment

pattern which is a value addition to the original policy (i.e. top -ups)

UNIT LINKED INSURANCE POLICY

10

VIVEK COLLEGE OF COMMERCE

CHAPTER 4 TYPES OF ULIPs


One of the big advantages that a ULIP offers is that whatever be your specific financial objective, chances are that there is a ULIP which is just right for you. The figure below gives a general guide to the different goals that people have at various age -groups and thus, various lifestages. Depending on your specific life-stage and the corresponding goal, there is a ULIP which can help you plan for it.

ULIPs for retirement planning

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

UNIT LINKED INSURANCE POLICY

11

VIVEK COLLEGE OF COMMERCE

can accumulate over a period of time to provide a steady income post retirement. Usually all retirement plans have two distinctive phases
y

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 co rpus of Rs. 13, 82,368.

UNIT LINKED INSURANCE POLICY

12

VIVEK COLLEGE OF COMMERCE

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 Gauravs 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. So, you see how despite setting aside more than 50% of Gauravs annual contribution, Hari ends up with a retirement corpus which is almost a third lesser than Gauravs. That is the power of compounding. Which is why, it is never too early to invest in a ULIP for retirement planning.

ULIPs for child 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. Today there are ULIPs that offer money at key milestones of your child's education thus ensuring that your childs education con tinues 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.

UNIT LINKED INSURANCE POLICY

13

VIVEK COLLEGE OF COMMERCE

Flexibility of adding on various riders like Income benefit rider,

disability rider etc to get additional benefits .For e.g. In case of income benefit rider, In the event of the death of the parent, the child will receive a regular pre-determined amount every year to meet the educational expenses.
y

In case of unfortunate incidence of the death of a parent, not only

will the child receive the sum assured immediately but will also continue to receive money at the key educational milestones.

UNIT LINKED INSURANCE POLICY

14

VIVEK COLLEGE OF COMMERCE

CHAPTER 5 HOW DOES ULIP WORK ?

Illustration: 1

Rahul is a thirty-year old who wants a product that will give him market linked returns as well as a life cover. He wants to invest Rs 50,000 a year for 10 years in an equity-based scheme. Based on this premium, the sum assured works out to Rs 532,000, the exact amount of premium being Rs 50,032. Based on the current NAV of the plan that Rahul chooses to invest in, he is allotted units in the scheme. Then, units equivalent to the charges are deducted from his portfolio. The charges in the first year include a 14 per cent sales charge, an administration charge (7 per cent for the first Rs 20,000 and 3 per cent for the remaining Rs 30,000) and underwriting charges, which are deducted monthly. Besides, mortality charges or the charges for the life cover are also deducted. For the remaining nine years a 3.5 per cent sales charge and an administrative charge of 4 per cent (for the first Rs 20,000 and 2 per cent for the remaining Rs 30,000) are levied in addition to mortality charges. Fund management fee of 1.5 per cent (equity) and brokerage are also charged. This cost is built into the calculation of net asset value. On maturity - that is, after 10 years - Rahul would receive the sum assured of Rs 532,000 or the market value of the units whichever is higher.
UNIT LINKED INSURANCE POLICY

15

VIVEK COLLEGE OF COMMERCE

Assuming the growth rate in the market value of the units to be 6 per cent per annum Rahul would receive Rs 581,500; assuming the growth rate in the market value of the units to be 10 per cent, Rahul would receive Rs 724,400. In case of Rahul's untimely death at the end of the ninth year, his beneficiaries would receive the sum assured of Rs 532,000 or the market value of the units whichever is higher. Assuming the growth rate in the market value of units is 6 per cent per annum, the value of investment would be Rs 510,200. However, his family will get Rs 532,000 as it is the sum assured.

Illustration: 2

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 examp le 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.

UNIT LINKED INSURANCE POLICY

16

VIVEK COLLEGE OF COMMERCE

CHAPTER 6 WHAT YOU MUST ASK YOUR AGENT?

First-year charges: Usually, a minimum of 15 per cent. However, high premiums attract lower charges and vice versa. Charges can be as high as 50 per cent if the scheme affords a lot of flexibility. Subsequent charges: Usually lower than first -year charges. However, some insurers charge higher fees in the initial years and lower them significantly in the subsequent years.
Administration charges: This ranges between Rs 15 per month to Rs 60

per month and is levied by cancellation of units.


Risk charges: The charges are broadly comparable across insurers. Asset management fees: Fund management charges vary from 0.6 per

cent to 0.75 per cent for a money market fund, and around 1.5 per cent for an equity-oriented scheme. Fund management expenses and the brokerage are built into the daily net asset value.
Switching charges: Some insurers allow four free switches in every year

but link it to a minimum amount. Others allow just one free switch in each year and charge Rs 100 for every subsequent switch. Some insurers don't charge anything.
Top-ups: Usually attracts 1 per cent of the top -up amount. Top-up

normally goes directly into your investment account (units) unless you specifically ask for an increase in the risk cover.
Surrender value of units: Insurers levy certain charges if the policy is

surrendered prematurely. This levy varies between insurers and could be


UNIT LINKED INSURANCE POLICY

17

VIVEK COLLEGE OF COMMERCE

around 75 per cent in the first year, 60 per cent in the second year, 40 per cent in the third year and nil after the fourth year.
Fund performance: You could check out the performance o f similar

schemes (balanced with balanced; equity with equity) across insurance companies. Look at NAV performance over a period of at least two to three years. This can only give you some indication about the credibility of the fund manager because past performance is no guarantee to future returns, especially in insurance products where the emphasis is on long -term performance (10 years or more). What happens if you miss a premium? Does the policy provide for a grace period or does the policy lapse? Under what circumstances will the policy lapses? What are the exclusion clauses? Company policies on these points differ.

