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Unit Linked Insurance Policies (ULIPs)

IndianMoney.com Research Team | Posted On Wednesday, May 06,2009, 07:19 PM

Unit Linked Insurance Policies (ULIPs)

 

 

This is the second article coming in the insurance series that IndianMoney.com is publishing on Insurance for its readers. Today we will discuss about ULIPs (Unit Linked Insurance Policy), its importance, comparisons and advantages over other insurance plans.

 
What is ULIP?
When we talk about Insurance as an investment option, ULIPs have an important role as many of the investor nowadays goes for this as a profitable avenue. ULIP is an abbreviation for Unit Linked Insurance Policy. A ULIP is a life insurance policy which provides an arrangement of risk cover and investment. The dynamics of the capital market have a direct impact on the performance of the ULIPs. Remember that in a unit linked insurance policy, the investment risk is generally borne by the investor/ the holder of the policy.
 
Under this policy the insurer allocates the total premium into various units. You are also given the opportunity to choose the option of investment units. Most of the investors prefer to allocate them in financial instruments and assets. The number of units you choose on each option might differ from individual to individual. Some of you may choose to invest more on Real Estate while the rest prefer to invest more on financial instruments such as shares, debentures, etc.
 
Likewise the insurer takes care to allocate a unit of the premium for insurance maintenance and the related expenses. You are also excused from paying income tax for the profits received from the investment. However this policy does not guarantee profits like the traditional plans and is therefore risky as far as returns are concerned. But the possibility of making more profit is very high in this policy.
 
ULIPs fundamentally work like a Mutual Fund with a life cover thrown in. They invest the premium in market-linked instruments like stocks, debentures, Corporate Bonds and Government Securities. Investments in ULIPs help to gain tax benefits under Section 80C.
 
Depending upon the performance of the unit linked funds chosen; the policy holder may realize gains or losses on his/her investments. It should also be noted that the past performance of a fund are not necessarily indicative of the future returns of the fund.
 
Types of Funds do ULIP Offer
Most insurers offer a wide variety of funds to suit your investment objectives, risk profile and time horizons. Different funds have different risk profiles. The possible for returns also varies from fund to fund. Following are some of the common types of funds accessible along with an indication of their risk uniqueness.
 
Funds
Nature if investments
Risk category
Equity funds
Primarily invested in company stocks with the general aim
capital appreciation
 
Medium to High
Income, Fixed Interest and Bond Funds
Invested in corporate bonds, government securities and other fixed income instruments
 
Medium
 
cash funds
Sometimes known as Money Market Funds invested in cash, bank deposits and money market instruments
 
Low
 
Balanced funds
 
Combining equity investment with fixed interest instruments
 
Medium
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ULIPs and Mutual Funds: Which is superior?
In configuration ULIPs and mutual funds are similar; in purpose it’s not similar. Because of the high first-year charges of ULIPs mutual funds are an improved option if you have a five-year investment 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 agent’s commissions. As a result, they discover it difficult to break mutual funds in the first five years. But in the long-term ULIP managers have numerous 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 comparable long-term view because they have volume investors who can move money in and out of schemes at short notice.
 
As we discussed already Unit Linked Insurance Policies (ULIPs) as an investment avenue are closest to mutual funds in terms of their structure and functioning. As is the cases with mutual funds investors in ULIPs are selected units by the Insurance Company and a net asset value (NAV) is affirmed for the same on a daily basis.
 
Similarly ULIP investors have the option of investing across various schemes like the ones found in the mutual funds domain i.e. diversified equity funds, balanced funds and debt funds to name a few. Normally talking ULIPs can be termed as mutual fund schemes with an insurance component. However it should not be interpreted that excepting the insurance element there is nothing differentiating mutual funds from ULIPs.
 
ULIPs Vs Mutual Funds
In spite of the apparently similar structures there are various factors wherein ULIPs Vs Mutual Funds differ and they are as follows.
                                           
Mode of investment/ investment amounts
Mutual fund investors have the choice of either making lump sum investments or investing using the systematic investment plan (SIP) route which entails commitment over longer time horizons. The minimum investment amounts are laid out by the fund house. ULIP investors also have the option of investing in a lump sum or using the conventional route i.e. making premium payments on an yearly, half-yearly, quarterly or monthly basis. In ULIPs formative the premium paid is frequently the initial point for the investment activity. This is in stark contrast to conventional insurance plans where the sum guaranteed is the starting point and premiums to be paid are strong-minded thereafter.
 
