Unit Link Insurance Plan ULIP

Introduction To ULIP

In India, ULIP insurance policies are on the top in the popularity chart because it offers more
benefits than traditional life insurance plans. There are many benefits are available such as
higher returns on investment, partial withdrawal, flexibility to choose life cover, wider fund
options, top up facility, free switches, tax benefits, etc.

If you are looking for long term investment and better returns, ULIP is a right option to
achieve your goal. But, you may find difficulties while purchasing the ULIP, because there
are single and regular premium option. You have to choose the right option for you.

In single premium ULIP, you need to pay a single payment and you will enjoy the benefits
throughout the policy term. In case of regular premium, you need to pay premium on regular
basis, it can be paid by annual, half annual, quarterly and monthly mode.

In terms of investment, both products offers similar options like equity, debt and liquid.
Under regular premium option you may ask for commitment to pay more. But, under single
premium product nobody will ask you to pay more as a matter of commitment.

In the initial years of ULIP, single premium product offer better returns than regular premium
product. But, it's balance power shifts down latter. But this is not in effect, the product is sold
very aggressively due to IRDA norms. Regular premium ULIP products are also good in
various factors such as affordability, tax benefit and large return.

There are also ULIP charges to consider than single and regular premium. It is also important
to take a overview of different charges are under ULIP plans. It includes premium allocation
charge, risk cover charges, policy administration charges, fund management charges, service
tax charge, miscellaneous charge, etc.

At the end, ULIP is a good mixture of life cover and investment. But don't buy it for
investment purpose only, there are another good options available for the investment. Unit
linked insurance plan (ULIP) is a life insurance solution that provides the client with the
benefits of protection and flexibility in investment. It is a solution which provides for life

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Unit Link Insurance Plan ULIP

insurance where the policy value at any time varies according to the value of the underlying
assets at the time .

The investment is denoted as unit and is represented by the value that it has attained called as
Net Asset Value (NAV). ULIP came into play in 1960s and became very popular in Western
Europe and America. The reason that is attributed to the wide spread popularity of ULIP is
because of the transparency and the flexibility which it offers to the clients.

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

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What Is ULIP?
ULIP stands for Unit Linked Insurance Plans. As we know that insurance is for protecting
our life from the any uncertain events like death or accident. The purpose of the normal
insurance plan is just protecting the life but not ensuring any savings for the future. Many
people wanted plan which gives protection also gives the returns for their investment. So,
insurance companies come up with the ULIP plan where the premium about is invested in the
share market and returns better income on the maturity period.

Unit-linked insurance plans, ULIPs, are distinct from the more familiar ‘with profits’ policies
sold for decades by the Life Insurance Corporation. ‘With profits’ policies are called so
because investment gains (profits) are distributed to policyholders in the form of a bonus
announced every year. ULIPs also serve the same function of providing insurance protection
against death and provision of long-term savings, but they are structured differently.

In ‘with profits’ policies, the insurance company credits the premium to a common pool
called the ‘life fund,’ after setting aside funds for the risk premium on life insurance and
management expenses.

Every year, the insurer calculates how much has to be paid to settle death and maturity
claims. The surplus in the life fund left after meeting these liabilities is credited to
policyholders’ accounts in the form of a bonus. In a ULIP too, the insurer deducts charges
towards life insurance (mortality charges), administration charges and fund management
charges. The rest of the premium is used to invest in a fund that invests money in stocks or
bonds. The policyholder’s share in the fund is represented by the number of units.

The value of the unit is determined by the total value of all the investments made by the fund
divided by the number of units. If the insurance company offers a range of funds, the insured
can direct the company to invest in the fund of his choice. Insurers usually offer three choices
an equity (growth) fund, balanced fund and a fund which invests in bonds.

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Unit Link Insurance Plan ULIP

In both ‘with profits’ policies as well as unit-linked policies, a large part of the first year
premium goes towards paying the agents’ commissions.

Which Is Better, Unit-Linked Or ‘With Profits’?