Here are some cardinal principles you need to follow when you buy insurance. Since an insurance agent is permitted to sell only one insurance company's policies it is advisable to meet agents from different companies. That would help you compare schemes across companies. Since insurance is a product, which entails a long-term commitment on the part of the insurer, it is important not to go only by the features or the cost advantages of schemes but by the parentage of the insurer as well. Comparing schemes based on costs is a fairly complex exercise. As a rule, the higher the initial years' expenses the longer it takes for the policy to outperform its peers with low initial years' costs and slightly higher subsequent year expenses.
UNIT LINKED INSURANCE POLICY

18

VIVEK COLLEGE OF COMMERCE

Retire unhurt

Pension plans are essentially tailored to meet old age financial requirements. But there are certain advantages in joining a pension plan. First of all, contribution to pension funds upto Rs 10,000 is eligible for tax deduction under section 80CCC. In other words, your pension contribution will get deducted from your taxable income. So if you are in the top tax bracket, liable to pay to a 30.6 pe r cent tax, then your tax savings will be that much. All life insurance companies offer pension products - both conventional and unit-linked. In both cases you pay a certain premium amount for a specified length of time. Usually, the minimum entry age is 18 years and the maximum age is 60 years. You can choose to pay the premium for five to 30 years. When the policy matures, you receive one -third of the value of the accumulated amount as a lump-sum payment. For the remaining, you can buy annuities either fr om the existing insurer or any other insurer. While in a conventional scheme, your money is managed through the insurer's pooled investment account and you are entitled to bonuses every year, in a ULIP you receive the value of the investment in your indivi dual account. In a ULIP you have the flexibility to choose between a conservative scheme or an aggressive scheme with high allocation to equities. Pension policies impose huge penalties for early termination.

UNIT LINKED INSURANCE POLICY

19

VIVEK COLLEGE OF COMMERCE

Most pension plans provides for four annuity options (1) Annuity for life, (2) Annuity payable for a chosen term and for life thereafter, (3) Annuity for life with return of purchase price on death to the beneficiary and (4) Annuity for life to you and then to your spouse with return of purchase price to the beneficiary on death of last survivor - which can

be exercised at any time within six month of the vesting date or the date on which you are eligible for pension. Schemes allow postponements of vesting age and also early retirement.

Integrated Financial Planning Expense Charged in a ULIP:


Premium Allocation Charged: A percentage of the premium is

appropriated towards charges initial and renewal expenses apart from commission expenses before allocati ng the units under the policy.

Morality Charges: These are charges for the cost of insurance coverage

and depend on number of factors such as age, amount of coverage, state of health etc.

Fund Management Fees: Fees levied for management of the fund and

are deducted before arriving at the NAV.

Administration Charges: This is the charge for administration of the

plan and is levied by cancellation of units.


UNIT LINKED INSURANCE POLICY

20

VIVEK COLLEGE OF COMMERCE

Surrender Charges: Deducted for premature partial or full encashment

of units.

Fund Switching Charge: Usually a limited number of fund switches are

allowed each year without charge, with subsequent switches, subject to a charge.

UNIT LINKED INSURANCE POLICY

21

VIVEK COLLEGE OF COMMERCE

CHAPTER 7 ULIP GUIDELINES: IRDA


After being witness to rampant misrepresentation of ULIPs (unit linked insurance plans), the regulator Insurance Regulatory and Development Authority (IRDA) finally introduced some much-needed guidelines to lend an element of insurance to an otherwise investment product. However, we maintain that there is still more to be done to make ULIPs more transparent and make it even more insurance oriented. First some background ULIPs made an entry at a rather opportune time for insurance companies. The mood in equity markets was very pessimistic; however, at those levels (BSE Sensex less than 3,000 points ) markets could go in only one direction - up. And take off they did in an unprecedented manner. From 3,000 points, the BSE Sensex surged furiously to over 12,000 points leaving investors breathless. Why are we talking of stock markets in an insurance article where we propose to discuss the latest ULIP guidelines? Because unfortunately, not just fund managers, even insurance companies were rather excited by the sharp rise in stock markets. When you come to think of it, insurance companies should be more concerned about insuring lives than the vagaries of stock markets. However, in ULIPs, they had a product that was more geared towards offering a return than insuring lives. And this anomaly was put to good use by insurance agents. ULIPs were spoken of in the same breath as mutual funds. In fact, many agents even went as far as projecting ULIPs superior to mutual funds because they attract tax benefits (under Section 80C) on all options, unlike mutual
UNIT LINKED INSURANCE POLICY

22

VIVEK COLLEGE OF COMMERCE

funds where you get a tax benefit only on the ELSS (equi ty-linked savings scheme) category. Moreover, ULIPs were shown to be a short-cut investment/insurance avenue for instance, investors were encouraged to pay premiums only for the first 3 years and not necessarily over the entire tenure of the policy. The reason is because the expenses in the initial 3 years premium are so high that insurance companies recover the entire cost of the policy (including life cover charges) and can do without the remaining premiums. While these marketing gimmicks were glaring, the IRDA, to their credit, did intervene at regular intervals to infuse some much -needed sanity. But as we, at Personalfn, have seen on the mutual fund side, at times the regulator must come down heavily as financial service providers can take quite a while to get the hint. On July 1, 2006, the IRDA introduced revised ULIP guidelines to correct "some" of these anomalies, we say some because much is yet to be achieved, but more on that later. For one IRDA has given the new ULIP a face, in insurance a face can be taken as the sum assured and the tenure. The old ULIP lacked both and individuals did not have an inkling about either even after taking the ULIP. The latest guidelines dictate that:
1. Term/Tenure

The ULIP client must have the option to choose a term/tenure. If no term is defined, then the term will be defined as 70 minus the age of the client. For example if the client is opting for ULIP at the age of 30 then the policy term would be 40 years. The ULIP must have a minimum tenure of 5 years.
UNIT LINKED INSURANCE POLICY