ULIP investors also have the elasticity to modify the premium amounts during the policy's residence. For example an individual with access to surplus funds can improve the payment thereby ensuring that his surplus funds are profitably invested, conversely an individual faced with a liquidity crunch has the option of paying a lower amount (the differentiation being adjusted in the accumulated value of his ULIP). The liberty to adjust premium payments at one's convenience clearly gives ULIP investors an edge over their mutual fund counterparts.
 
Expenses
In mutual fund investments, expenses charged for various activities like fund management, sales and marketing, management among others are subject to pre-determined higher limits as arranged by the Securities and Exchange Board of India. For example equity-oriented funds can charge their investors a maximum of 2.5% per annum on a recurring basis for all their expenses, any expenditure above the agreed limit is borne by the fund house and not the investors. Similarly funds also charge their investors entry and exit loads in most cases. Entry loads are charged at the timing of creation an investment while the exit load is charged at the time of sale. Insurance companies have a free hand in levying expenses on their ULIP products with no upper limits being arranged by the regulator i.e. the Insurance Regulatory and Development Authority. This explains the complex and at times unwieldy expenditure structures on ULIP offerings. The only command placed is that insurers are necessary to notify the controller of all the expenses that will be charged on their ULIP offerings. Expenses can have far-reaching penalty on investors since higher expenses translate into lower amounts being invested and a smaller quantity being accumulated.
 
Portfolio disclosure
Mutual funds are necessary to statutorily declare their portfolios on a quarterly basis, although most fund houses do so on a monthly basis. Investors get the opportunity to see where their monies are being invested and how they have been managed by studying the portfolio. There is lack of agreement on whether ULIPs are necessary to disclose their portfolios. During our connections with important insurers we came across different views on this issue. While one school of thought believes that disclosing portfolios on a periodical basis is mandatory, the other believes that there is no legal compulsion to do so and that insurers are mandatory to disclose their portfolios only on demand.
 
Some insurance companies do announce their portfolios on a monthly/quarterly basis. However the lack of transparency in ULIP investments could be a cause for concern allowing for that the amount invested in insurance policies is basically meant to provide for contingencies and for long-term needs like retirement, regular portfolio disclosures on the other hand can enable investors to make timely investment decisions.
 
Flexibility in altering the asset allocation
As we discussed earlier the offerings in both the mutual funds section and ULIPs segment are mainly comparable. For example plans that invest their entire corpus in equities (diversified equity funds) a 60:40 allotment in equity and debt instruments and those investing only in debt instruments can be found in both ULIPs and mutual funds. If a mutual fund investor in a diversified equity fund wishes to shift his quantity into a debt from the same fund house he could have to bear an exit load or entry load.
 
On the other hand most insurance companies allow their ULIP inventors to shift investments crossways various plans/asset classes either at a nominal or no cost. Usually pair of switches are allowable free of charge every year and a cost has to be borne for extra switches. Successfully the ULIP investor is given the choice to invest across asset classes as per his convenience in a cost-effective manner. This can create to be very useful for investors for example in a bull market when the ULIP investor's equity component has appreciated he can book profits by simply transferring the necessary amount to a debt-oriented plan.
 
Tax benefits
ULIP investments are eligible for deductions under Section 80C of the Income Tax Act. This holds well, irrespective of the nature of the plan selected by the investor. On the other hand in the mutual funds area only investments in tax-saving funds also referred as equity-linked savings schemes are eligible for Section 80C benefits. Maturity incomes from ULIPs are tax free. In case of equity-oriented funds for example diversified equity funds, balanced funds, if the investments are detained for a period over 12 months; the gains are tax free; conversely investments sold within a 12-month period attract short-term capital gains tax @ 10%. Similarly, debt-oriented funds pull towards you a long-term capital gains tax @ 10% while a short-term capital gain is taxed at the investor's marginal tax rate.
 
Even though they are seemingly alike in structure, obviously both mutual funds and ULIPs have their sole set of advantages to offer. As always it is vital for investors to be aware of the differences in both offerings and make learned decisions. Following are the major difference between ULIPs and Mutual Funds.
 