The two strong arguments in favor of unit-linked plans are that — the investor knows exactly
what is happening to his money and two, it allows the investor to choose the assets into
which he wants his funds invested. A traditional ‘with profits,’ on the other hand, is a black
box and a policyholder has little knowledge of what is happening. An investor in a ULIP
knows how much he is paying towards mortality, management and administration charges.

He also knows where the insurance company has invested the money. The investor gets
exactly the same returns that the fund earns, but he also bears the investment risk.The
transparency makes the product more competitive. So if you are willing to bear the
investment risks in order to generate a higher return on your retirement funds, ULIPs are for
you.

Traditional ‘with profits’ policies too invest in the market and generate the same returns
prevailing in the market. But here the insurance company evens out returns to ensure that
policyholders do not lose money in a bad year. In that sense they are safer.

ULIPs also offer flexibility. For instance, a policyholder can ask the insurance company to
liquidate units in his account to meet the mortality charges if he is unable to pay any premium
installment. This eats into his savings, but ensures that the policy will continue to cover his
life.

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Unit Link Insurance Plan ULIP

Charges Under ULIP

Contribution Related Charges

These are the charges that are represented as a percentage of the regular or single contribution
paid. In case of a regular contribution plan, it is usually high in the first year to pay for the
distribution cost. This charges pays for the issuance and for distribution commissions. This
charges are running for the policy.

Administrative Charges

These are charges that are levied for the administration of the policy and the related cost of
administration of the insurance company,itself. They are more related to the cost like IT ,
operational, etc cost of continuing the policy.

Fund Management Charges

These are the charges for buying and selling debt and equity. These are the charges are
adjusted in NAV it self.

Mortality Charges

This covers the cost of providing life protection for the insured and may be paid once at the
start of the policy for a recurrent manner for example this charges levied to provide the
insurance cover under the plan . normally these charges are one year charges as per the age of
the holder.

Rider charges

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Unit Link Insurance Plan ULIP

Rider charges are similar in nature to the mortality charges as they are levied to pay for the
other protection benefits that the policy holder has choosen for- like the critical illness benefit
or the accident benefit,etc.

Surrender Charges

When the policy holder decides to surrender the policy or partially withdraw some of the
units for cash , a surrender charge may be apply.

Surrender charges are used to cover initial expenses that have been incurred by the company
but not yet recovered from the policyholder yet.

Bid offer Charges

In ULIP specifically certain insurers might create a difference in the price at which they sell
the unit and the price at which they buy the units. Investor’s contribution are used to buy
units in the investment fund at the offer price and are sold when benefits are required at the
bid price. The difference between the offer and bid prices Is known as the “bid-offer spread",
this is used to cover expenses when setting up the policy.

Transactional specific Charges

These charges are levied when the client does some specific transaction like changing funds,
topping up the investment component or withdrawals.

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Unit Link Insurance Plan ULIP

Benefits Of Unit Linked Plan

ULIP distinguishes itself through the multiple benefits that it provides to the consumer. The
plan is a one stop solution providing

1. Life protection

2. Investment and Savings

➢ Market linked fund based on risk profile

➢ Switch option
➢ Premium redirection
➢ Automatic transfer plan(ATP)

3. Flexibility of cover continuance

4. Transparency

5. Extra protection with riders

➢ Death due to accident

➢ Disability
➢ Critical illness

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Unit Link Insurance Plan ULIP

6. Liquidity

➢ During the term partial withdrawals

➢ At Maturity

7. Tax planning

How To Select The Right ULIP

For a product capable of adding significant value to investors' portfolios, ULIPs have far too
many critics. We at Personalfn have interacted with a number of investors who were very
disillusioned with their ULIPs investments; often the disappointment stemmed from poor and
inappropriate selection.

We present a 5-step investment strategy that will guide investors in the selection process and
enable them to choose the right ULIP.

1. Understand The Concept Of ULIPs

Do as much homework as possible before investing in an ULIP. This way you will be fully
aware of what you are getting into and make an informed decision.