23

VIVEK COLLEGE OF COMMERCE

2. Sum Assured

On the same lines, now there is a sum assured that clients can associate with. The minimum sum assured is calculated as: (Term/2 * Annual Premium) or (5 * Annual Premium) whichever is higher. There is no clarity with regards to the maximum sum assured. The sum assured is treated as sacred under the new guidelines; it cannot be reduced at any point during the term of the policy except under certain conditions like a partial withdrawal within two years of death or all partial withdrawals after 60 years of age. This way the client is at ease with regards to the sum assured at his disposal.
3. Premium Payment

If less than first 3 years premiums are paid, the life cover will lapse and policy will be terminated by paying the surrender val ue. However, if at least first 3 years premiums have been paid, then the life cover would have to continue at the option of the client.
4. Surrender value

The surrender value would be payable only after completion of 3 policy years.
5. Partial withdrawals

The client can make partial withdrawals only after 3 policy years .
6. Settlement

UNIT LINKED INSURANCE POLICY

24

VIVEK COLLEGE OF COMMERCE

The client has the option to claim the amount accumulated in his account after maturity of the term of the policy up to a maximum of 5 years. For instance, if the ULIP matures on January 1, 2007, the client has the option to claim the ULIP monies till as late as December 31, 2012. However, life cover will not be available during the extended period.
7. Loans

No loans will be granted under the new ULIP.


8. Charges

The insurance company must state the ULIP charges explicitly. They must also give the method of deduction of charges.
9. Benefit Illustrations

The client must necessarily sign on the sales benefit illustrations. These illustrations are shown to the client by the agent to give him an idea about the returns on his policy. Agents are bound by guidelines to show illustrations based on an optimistic estimate of 10% and a conservative estimate of 6%. Now clients will have to sign on these illustrations, because agents were violating these guidelines and projecting higher returns. While what the IRDA has done is commendable, a lot more needs to be done. At Personalfn, we have our own wish list with regards to ULIP portfolios. Regular disclosure of detailed ULIP portfolios. This is a problem with the industry; for all their talk on being just like (or even better than) mutual funds, ULIP portfolios are nowhere near their mutual fund counterparts in frequency as well as in transparency. On the same lines, other data

UNIT LINKED INSURANCE POLICY

25

VIVEK COLLEGE OF COMMERCE

points like portfolio turnover ratios need to be mentioned clearly so clients have an idea on whether the fund manager is investing or punting. ULIPs (especially the aggressive options) need to mention their investment mandate, is it going to aim for aggressive capital appreciation or steady growth. In other words will it be managed aggressively or conservatively? Will it invest in large caps, mi d caps or across both segments? Will it be managed with the growth style or the value style? Exposure to a stock/sector in a ULIP portfolio must be defined. Diversified equity funds have a limit to how much they can invest in a stock/sector. Investment guidelines for ULIPs must also be crystallised. Our interaction with insurance companies indicates that there is little clarity on this front; we believe that since ULIPs invest so heavily in stock markets they must have very clear -cut investment guidelines.
ULIP Guidelines July 27, 2009

Since opening up of insurance industry to private players, unit linked insurance products (ULIPs) have undoubtedly been the most popular type of products among the flourishing private life insurers. In December 2005 IRDA issued set of guidelines (effected from June 2006) to be adhered to in the structure of ULIPs to ensure comparability among products offered by various companies and to reduce then prevalent short-termism in ULIPs. These guidelines have now come to be known as ULIP Guidelines and mark a milestone in product cycle of all companies.

UNIT LINKED INSURANCE POLICY

26

VIVEK COLLEGE OF COMMERCE

Since then, insurance industry has only grown larger and ULIPs have particularly been coming under attack by mutual fund industry and financial press for high charge structure. On 22nd July 2009 IRDA issued another set of guidelines, which are popularly known as ULIP Guidelines II. This time around, the focus has been on the returns achieved by the policyholder. The core principle is that the net return to the customer should not be less than a particular precharge return. These guidelines are expected to affect most, if not all, products currently in the market and will undoubtedly usher in a new era of unit linked products. It remains to be seen what direction do the insurers ch oose and how their product decisions are met by two of the other important parties in the sale, customer and the intermediary
IRDAS ULIP guideline will protect policy holders

The Insurance Regulatory and Development Authority (IRDA) recently introduced its much-awaited guidelines to govern unit-linked insurance policies (ULIPs), which are among the most popular class of life insurance policies sold in the country today. Till the privatisation of the insurance industry around the end of the century, only the Unit Trust of India (UTI) sold unit-linked insurance plans, apart from the Dhanaraksha Plan of the LIC Mutual Fund. ULIPs are life insurance policies where the insurance cover is bundled with an investment benefit under a single contract; the customer ge ts insurance cover as well as investment returns based on market performance. As in mutual funds, there are different options like predominantly equity-oriented investments, pure debt investments,
UNIT LINKED INSURANCE POLICY

27

VIVEK COLLEGE OF COMMERCE

government securities investments, etc, which the customer can choose, depending on his or her risk appetite. The most important point is that the risk under ULIPs is borne by the policyholder. Though unit-linked insurance schemes have proved to be incredibly popular, there were no regulations and there were compl aints that some insurance companies were taking unfair advantage of this, selling ULIP policies that were little more than thinly disguised mutual funds. IRDA's new regulations are aimed at ensuring that the customer gets a fair deal, at enhancing transparency, providing a better understanding of the product design and assuring a reasonable amount of insurance cover in ULIPs, consistent with the long-term nature of life insurance products. The primary advantage of ULIPs is that the customer gets the advanta ges of both insurance and mutual fund investment in a single contract. An in house team invests and manages the premiums and gets the customer a return. ULIPs also offer tax deduction of up to Rs100,000 from the gross total income under Section 80C of the Income Tax Act, 1961. Returns from ULIPs are exempt from tax, subject to the conditions under Section 10(10D). The downside is that, generally, there are limited guarantees, and market risks are passed on to the customer completely. Returns could be lucrative if the market is upbeat, but the unit value could decline if the market goes down.
The New Provision