Features
ULIP’s
Mutual Funds
 
Investment amounts
 
Determined by the investor and can be modified as well
Minimum investment amounts are determined by the fund house
 
Expenses
No upper limits, expenses determined by the insurance company
Upper limits for expenses chargeable to investors have been set by the regulator
 
Portfolio disclosure
Not mandatory
Quarterly disclosures are mandatory
 
Modifying asset allocation
Generally permitted for free or at a nominal cost
Entry/exit loads have to be borne by the investor
 
Section 80C benefits are available on all ULIP investments
Section 80C benefits are available only on investments in tax-saving funds
 
ULIPs Vs Term Plans
Term life insurance is the simplest and least expensive type of insurance. It pays benefits only upon the policy holder's death. Age is very important factor in determining the premium of a term policy. Following given table will help you to determine the major difference between ULIPs and Mutual Funds.
 
Features
ULIPs
Term Insurance
Good for
More than 10 Years Investments
Less than 10 years investments.
On Maturity
Fund Value
No Survival Benefit on Term
On Death
Fund Value/Death Benefit or both will be paid
Sum assured will be paid
Long Term Costs
Good for long term investing as there are high upfront charges. In the Long term total charges are lower than Mutual Funds
Mutual Funds charge close to 2.25% of Annual Fund Management charge till you remain invested.
Switching Costs  
Mostly ULIPs have 3 Switches Free
Switches are charged at 3-4%.
Switching Tax Costs
No Tax Implication
Profits on switching are charged at 10%
Discipline
Compulsion of Investment every year. Helps you to plan your child’s future or retirement.
No Compulsion. Planning to be implemented by you.
Tax
All profits are tax free
Tax payable on short term gains
 
ULIPs Vs Traditional Policy
A Unit Linked Insurance Plan, popularly called ULIP, is a financial product that offers the twin benefits of life insurance as well as an investment. After deducting fees and charges, part of the premium paid goes towards buying insurance cover and the balance gets invested in the investments chosen by the policyholder, be it equity, debt or a mix of both. Thus, ULIP is life insurance solution that provides the benefits of protection and flexibility in investment.
 
Traditional policies also broadly work like that. A part of the premium is set aside for life cover and the rest is invested in a fund after deducting charges. But the difference is that in a ULIP, you know exactly how much is deducted as life cover, how much you are paying as fees and how much you are investing in a fund. You can also track the performance of the fund as the returns are linked to the market performance. Traditional policies like Endowment plans are where the insurance and saving portion is undistinguished to the policyholder. You does not know the breakup of charges and has no information about how much of your premium is invested and where. You also do 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.
 
Below given are some of the comments given by our customers on the difference between ULIPS and Traditional Plans.
 
·         The essential difference in the two lies in the fact that traditional policies encourage savings whereas ULIPs take the investment path and hence have higher growth options
           
·         The choice between ULIPs and traditional policy is essentially a matter of having the controls in your hands. Where ULIPs give you a choice of funds for both the risk averse and the aggressive investor, traditional policies take the investment decisions themselves though many do guarantee some returns by way of bonuses
 
·         Investment in ULIP with equity investment options should be better for you than that of traditional investment. If your investment horizon is long and equity should generate decent returns in the long run in your investments. Simultaneously, you can think of investing in Mutual Funds
 
·         ULIPs are the smart choice for people who want to enjoy market returns and keep the controls in their hands. Add to that it gives you insurance cover with the flexibility to adapt it to your changing lifestyle needs. This is a viable option for those who want a convenient, economical, one-stop solution.
 
Comparison of ULIPs
The below given table provides you the comparison of some of the important ULIP plans in India. IndianMoney.com provides you a good platform for knowing insurance in great details about products and their features in its insurance section.

 