More importantly, it will ensure that you are not faced with any unpleasant surprises at a later
stage. Our experience suggests that investors on most occasions fail to realise what they are
getting into and unscrupulous agents should get a lot of 'credit' for the same.

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Gather information on ULIPs, the various options available and understand their working.
Read ULIP-related information available on financial Web sites, newspapers and sales
literature circulated by insurance companies.

2. Focus On Your Need And Risk Profile

Identify a plan that is best suited for you (in terms of allocation of money between equity and
debt instruments). Your risk appetite should be the deciding criterion in choosing the plan.

As a result if you have a high risk appetite, then an aggressive investment option with a
higher equity component is likely to be more suited. Similarly your existing investment
portfolio and the equity-debt allocation therein also need to be given due importance before
selecting a plan. Opting for a plan that is lop-sided in favour of equities, only with the
objective of clocking attractive returns can and does spell disaster in most cases.

3. Compare ULIP Products From Various Insurance Companies

Compare products offered by various insurance companies on parameters like expenses,

premium payments and performance among others. For example, information on premium
payments will help you get a better picture of the minimum outlay since ULIPs work on
premium payments as opposed to sum assured in the case of conventional insurance products.

Compare the ULIPs' performance i.e. find out how the debt, equity and balanced schemes are
performing; also study the portfolios of various plans. Expenses are a significant factor in
ULIPs, hence an assessment on this parameter is warranted as well.

Enquire about the top-up facility offered by ULIPs i.e. additional lump sum investments
which can be made to enhance the policy's savings portion. This option enables policyholders
to increase the premium amounts, thereby providing presenting an opportunity to gainfully
invest any surplus funds available.

Find out about the number of times you can make free switches (i.e. change the asset
allocation of your ULIP account) from one investment plan to another. Some insurance
companies offer multiple free switches every year while others do so only after the
completion of a stipulated period.

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4. Go For An Experienced Insurance Advisor

Select an advisor who is not only conversant with the functioning of debt and equity markets,
but also independent and unbiased. Ask for references of clients he has serviced earlier and
cross-check his service standards.

When your agent recommends a ULIP from a given company, put forth some product-related
questions to test him and also ask him why the products from other insurers should not be
considered.

Insurance advice at all times must be unbiased and independent; also your agent must be
willing to inform you about the pros and cons of buying a particular plan. His job should not
be restricted to doing paper work like filling forms and delivering receipts; instead he should
keep track of your plan and offer you advice on a regular basis.

5. Does Your ULIP Offer A Minimum Guarantee?

In a market-linked product, protecting the investment's downside can 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.

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 horizon of 10 years or more,
then ULIPs have an edge. To 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 advantages 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

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investors who can move money in and out of schemes at short notice.

Why do insurers prefer ULIPs?

Insurers love ULIPs for several reasons. Most important of all, insurers can sell these policies
with less capital of their own than what would be required if they sold traditional policies.

In traditional ‘with profits’ policies, the insurance company bears the investment risk to the
extent of the assured amount. In ULIPs, the policyholder bears most of the investment risk.

Since ULIPs are devised to mobilise savings, they give insurance companies an opportunity
to get a large chunk of the asset management business, which has been traditionally
dominated by mutual funds.

Advantage

1. The accretion to the fund invested can be checked on daily basis unlike the traditional
policies.

2. There is lot more flexibilities like partial withdrawal, switching, redirection, early
withdrawal, Sum Assured reduction, top up contribution, etc.

3. Charges are transparent in nature, with the latest AML guidelines insisting on common
nomenclature of charges for all insurance companies.

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Unit Link Insurance Plan ULIP

4. The customer can time the market by exercising switch options and make the most when
markets are zooming or choose to be conservative when markets are falling..its thus win-win
situation

5. He gets a life cover at a nominal cost unlike mutual funds,

6. Almost all companies provide riders like accidental death and disability/dismemberment
riders, crtitical illness rider, hospital cash benefit rider, income loss rider, etc

7. Stages in one life like education of children, marriage, and retirement needs can be soundly
planned by the help of ULIPs.

8.Tax advantages are also offered by the ULIPs.