IRDA has prescribed a minimum sum assured equal to 50 per cent of the total annualised premium during the entire policy term or five times the annualised premium, whichever is higher. This regulation is aimed at maintaining the basic characteristic of a life insurance policy, where life
UNIT LINKED INSURANCE POLICY

28

VIVEK COLLEGE OF COMMERCE

cover should be the primary benefit. Till the policyholder turns 60 years old, the sum assured cannot be reduced by partial withdrawals. This is aimed at protecting the life insurance cover.
Premium Holiday

If the policyholder stops paying premium instalments after paying premiums for three years, the risk premiums and the applicable charges can be adjusted from the balance in the account value, till such time as the balance in the account reduces to one year's premium. This would help policyholders who are unable to pay premiums owing to a temporary disruption in income because of change in employment, or any other sudden drop in income. The premium holiday option ensures continued insurance protection by transferring the risk premium and charges due from the account value, which is built up over a period. But the policy would lapse and this benefit would not be available if premium payments are stopped within three years.
Top-up Premiums

Top up premiums are irregular dump-in amounts allowed in a ULIP. Up to now, there were no restrictions; it was possible, for example, to dump in Rs1 crore in a ULIP and invest the entire amount in the market. But this vitiates the basic characteristic of the policy by making the insurance component insignificant. To plug this loophole, IRDA has prescribed that a sum assured must back any dump-in that exceeds 25 per cent of normal premium, which will be constant throughout the term of the policy. Any appropriation towards a dump-in can take place only if the normal premiums are paid.

UNIT LINKED INSURANCE POLICY

29

VIVEK COLLEGE OF COMMERCE

Withdrawals from ULIPs

Earlier, withdrawals from ULIPs were possible even within a year of issue. Depending on the option selected, they were reduced from the sum assured, resulting in dilution of death benefits to the nominees. Now, withdrawals will be allowed only after three years. The new guidelines provide that except for withdrawals made during the two yea rs immediately preceding death, no other withdrawals can be reduced from the sum assured. But once the customer is past the age of 60, all withdrawals can be reduced from the sum assured.
Lock-in period

A top-up premium cannot be withdrawn for three years. This places ULIPs on par with mutual fund contributions under Section 80C of the Income Tax Act, 1961. The only relaxation in this condition is on withdrawal of top-up premiums made during the last three years of the policy contract.
Settlement options

The policyholder has settlement options, to receive the policy benefits in various forms, rather than a lump sum. For example, the company can give the policyholder an option to receive the maturity benefit in the form of a monthly pension. IRDA has restricted such extended periods of settlement to five years from the date of maturity. The company should also make clear the inherent risk involved in extended periods of settlement.

UNIT LINKED INSURANCE POLICY

30

VIVEK COLLEGE OF COMMERCE

Date of unitization

The invest-able portion of the contributions (after ded ucting risk premium, charges, etc) is invested based on net asset value (which reflects the average market value of the invested contributions). So far, insurance companies were unitising on the date of placing of the policy, which could be much later than the date on which the customer gave the cheque towards the first premium, renewal premium or dump -in premium. This often resulted in loss to policyholders, as the market moved up between the date of receipt of the cheque and the date of placing the policy. To resolve this anomaly, the IRDA has prescribed the following guidelines:
y

Contributions by local cheque / DD: If the payment is received up

to 4.15 pm, payable at par at the place of receipt, the same day's closing NAV will be applied. After 4.15 pm, th e next day's closing NAV is applicable.
y

Contributions by outstation cheque: The closing NAV on the date

of realisation of the outstation cheque is applicable. This provision ensures that the company banks the cheques on time. The company will make good any loss on account of delays on its part. This rule is applicable for redemptions too.
Charges

Charges are costs appropriated by insurance companies from ULIP premiums. The IRDA has listed the charges that insurance companies can levy on policyholders, as well as laid out the standard definitions for use in policy contracts. This is aimed at clarity and to enable customers to understand and compare costs between different insurance companies.
UNIT LINKED INSURANCE POLICY

31

VIVEK COLLEGE OF COMMERCE

Statement of Account

A statement of account, which forms part of the policy document, must be issued at the end of each policy year and also when a transaction takes place, giving complete information on the nature of the transaction (investment / switch over, etc), the NAV on the date of transaction, number of units before and after the transaction, etc. The annual statement must give the number of units in the account and the NAV on the date of the statement, besides other relevant information.
Market Conduct

There is an inherent risk in investing in ULIPs, as the perfor mance of the funds underlying the ULIPs governs their returns. To address these risks, the IRDA has authorised the Life Insurance Council to formulate a Code of Conduct for sale of ULIPs. This includes mandatory training for agents before they are authorised to sell ULIPs, documentation to enable the customer to understand and acknowledge the risk involved in buying ULIPs, a code of conduct for their sale, educating policyholders on risk factors, terminology, charges, etc.
Disclosure norms

To prevent misleading information, the IRDA has prescribed norms for mandatory disclosures. All promotional materials must specify all fund options (like equity funds, debt funds, balanced funds, etc), the minimum and maximum percentage of investments in fund options, all charges with limits, and the risk profile. All promotional materials and policy documents must carry a clear statement that the investment risk is borne solely by the policyholder. The size of the fonts used in disclosures must

UNIT LINKED INSURANCE POLICY

32

VIVEK COLLEGE OF COMMERCE

be the same as that used for other purposes in promotional materials and policy documents. All advertisements for ULIPs must clearly address the question of risk and distinguish ULIPs from conventional life insurance products. They must disclose all charges and guarantees, if any, an d include a statement that the fund name and the company name do not indicate the performance of the fund. Advertisements must be simple, understandable to policyholders and avoid legal and financial jargon, to avoid misleading sales. Past performance can be given only on completion of one calendar year from the introduction of the fund. Emphasis on past performance should be minimal. Under no circumstances can there be any justification for projecting or suggesting future performance based on past performa nce; there should be a clear-cut statement that past performance is no indication of future performance.