Product Name
Premium
Premium Allocation Charges
Fund Management Charges
Policy Administration Charges
Sum Assured
Bajaj Allianz New Unit Gain Super Plan
Rs. 15,000
A Portion of the premium paid will be charged towards the initial & other expenses. the balance will be allocated to purchase units
1.75% of NAV for Equity Growth Fund and Pure Stock Fund, 1.25% of NAV fot the Equity Fund II, and 0.95% of NAV for the Bond Fund
Rs. 600 Per annum per policy (Charged monthly through Cancellation of Units)
It depends on the age group, Maximum Sum Assured is 20 times the annualized premium
LIC- Profit Plus Plan
Rs.20,000 for Single Premium Rs. 10,000 p.a. for Regular Premium
upto 4,00,000 - 5.00% 4,00,000 and above - 4.50%
0.75% p.a. of Unit Fund for
Rs. 60/- per month during the first year policy and Rs. 20/- per month there after
2.5 times the single premium if age ar maturity age is 71 Years and above
HDFC Life Unit Linked Enhanced Life Protection
 Rs. 12,000
For 12,000 to 1,99,999 the charges will be 65%, For 2,00,000 to 4,99,999 the charges will be 72%, For 5,00,000 to 9,99,999 the charges will be 79%, For 10,00,000 to 19,99,999 the charges will be 85%, For 20,00,000 and above the charges will be 91%
In the long term, the key to building great maturity value is a low FMC. The daily unit price already includes our low fund managment charge of only 1.25% per annum charged daily, of the fund's value.
Rs. 60 per month will be charged
20 times your chosen annual regular premium
AVIVA Life Saver Plus Plan
Rs. 15000/-
35%, 30% and 25% in the 1st yr for premium between 15000-49999, 50000-99999 and 100000 & above respectively.
Secure fund 1.5%, Protector fund 1%, Growth fund 1.50% and Balanced Fund 1.25%
Rs. 52 per month
1.5*Policy Term*annual preium
ICICI Prudential Life Stage
Rs 15000 p.a.
25%, 12% and 12% in first, second and third year respectively. 4th year to 10th year it is 2%. Afterwords it will be nill
Varies between 1.5% to 0.75% depends on the fund
Rs 60 per month for annual and Half yearly modes. Rs 90 pm for monthly modes
Depends on the age, annual income and medical examination
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Charges, fees and deductions in a ULIP
ULIPs accessible by different insurers have varying charge structures. Generally the different types of fees and charges are given below. However it may be well-known that insurers have the right to modify fees and charges over a period of time.
 
Premium Allocation Charge
This is a percentage of the premium appropriated towards charges before allocating the units under the policy. This charge usually includes initial and renewal expenses apart from commission expenses.
 
Mortality Charges
These are charges to offer 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
 
Fund Management Fees
These are fees levied for management of the fund’s and are deducted before arriving at the Net Asset Value (NAV).
 
Policy/ Administration Charges
These are the fees for management of the plan and levied by cancellation of units. This could be flat during the policy term or vary at a pre-determined rate.
 
Surrender Charges
            A surrender charge may be deducted for early partial or full encashment of units anywhere applicable as mentioned in the policy conditions.
 
Fund Switching Charge
            Normally a limited number of fund switches may be permitted each year without charge with succeeding switches subject to a charge.
 
 Service Tax Deductions
Previous to allotment of the units the applicable service tax is deducted from the risk part of the premium.
 
To find out the charges related to ULIPs please Click here…
 
5 steps to select right ULIP
We present a 5-step investment plans that will guide investors in the selection process and facilitate them to choose the right ULIP. 
  •          Understand the concept of ULIPs
  •          Focus on your need and risk profile
  •          Compare ULIP products from various insurance companies
  •          Go for an experienced insurance advisor
  •          Does your ULIP offer a minimum guarantee?
 
Understand the concept of ULIPs
Do as much homework as probable before investing in an ULIP. This way you will be fully attentive of what you are getting into and make an informed decision. More significantly, it will guarantee that you are not faced with any unpleasant surprises at a later stage. Our knowledge suggests that investors on most occasions fail to realise what they are getting into and unprincipled agents should get a lot of credit for the same. Collect information on ULIPs the variety of options available and understand their working. Read ULIP-related in order available on financial Web sites, newspapers and sales literature circulated by insurance companies. Our insurance Vertical will help you in finding one suitable product.
 
Focus on your need and risk profile
Identify a plan that is best suitable 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 an effect if you have a high risk appetite, then an aggressive investment option with a higher equity constituent is likely to be more suited. Similarly your existing investment portfolio and the equity-debt allocation therein also require to be given due importance before selecting a plan. Opting for a plan that is unbalanced in favor of equities only with the purpose of clocking attractive returns can and does spell disaster in most cases.
 
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 an improved picture of the minimum outlay since ULIPs work on premium payments as opposed to sum guaranteed 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; therefore an assessment on this limit 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 part. This option enables policyholders to increase the premium amounts thereby providing presenting an opportunity to usefully invest any surplus funds available. Our comparison tool will help you in finding the suitable plan.
 
Go for an experienced insurance advisor
Select an advisor who is not only familiar 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 suggestion at all times must be unbiased and independent; also your agent must be eager to inform you about the pros and cons of buying an exacting plan. His job should not be controlled 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.
 