Disadvantages
1. Investors find it difficult to understand the nuances of capital market and therefore goes by
the heard mentality. ie, they invest because their friends and family is investing without
understanding how ULIPS are designed.

2. ULIPS are attractive for risk taking people and less attractive for risk averse people.

3. Some consider taking term insurance and a mutual fund as a combination to beat the ULIP.

4. Some consider charges levied exorbitant and not commensurate to the returns offered

5. The complicated design of the polices make them les aware of the product features and
chances of misselling by agents are very high.

ULIP And Mutual Funds difference?

In structure both ULIP and Mutual Funds looks similar. But, in objective they are different.
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 horizon of 10 years or more, then ULIPs have an edge. To
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

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Unit Link Insurance Plan ULIP

years. But in the long-term, ULIP managers have several advantages 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.

Unit Linked Insurance Plan, popularly called ULIP, it is to be borne in mind that ULIP’s
being a market linked instrument will fetch good returns on a long term basis. The basic
advantage of a ULIP over other investment instruments is that it offers the twin benefits of
life insurance as well as an investment. Apart from that, there are a number of ways in which
ULIP’s can prove to be advantageous over Mutual Funds, Regular Insurance Policies and
Fixed Deposits. Let’s analyze:

ULIP vs MUTUAL FUND

1. Flexibility on Mode of Investment/investment amounts

ULIP provide the flexibility to alter the premium amounts during the policy’s tenure. Surplus
funds can be used to enhance the contribution thereby ensuring that the funds are gainfully

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Unit Link Insurance Plan ULIP

invested. Alternatively, lower payments can be made when faced with a liquidity crunch (the
difference being adjusted in the accumulated value of the ULIP). This option of modifying
premium payments at one’s convenience clearly gives ULIP an edge over Mutual Funds.

2. The cost factor for altering Asset Allocation

In Mutual Funds, shifting the corpus into a debt from the same fundhouse will involve an exit
load and/or entry load. On the other hand, in a ULIP, the option to invest across asset classes
as per your convenience is very cost-effective Most insurance companies allow shifting the
investments across various plans/asset classes either at a nominal or no cost. This can prove
to be very useful. For example, in a bull market when the ULIP investor’s equity component
has appreciated, he can book profits by simply transferring the requisite amount to a debt-
oriented plan.

3. Tax Benefits

ULIP’s qualify for tax benefits under Section 80C of the Income Tax Act. This holds good
for any kind of plan chosen by the investor. In Mutual Funds, only investments in tax-saving
funds (also referred to as equity-linked savings schemes) are eligible for Section 80C
benefits.

ULIP vs REGULAR INSURANCE POLICY

ULIP’s and Traditional policies both work alike. A part of the premium is set aside for life
cover and the rest is invested in a fund after deducting charges.

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Unit Link Insurance Plan ULIP

The main advantage of a ULIP is that the investor knows exactly about the break-up of his
premium into life cover, the fees being paid and the amount being invested in a fund. The
performance of the funds can also be tracked as the returns are linked to the market
performance. On the other hand, in traditional policies, no information about the break-up of
charges is shared with the investor. He also does not know whether the bonuses paid to him
every year are all that his fund has made or whether the company is giving him only a share
of the profits. Policies encourage savings whereas ULIPs take the investment path and hence
have higher growth options.

ULIP vs FIXED DEPOSIT

There is always a degree of risk, however small, involved in a ULIP. Traditionally, investors
preferred investing in safer instruments like Fixed Deposits, despite the lower returns. But
Fixed Deposits are able to only beat the inflation. On the other hand a ULIP is a market-
linked plan with an equity exposure. A plan with an equity exposure for a long term usually
consistently gives better returns than any other asset like Fixed Deposit or Bonds.

Ulip An Better Investment Option For Your Money

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Unit Link Insurance Plan ULIP

Maximiser: If high growth is your priority, this is the plan for you. You can enjoy long-term
capital appreciation from a portfolio that is invested primarily in equity and equity-related
securities

Protector: - If on the other hand, your priority is steady returns, you can opt for the protector
Plan. Plan, you can accumulate a steady income at a low risk across a medium to long-term
period from a portfolio, which is primarily invested in fixed income securities.