IRDA may cut ULIP approval time from 30 to just 3 days

The Insurance Regulatory and Development Authority (IRDA) is likely to hasten the file and use procedure for unit -linked insurance plans (ULIPs). At present, IRDA takes 30 days to approve any product. Insurers expect it to come down to three days in case of the existing products. After the cap on the overall charges, 22 life insurance companies will together re file around 150-200 unit-linked products. As far as products are in line with the new norm, we will approve it in less than the normal time since
UNIT LINKED INSURANCE POLICY

33

VIVEK COLLEGE OF COMMERCE

there are more than 200 ULIPs of the 22 life insurance companies, said IRDA Executive Director K Subrahmanyam. The regulator has called for a meeting with the appointed actuaries on September 9 to assure proper implementation of the new norms. IRDA has formed a committee headed the Life Insurance Council Chairman S B Mathur, chief actuaries of few insurance companies and chief executives of a few life companies. An actuary of a life insurance company said that insurers would take the issue to the regulator and it was likely to reduce the timeline of process as it did in 2006 when it came out with fresh guidelines on ULIPs. In 2006, when IRDA had changed ULIPs guidelines mainly imposing sum assured at five times the premium and three-year lock-in period, it approved products in 15 days. All existing unit -linked products will have to comply with the revised guidelines from January 1, 2010, and therefore, these products will have to be re-filed by December 31, 2009. Last time, when IRDA had changed the norms, it had asked insurance companies to file ULIPS and use it after certifying it with appointed actuary. It involved risks and the regulator had later asked insurers to withdraw or change those products, which did not meet new rules, said Future General Chief Actuary GN Agarwal. IRDA will look at quick approvals as there are so many products. The numbers of companies and ULIPS have doubled from 2006 when the guidelines were laid down. The regulator will speed up the process. Since it approved products in 10-15 days in 2006, it may start clearing the existing products in three days, said SBI Life Chief Actuary Sanjeev Pujari.

UNIT LINKED INSURANCE POLICY

34

VIVEK COLLEGE OF COMMERCE

CHAPTER 8 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. 1. 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 lat er stage. Read the literature
available on ULIPs on the Web sites and brochures circulated by insurance companies.

2. 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.

3. 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.

UNIT LINKED INSURANCE POLICY

35

VIVEK COLLEGE OF COMMERCE

4. Examine the performance of scheme: Compare the performance of

the scheme with benchmark indices like BSE Sensex or Nifty for th e 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.

5. 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 char ges 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 an d sell rates of the units, which can significantly reduce the value of the investment over the long term.

6. 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.

7. 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
UNIT LINKED INSURANCE POLICY

36

VIVEK COLLEGE OF COMMERCE

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.

UNIT LINKED INSURANCE POLICY

37

VIVEK COLLEGE OF COMMERCE

CHAPTER 9 CASE STUDY

The basic project objectives are as follows: y

Trust needs to be developed among the customers both as far as the

ULIP as a product is concerned


y

Some respondents despite of knowing about ULIP were hesitant to

talk on it because they were not too confident about their knowledge. This very fact completely declines the concept of providing switches as a lucrative feature in ULIP (which is done by most of the companies). The reason is that very rarely people have t he ability or time to use these features.
y

Awareness was missing

COMPANY PROFILE

KOTAK GROUP is one of the top most financial product service

providers in India. It is one of India's leading financial conglomerates, offering complete financial solutions that encompass every sphere of life. From commercial banking, to stock broking, to mutual funds, to life insurance, to investment banking, the group caters to the financial needs of individuals and corporates.

The group has a net worth of over Rs5,824 crores, employs around 20,000 people in its various businesses and has a distribution network of branches, franchisees, representative offices and satellite offices across 370 cities and towns in India and offices in New York, London, San
UNIT LINKED INSURANCE POLICY

38

VIVEK COLLEGE OF COMMERCE

Francisco, Dubai, Mauritius and Singapore. The group services around 4.4 million customer accounts. It comprises of following sub units which combines to form such a vast company and group of people.

1. Kotak Securities. 2. Kotak Insurance. 3. Kotak Mahindra bank. 4. Kotak Mutual funds. 5. Kotak Private equity. 6. Kotak Investment banking. 7. Kotak Reality funds.

The Kotak Mahindra Group was born in 1985 as Kotak Capital Management Finance Limited. This company was promoted by Uday Kotak, Sidney A. A. Pinto and Kotak & Company. Industrialists Harish Mahindra and Anand Mahindra took a stake in 1986, and that's when the company changed its name to Kotak Mahindra Finance Limited. Since then it's been a steady and confident journey to growth and success.

KOTAK DIRECT
KOTAK DIRECT (A Subsidiary of KOTAK SECURITIES) deals with ULIPs (Unit Linked Insurance Plans). It was started in 2007 with the Head office in Mumbai. The various branches of Kotak Direct are located throughout the country & new branches are openin g up as well. Kotak Securities, a subsidiary of Kotak Mahindra Bank, is the stock broking and distribution arm of the Kotak Mahindra Group. The institutional business division, which brings you AKSESS, primarily
UNIT LINKED INSURANCE POLICY

39

VIVEK COLLEGE OF COMMERCE

covers secondary market broking. It caters to the needs of foreign and Indian institutional investors in Indian equities (both local shares and GDRs). The division also has a comprehensive research cell with sectoral analysts covering all the major areas of the Indian economy. Kotak Securities Ltd. is one of the oldest and leading stock broking houses in India with a market Kotak Securities Ltd. has also been t he largest in IPO distribution.