Does your ULIP offer a minimum guarantee?
In a market-linked product protecting the investment's downside can be an enormous advantage. Find out if the ULIP you are considering offers a minimum guarantee and what costs have to be borne for the same. Select the product only if it is suitable for you.
 
Is investment in ULIPs a risky option?
ULIPs are also known as investment plans is an ideal package that comes with insurance coverage and investment options. So that leaves the customer with the opportunity of investing in equities. But they need to keep in mind that the investments in stocks are subject to the fluctuations of the market. The volatility in equity markets can keep the customer anxious and disturbed since they wouldn't like to see their reserve being affected. Customer need to know their risk taking capacity and then make a choice accordingly by choosing an appropriate fund.
 
As mentioned earlier; ULIPs offer the option to invest in anyone of the four funds. If customers are not tending to take a lot of risk then they can certainly invest in secured or balanced fund. However the best part of having an investment plan is that one can switch from one fund to another, which they find less risky. Two factors considered responsible for the introduction of ULIPs are firstly- the entry of private insurance companies in the insurance sector and the second factor being the decline of guaranteed returns on endowment plans.
 
Private players proved their innovative ideas with the introduction of ULIPs. The performance of these plans has also been quite impressive. The performance of stock market has made ULIPS all the more popular. It is the only option that lets one to be a part of the stock market and at the same time offers insurance coverage. It is like the better of two things merged into one and honestly things couldn't get any better when we bring its other features into the limelight. 
 
An innovative aspect of ULIPs is the 'top-up' facility; a top-up is a one-time additional investment that is paid apart from the predetermined annual premium of the policy. This feature works well when customers have a surplus that they are looking to invest in a market-linked avenue. ULIPs also have the facility that allows the holder to skip premiums if they have paid their premiums regularly for the first three years. For example, if you have paid your premiums dutifully for the first three years then you have missed out the payment of fourth year's premium then the insurance company will make the necessary adjustments from your investment surplus and will ensure that the policy remains active. But it is always advisable to pay the premiums regularly to avoid difficulties. All these facilities are not available with any other policy. This makes it a differentiating factor when compared to policies like traditional endowment, term or money back policies. 
 
Another important characteristic is that ULIPs disclose their portfolios regularly. This gives the customer an idea of how the money is being managed. Another important feature is its 'liquidity' factor. Since ULIP investments are NAV (Net Asset Value) -based it is possible to withdraw a portion of the investments before maturity. It is possible only after the completion of the lock-in period, usually it is three years. Such facility is not available with a traditional endowment policy. With ULIPs you can also take advantage of the tax benefits which is offered under Section 80C. It is subject to a maximum limit of Rs 1, 00,000. ULIP investment plans are mainly for those looking for security with an inclination for the share market.
 
Read the fine print before investing in ULIP
ULIPs have been a rage over the past year. Individuals have been buying ULIPs like they were going out of fashion. But do these individuals really know where their premium monies go?
 
Let’s begin first with what ULIPs can do for you. A ULIP, as the name suggests, 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 (G - secs) and AAA rated corporate paper, while ULIP premiums can be invested in stock markets in addition to corporate bonds and G - secs.
 
ULIPs offer a variety of options to the individual depending on his risk profile. For instance, an individual with an above-average risk appetite can choose a ULIP option that invests upto 60% of premium in equities. Likewise, an individual with a lower risk appetite can select a ULIP that invests upto 20% of premium in equities. While there are no two opinions on the flexibility that ULIPs afford to the individual, ULIP costs are another issue altogether. An example would make things clearer.
 
Suppose an individual, aged 30, wants to invest money in a ULIP from an insurance company, XYZ Ltd. The sum assured is Rs 200,000 and the tenure is 10 years. He has opted for 100% investment in equities i.e. he has opted for the aggressive growth fund option. The annual premium in this case works out to approximately Rs 19,000.
 
So it is very important to read the fine print of the ULIP before accepting it. Choose it only if all the features are suitable for you.
 
What happens if payment of premiums is discontinued?
Discontinuing premium payment can be of two kinds such as;
 
  •          Discontinuance within three years of commencement
  •          Discontinuance after three years of commencement
 
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 renewal within the period allowed; if the policy is not renewed 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.
 
Discontinuance after three years of commencement
In this case at the end of the period allowed for renewal, 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
 
To compare the insurance products please Click here.....
 

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