Balancer:-If you prefer a balance of growth and steady returns, choose our balancer plan.
This would ensure that your portfolio is invested in equity-linked securities, as well as in
fixed income securities.

Preserver: The objective of this plan is not ensuring capital protection by investing in very
low risk investments like the cash and call money markets. However, the returns generated
may also be on the lower side due to the investment pattern. At inception, investments up to
20% can be allocated to this fund.

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Unit Link Insurance Plan ULIP

POTENTIAL
FUND TYPE ASSET MIX
RISK /REWARD

Equity& Related securities:

Max 100%
Maxi miser High
Debt, Money market & Cash:
Max 25%

Debt. Money market & Cash:

Min 60% Moderate

Balancer
Equity & Related securities:
Max: 40%
Debt Instruments,

Protector Money market & Cash: Max Low

100%:
Debt Instruments: Max 50%
Capital
Preserver Money market & Cash: Min preservation
50%

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Unit Link Insurance Plan ULIP

Financial Planning And Tax Planning

All of us want to save for a rainy day. We want our money or investment to:

➢ Give the best possible return and

➢ Be available to us when we require it.

Financial planning makes this possible. Financial planning is an attempt to maximize

returns keeping in mind the liquidity and security of our investment.The three basic
principles (guiding factors) of financial planning are:

• Setting realistic financial goals

• Starting investments early
• Thinking long term while allowing for short-term needs that may arise.

One can invest money only when one possesses it, which is possible by saving
systematically. Selecting a good saving scheme can do this.

Feature of a Good Saving Plan

(a) Safety
(b) Flexibility
(c) Should have incentive to save continuously without default.
(d) Tax saving
(e) Should fulfill financial objective even in case of death.

Features of an ideal Investment Scheme

(a) Safety

(b) Liquidity

(c) Higher Yield

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(d) Capital growth

(e) Tax saving

Safety: refers to financial soundness of investment.

Liquidity: means quickness with which an assets can be converted into cash whenever
required.

Yield: is the amount of money that an investment is expected to earn.

Capital growth: Any return, which is not taxable, will be preferred to those on which taxes
have to be paid. A good investment is that which earns decent returns after providing for
taxes and inflation.

However, there is no single wonder investment, which can have all the above features. A
prudent person should look for those investments, which offer the ideal solution to his
personal needs under his own set of circumstances.

High Returns and Best Returns

(i) These are not necessarily the same.

(ii) High returns may be offset by risk to capital.

(iii) Best returns should be determined by the advantage an investment offers.

The Investor’s Approach

Investor’s approach can be conservative (safety is of utmost importance), enterprising

(willing to take some risks) or speculative (willing to take high risk in order to gain high
returns). The investor’s approach is related to a host of personal factors such as:

a) Age and family

b) Future responsibilities

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Unit Link Insurance Plan ULIP

ULIPs- Systematic Insurance cum Investment Plan

Any individual who has purchased a life insurance policy in the last year or so surely would
have a Unit Linked Insurance Plan (ULIP). ULIPs have been selling like Wonder Products in
the recent past and they are likely to continue to outsell their plain vanilla counterparts going
ahead.

A ULIP is a market-linked insurance plan. The difference between a ULIP and other
insurance plans is the way in which the premium money is invested. Premium from, say, an
endowment plan, is invested primarily in risk-free instruments like government securities
(gsecs) and AAA rated corporate paper, while ULIP premiums can be invested in stock
markets in addition to corporate bonds and gsecs. So what else apart from this reason makes
ULIPs so attractive to the individual? Here, we have explored some reasons, which have
made ULIPs so irresistible.

Transparency
However, ULIPs offer a transparent option for customers to plan their various life stage needs
through market-led investments as compared to traditional investment plans.