Kotak Securities has 877 outlets servicing over 4, 30,000 customers and a coverage of 321 cities. Kotaksecurities.com, the online division of Kotak Securities Limited offers Internet Broking services and also online IPO and Mutual Fund Investments.

Kotak Securities Limited has over Rs. 3300 crore of Assets Under Management (AUM) as of 31st March, 2008. The portfolio Management Services provide top class service, catering to the high end of the market. Portfolio Management from Kotak Securities comes as an answer to those who would like to grow exponentially on the crest of the stock market, with the backing of an expert.

UNIT LINKED INSURANCE POLICY

40

VIVEK COLLEGE OF COMMERCE

STRUCTURE OF KOTAK DIRECT Vice President


STRATEGIC LEVEL OR TOP

Zonal Head

Area Head
MIDDLE LEVEL

Territory Head

TEAM of 10 TO 20 people

Sales Manager
OPERATION AL LEVEL

Senior Relationship Manager

Relationship Manager

UNIT LINKED INSURANCE POLICY

41

VIVEK COLLEGE OF COMMERCE

POLICIES OF KOTAK DIRECT


There are basically 3 policies dealt in KOTAK DIRECT   

KOTAK SAFE INVESTMENT PLAN (KSIP) KOTAK SMART ADVANTAGE PLAN (KSAP) KOTAK HEADSTART FUTURE PROTECT

Depending upon the needs & wants, clients have the option of choosing between any of these three plans which provides them with various benefits & growth options along with an Insurance cover.

KOTAK SAFE INVESTMENT PLAN (KSIP)

Kotak Safe Investment Plan is a Unit Linked Insurance Plan that combines the benefits of insurance and capital market returns into one. This plan from the stable of Kotak Life Insurance is a true reflection of the companys essence: innovation that will benefit the investor. What makes investing in Kotak Life Insurance truly unique is that you enjoy a Guaranteed Maturity Value with varying degrees of equity exposure depending on your risk appetite. So if the market value of your units is higher, you reap the benefits with the peace of mind that whilst in a bear market your investment is under-pinned by the Guaranteed Maturity Value. And there is more, the returns are totally Tax free.

KOTAK SMART ADVANTAGE (KSAP)

Guaranteed returns of unto 275% of your first y ear premium at


42

maturity
UNIT LINKED INSURANCE POLICY

VIVEK COLLEGE OF COMMERCE

Assured bonus additions at regular intervals during the policy term 100% allocation of the premium from 2 nd year onwards Unique fund offering maximum opportunity for growth and choice

to enhance your fund value.


y y

for your investment needs


y

Maximum protection for your loved ones to choose from.

KOTAK HEADSTART FUTURE PROJECT

Every child is different. Each has their own set of dreams and aspirations. As a parent you would like to provide your child with all the building blocks that could develop his or her potential to the fullest. This could mean extra coaching or tuition for talented children, special training or equipment for natural athletes or professional training for born singers. Headstart Child Plans is a specially tailored, cost-effective plan, aims to give your children the financial means to pursue his or her dreams and live them.
The Headstart Advantage : y

Triple Death Benefit : Sum received at death =( Sum assured +

Fund value + Remaining premium)


y y y y y y

Dynamic Floor Fund Maximizes wealth while providing protection Joint life option Save for 2 children with one plan Additional bonus units Flexible Withdrawal

UNIT LINKED INSURANCE POLICY

43

VIVEK COLLEGE OF COMMERCE

Additional Benefits:

Term / Preferred Term Benefit:

In the event of death during the term of this benefit, the beneficiary would receive an additional death benefit amount, which is over and above the sum assured. The maximum amount of benefit you can avail is equal to the basic sum assured. Where the Term Benefit cover applied for is more than Rs.10 lakhs, better rates may apply.

Accidental Death Benefit:

This benefit provides an additional amount (over and above the sum assured) to the beneficiary in the event accidental death of the life insured. The maximum cover available under this benefit is equal to the basic sum assured (subject to a maximum of Rs.10 lacs).

Critical Illness Benefit:

This benefit can be added to the basic life insurance plan to provide financial support in the event of medical emerg encies. On the first occurrence of critical illness during the term of the plan, you would receive a portion of the sum assured to reduce your financial burden in this emergency. The maximum Critical Illness Benefit that you can avail of is equal to half the basic sum assured (subject to a maximum of Rs.20 lacks).

Life Guardian Benefit:

In case of the unfortunate death of the proposer, this benefit keeps the policy alive by waiving all future premiums on the policy.

UNIT LINKED INSURANCE POLICY

44

VIVEK COLLEGE OF COMMERCE

Accidental Disability Guardian Benefit:

In case the proposer is permanently disabled as a result of accident, this benefit keeps the policy alive by waiving all future premiums on the policy.

COMPARISON BETWEEN VARIOUS POLICIES:

POL ICIES FEATURES

KSAP

KSIP

HEADSTA RT

MIN: 0 Years
ENTRY AGE

MIN: 0 Years MAX:65Years

MIN: Years

MAX:65Years

MAX:65Ye ars

MATURITY AGE

MIN:18Years MAX:75Years

MAX:75Years

MIN:18Yea rs MAX:70Ye ars

REGULAR:10/15 /20/25Years
POLICY TERMS

MIN: 10Years or Min: 18 minus age at Greater of

FOR

MINOR: entry for minors; (10 Yrs or 18 childs present age) Max: Yrs.
45

10Years or 18 less whichever entry age at last Is higher birthday whichever higher. is MAX: 30Years

less

25

UNIT LINKED INSURANCE POLICY

VIVEK COLLEGE OF COMMERCE

REGULAR PPT: REGULAR:


MINIMUM PREMIUM

REGULAR PPT: Rs.15, 000 p.a. LIMITED PPT: Rs p.a for 4-10 Yrs Rs p.a. for 3 Yrs 50,000 25,000

Rs.15, 000 p.a. LIMITED PPT: Rs 36,000p.a.

Rs.18, 000 p.a. LIMITED PPT: Rs 50,000 p.a.

UNIT LINKED INSURANCE POLICY

46

VIVEK COLLEGE OF COMMERCE

MIN: 0.5 X (Policy term

HIGH x Policy

COVER: MIN: 0.5 X term x (Policy term x annual

annual premium.)
BASIC SUM ASSURED

annual premium

MAX: multiple premium,

Any LOW COVER: of Greater subject annual premium,0.5xpoli

premium.)

of(5x MAX: Any multiple of premium, to

to underwriting

cy term x annual subject premiums )

underwritin g

Critical Benefit

Illness

Critical Illness Benefit

Permanent Disability Benefit Permanent Disability Accidental Disability RIDERS BENEFITS Guardian Benefit: Premiums NO Accidental RIDERS Disability Guardian Benefit: Benefit

waiver protection BENEFITS on disability.

Premiums
Accidental Death Benefit

waiver protection on

UNIT LINKED INSURANCE POLICY

47

VIVEK COLLEGE OF COMMERCE

Preferred Benefit

Term

disability.

Accidental Life Benefit Guardian Death Benefit

RECOMMENDATIONS

The private players should try to establish Brand awareness and

credibility especially among the senior customers so as to divert their interest from the clean sweep made by LIC and UTI.
y

The companies should target more of female consumers as they

have money to invest but are completely unaware about the options available to them and ULIP should be made to look more attractive to them.
y

Adequate advertisement via appropriate media should be done by

the various companies as is done in the case of mutual Funds.


y

Certain discount charges should be made available because of the

severe competition within the private players as well as the biggest threat posed by LIC and SBI.
y

ULIP is a highly untapped market and here the right strategies and

hitting the bulls eye by propagating the most sought after benefit among the customers will attract most of the customers.
y

Every individual should be encouraged to do insurance planning.

Life Insurance cover should be taken when young and the person is able to service the premiums. The amount of coverage depends on the requirements.
UNIT LINKED INSURANCE POLICY

48

VIVEK COLLEGE OF COMMERCE

CHAPTER 10 UNIT LINKED INSURANCE POLICES (ULIPS) FREQUENTLY ASKED QUESTIONS (FAQS)
st

Unit linked guidelines were notified by IRDA on 21 December 2005. The main intent of the guidelines was to ensure that they lead to greater transparency and understanding of these products among the insured, especially since the investment risk is borne by the policyholder. It is the endeavor of IRDA to enable the buyer to make the most informed decision possible when planning for financial security. We hope the following FAQs will enable a better insight to all buyers about the character and features of Unit linked Products.

1.

What is a ULIP?

ULIP is an abbreviation for Unit Linked Insurance Policy. A ULIP is a life insurance policy which provides a combination of risk cover and investment. The dynamics of the capital market have a direct bearing on the performance of the ULIPs. REMEMBER THAT IN A UNIT
LINKED POLICY, THE INVESTMENT RISK IS GENERALLY BORNE BY THE INVESTOR.

2.

What is a Unit Fund?

The allocated (invested) portions of the premiums after deducting for all the charges and premium for risk cover under all policies in a
particular fund as chosen by the policy holders are pooled together to

form a Unit fund.

UNIT LINKED INSURANCE POLICY

49

VIVEK COLLEGE OF COMMERCE

3.

What is a Unit?

It is a component of the Fund in a Unit Linked Policy.


4. What Types of Funds do ULIP Offer?

Most insurers offer a wide range of funds to suit ones 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 Nature of Investments Risk Category

available along with an indication of their risk characteristics. General Description Equity Funds Primarily invested in company stocks Medium to High with the general aim of capital

appreciation Income, Interest Funds Cash Funds and Fixed Invested in corporate bonds, government Medium Bond securities instruments Sometimes known as Money Market Low Funds invested in cash, bank deposits and money market instruments Balanced Funds Combining equity investment with fixed Medium interest instruments and other fixed income

UNIT LINKED INSURANCE POLICY

50

VIVEK COLLEGE OF COMMERCE

5.

Are Investment Returns Guaranteed in a ULIP?

Investment returns from ULIP may not be guaranteed. In unit linked


products/policies, the investment risk in investment portfolio is borne by the policy holder. Depending upon the performance of the unit

linked fund(s) chosen; the policy holder may achieve gains or losses on his/her investments. It should also be noted that the past returns of a fund are not necessarily indicative of the future performance of the fund.

6.

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

ULIPs offered by different insurers have varying charge structures. Broadly, the different types of fees and charges are given below. However it may be noted that insurers have the right to revise fees and charges over a period of time .

6.1 Premium Allocation Charge

This is a percentage of the premium appropriated towards charges be fore allocating the units under the policy. This charge normally includes initial and renewal expenses apart from commission expenses.

6.2 Mortality Charges

These are charges to provide for the cost of insurance coverage under the plan. Mortality charge s depend on number of factors such as age, amount of coverage, state of health etc.

6.3 Fund Management Fees

These are the fees levied for management of the fund(s) and are deducted before arriving the net asset value (NAV).

UNIT LINKED INSURANCE POLICY

51

VIVEK COLLEGE OF COMMERCE

6.4 Policy/ Administration Charges

These are the fees for administration of the plan and levied by cancellation of units. This could be flat throughout the policy term or vary at a pre-determined rate.