Insurance cover plus savings

ULIPs serve the purpose of providing life insurance combined with savings at market-linked
returns. To that extent, ULIPs can be termed as a two-in-one plan in terms of giving an
individual the twin benefits of life insurance plus savings. This is unlike comparable
instruments like a mutual fund for instance, which does not offer a life cover.

Multiple investment options

➢ ULIPs offer variety than traditional life insurance plans. So there are multiple options at
the individual's disposal. ULIPs generally come in three broad variants:
➢ Aggressive ULIPs (which invest 80%-100% in equities, balance in debt)

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Unit Link Insurance Plan ULIP

➢ Balanced ULIPs (invest around 40%-60% in equities)

➢ Conservative ULIPs (invest upto 20% in equities)

Although this is how the ULIP options are generally designed, the exact debt/equity
allocations may vary across insurance companies. A ULIP policyholder has the option to
invest in a variety of funds, depending on his risk profile. If one does not have the appetite
to invest in equity, they can choose a debt or balanced fund.

Flexibility
Individuals can switch between the ULIP variants outlined above to capitalise on
investment opportunities across the equity and debt markets. Some insurance companies
allow a certain number of free' switches. This is an important feature that allows the
informed individual/investor to benefit from the vagaries of stock/debt markets. For
instance, when stock markets were on the brink of 7,000 points (Sensex), the informed
investor could have shifted his assets from an Aggressive ULIP to a low-risk Conservative
ULIP.

Switching also helps individuals on another front. They can shift from an Aggressive to a
Balanced or a Conservative ULIP as they approach retirement. This is a reflection of the
change in their risk appetite, as they grow older.

Works like a SIP

Rupee cost-averaging is another important benefit associated with ULIPs. Individuals have
probably already heard of the Systematic Investment Plan (SIP), which is increasingly
being advocated by the mutual fund industry. With an SIP, individuals invest their monies
regularly over time intervals of a month/quarter and don't have to worry about `timing' the
stock markets. These are not benefits peculiar to mutual funds. Not many realise that
ULIPs also tend to do the same, albeit on a quarterly/half-yearly basis. As a matter of fact,
even the annual premium in a ULIP works on the rupee cost-averaging principle. An

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added benefit with ULIPs is that individuals can also invest a one-time amount in the
ULIP either to benefit from opportunities in the stock markets or if they have an investible
surplus in a particular year that they wish to put aside for the future. When you're buying a
ULIP, make sure you select one that works well for you. The important thing is to look for
and understand the nuances, which can considerably alter the way the product works for
you. Take the following into consideration:
Charges : 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.

Fund Options and Management : Understand the various fund options available to you
and the fund management philosophy and objectives of each of them. Examine the track
record of the funds and how they are performing in comparison to benchmarks. Who
manages the funds and what experience do they have? Are there adequate controls?
Importantly, look at how easily you can access information about your fund's performance
when you need it -- are their daily NAVs? Is the portfolio disclosed regularly?

Features : Most ULIPs are rich in features such as allowing one to top-up or switch
between funds, increase or decrease the protection level, or premium holidays. Carefully
understand the conditions and charges associated with each of these. For instance, is there
a minimum amount that must be switched? Is there a charge on the same? Must you go
through medical underwriting if you want to increase the sum assured?

Company : Last but not least, insure with a brand you can trust to honour its commitment
and service you according to your requirements

First and foremost, investors need to understand that a ULIP is a bundled product of their
investments and their insurance proceeds. Since privatization in 2000 and the introduction
of ULIPs as a life insurance product category, the overall insurance penetration in the
country has grown from around 2% to 4%. Today, more than 70 per cent of the new

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business premium for life insurers comes from Ulips.

All Ulips have several funds in which your money can be put to work, much like a mutual
fund. Assuming that you choose the growth or the equity plan, ask for the NAV
performance for the last two years at least. Choose three with the highest performance
track record vis-a-vis the benchmark. Now choose the best performing policy in terms of
returns with the lowest cost.

Here's a 5-step investment strategy that will guide investors in the selection process and
enable them to choose the right unit-linked insurance plans (ULIPs).

But before we get there, let's understand what ULIPs are all about?

For the generation of insurance seekers who thrived on insurance policies with assured
returns issued by a single public sector enterprise, unit-linked insurance plans are a
revelation.

Traditionally insurance products have been associated with attractive returns coupled with tax
benefits. The returns part was often so compelling that insurance products competed with
investment products for a place in the investor's portfolio.

Perhaps insurance policies then were symbolic of the times when high interest rates and the
absence of a rational risk-return trade-off were the norms.

The subsequent softening of interest rates introduced a degree a much-needed rationality to

insurance products like endowment plans; attractive returns at low risk became a thing of the
past. The same period also coincided with an upturn in equity markets and the emergence of a
new breed of market-linked insurance products like ULIPs.

While in conventional insurance products the insurance component takes precedence over the
savings component, the opposite holds true for ULIPs.

More importantly ULIPs (powered by the presence of a large number of variants) offer
investors the opportunity to select a product which matches their risk profile; for example an
individual with a high risk appetite can shun traditional endowment plans (which invest about

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85% of their funds in the debt instruments) in favour of a ULIP which invests its entire
corpus in equities.

In traditional insurance products, the sum assured is the corner stone; in ULIPs premium
payments is the key component. ULIPs are remarkably alike to mutual funds in terms of their
structure and functioning; premium payments made are converted into units and a net asset
value (NAV) is declared for the same.

Investors have the choice of enhancing their insurance cover, modifying premium payments
and even opting for a distinct asset allocation than the one they originally opted for.

Also if an unforeseen eventuality were to occur, in case of traditional products, the sum
assured is paid along with accumulated bonuses; conversely in ULIPs, the insured is paid
either the sum assured or corpus amount whichever is higher.

Insurance seekers have never been exposed to this kind of flexibility in traditional insurance
products and it would be fair to say that ULIPs represent the new face of insurance.

While few would dispute the value-add that ULIPs can provide to one's insurance portfolio
and financial planning; the same is not without its flipside.

For the uninitiated, understanding the functioning of ULIPs can be quite a handful! The
presence of what seem to be relatively higher expenses, rigidly defined insurance and
investment components and the impact of markets on the corpus clearly make ULIPs a
complex proposition. Traditionally the insurance seeker's role was a passive one restricted to
making premium payments; ULIPs require greater participation from both the insured and the
insurance advisor.

As is the case with most evolved investment avenues, making informed decisions is the key if
investors in ULIPs wish to truly gain from their investments. The various aspects of ULIPs
dealt with in this publication will certainly further the ULIP investor's cause.

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Unit Link Insurance Plan ULIP

Frequently Asked Questions (FAQs)

Unit linked guidelines were notified by IRDA on 21stDecember 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.
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Unit Link Insurance Plan ULIP

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 one’s investment objectives, risk profile and
time horizons. Different funds have different risk profiles. The potential for returns also
varies from fund to fund. The following are some of the common types of funds available
along with an indication of their risk characteristics.

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 before 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
charges depend on number of factors such as age, amount of coverage, state of health etc

6.3 Fund Management Fees

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Unit Link Insurance Plan ULIP

These are fees levied for management of the fund(s) and are deducted before arriving at the
Net Asset Value (NAV) .

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

• lapsation and its consequences

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Unit Link Insurance Plan ULIP

• Other disclosures

• Illustration projecting benefits payable in two scenarios of 6% and 10% 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?

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.

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.

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Unit Link Insurance Plan ULIP

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 being 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
specified 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.

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 year’s premium. When the fund value
reaches an amount equivalent to one full year’s premium, the contract shall be terminated by
paying the fund value.

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

policyholder?

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Unit Link Insurance Plan ULIP

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 include fund performance analysis, investment portfolio of the fund, investment
strategies and risk control measures adopted.

Bibliography

Webliography

sites referred were:

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Unit Link Insurance Plan ULIP

➢ www.google.com
➢ www.bing.com
➢ www.corbis.com
➢ www.wikipedia.com
➢ www.yahoo.com
➢ www.quickdial.com
➢ www.management.comparadise

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