6.5 Surrender Charges

A surrender charge may be deducted for premature partial or full encashment of units wherever applicable, as mentioned in the policy conditions.

6.6 Fund Switching Charge

Generally a limited number of fund switches may be allowed each year without charge, with subsequent switches, subject to a charge.

6.7 Service Tax Deductions

Before allotment of the units the applicable service tax is deducted from the risk portion of the premium.

Investors may note, that the portion of the premium after deducting for all charges and premium for risk cover is utilized for purchasing units

7.

What should one verify before signing the proposal?

One has to verify the approved sales brochure for All the charges deductible under the policy Payment on premature surrender Features and benefits Limitations and exclusions
UNIT LINKED INSURANCE POLICY

52

VIVEK COLLEGE OF COMMERCE

Lapsation and its consequences Other disclosures Illustration projecting benefits payable in two scenarios of 6% and 1 0% returns as prescribed by the life insurance council.

8. How much of the premium is used to purchase units?

The full amount of premium paid is not allocated to purchase units. Insurers allot units on the portion of the premium remaining after providing for various charges, fees and deductions. However the quantum of premium used to purchase units varies from product to product. The total monetary value of the units allocated is invariably less than the amount of premium paid because the charges are first deducted from the premium collected and the remaining amount is used for allocating units.

9. Can one seek refund of premiums if not satisfied with the policy, after purchasing it?

The policyholder can seek refund of premiums if he disagrees with the terms and conditions of the policy, within 15 days of receipt of the policy document ( Free Look period ). The policyholder shall be refunded the fund value including charges levied through cancellation of units subject to deduction of expenses towards medical examination, stamp duty and proportionate risk premium for the period of cover.

10. What is Net Asset Value (NAV)? NAV 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.

UNIT LINKED INSURANCE POLICY

53

VIVEK COLLEGE OF COMMERCE

11. What is the benefit payable in the event of risk occurring during the term of the policy?

The Sum Assured and/or value of the fund units is normally payable to the beneficiaries in the event of risk to the life assured during the term as per the policy conditions.

12. What is the benefit payable on the maturity of the policy?

The value of the fund units with bonuses, if any is payable on maturity of the policy.

13. Is it possible to invest additional contribution above the regular premium?

Yes, one can invest additional contribution over and above the regular premiums as per their choice subject to the feature be ing available in the product. This facility is known as TOP UP facility.

14. Whether one can switch the investment fund after taking a ULIP policy?

Yes. SWITCH option provides for shifting the investments in a policy from one fund to another provided the feature is available in the product. While a specified number of switches are generally effected free of cost, a fee is charged for switches made beyond the spec ified number.

15. Can a partial encashment/withdrawal be made?

Yes, Products may have the Partial Withdrawal option which facilitates withdrawal of a portion of the investment in the policy. This is done through cancellation of a part of units.

UNIT LINKED INSURANCE POLICY

54

VIVEK COLLEGE OF COMMERCE

16. What happens if payment of premiums is discontinued?

a) Discontinuance within three years of commencement If all the premiums have not been paid for at least three consecutive years from inception, the insurance cover shall cease immediately . Insurers may give an opportunity for revival within the period allowed; if the policy is not revived within that period, surrender value shall be paid at the end of third policy anniversary or at the end of the period allowed for revival, whichever is later. b) Discontinuance after three years of commencement -- At the end of the period allowed for revival, the contract shall be terminated by paying the surrender value. The insurer may offer to continue the insurance cover, if so opted for by the policy holder, levying appropriate charges until the fund value is not less than one full years premium. When the fund value reaches an amount equivalent to one full years premium, the contract hall be terminated by paying the fund value.

17. What information related to investments is provided by the Insurer to the policyholder?

The Insurers are obliged to send an annual report, covering the fund performance during previous financial year in relation to the economic scenario, market developments etc. which should incl ude fund performance analysis, investment portfolio of the fund, investment strategies and risk control measures adopted.

18. Are ULIPs Similar To Mutual Funds?

In structure, yes; in objective, no. Because of the high first-year charges, mutual funds are a better option if you have a five-year horizon. But if you have a long term investment horizon, then ULIPs have an edge. To
UNIT LINKED INSURANCE POLICY

55

VIVEK COLLEGE OF COMMERCE

explain this further a ULIP has high first -year charges towards acquisition (including agents commissions). As a result, they find it difficult to outperform mutual funds in the first five years. But in the long-term, ULIP managers have several advanta ges over mutual fund managers. Since policyholder premiums come at regular intervals, investments can be planned out more evenly. Mutual fund managers cannot take a similar long-term view because they have bulk investors who can move money in and out of schemes at short notice.

19. Are unit-linked insurance plans good?

Most insurers in the year 2004 have started offering at least a few unit linked plans. Unit-linked life insurance products are those where the benefits are expressed in terms of number of units and unit price. They can be viewed as a combination of insurance an d mutual funds. The number of units that a customer would get would depend on the unit price when he pays his premium. The daily unit price is based on the market value of the underlying assets (equities, bonds, government securities, et cetera) and comput ed from the net asset value. The advantage of unit-linked plans is that they are simple, clear, and easy to understand. Being transparent the policyholder gets the entire upside on the performance of his fund. Besides all the advantages they offer to the customers, unit-linked plans also lead to an efficient utilization 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 unitlinked plans must give the inves tor an option to choose among debt,
UNIT LINKED INSURANCE POLICY

56

VIVEK COLLEGE OF COMMERCE

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 when one is 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 equ ity 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.

UNIT LINKED INSURANCE POLICY

57

VIVEK COLLEGE OF COMMERCE

CONCLUSION

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 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.
UNIT LINKED INSURANCE POLICY

58

You might also like