UNIT LINKED INSURANCE PLAN

BACHELOR OF BANKING AND

INSURANCE

(2018-2019)

PROJECT GUIDE: Prof. SONAM

SUBMITTED BY

AUSTIN ANTONY

44

MODEL COLLEGE OF SCIENCE AND COMMERECE

KAMBHALPADA ROAD, THAKURLI, DOMBIVILI (EAST),
MUMBAI – 421 301.

Cover ( black colour gold font)

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 UNIT LINKED INSURANCE PLAN BACHELOR

OF BANKING AND INSURANCE (2018-2019)

Submitted

In Partial Fulfilment of the Requirements

For the Award of Degree of Bachelor of Banking & Insurance

BY AUSTIN ANTONY
44

MODEL COLLEGE OF SCIENCE AND COMMERECE

KAMBHALPADA ROAD, THAKURLI, DOMBIVILI (EAST),
MUMBAI – 421 301.

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 CERTIFICATE

This is to certify that

Mr. AUSTIN ANTONY of Bachelor of BANKING AND INSURANCE (2018- 2019) has
successfully completed the project on under the guidance of Prof.
SONAM.

Course Co-ordinator Principal

Project Guide/ Internal Examiner

External Examiner

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 DECLARATION

I AUSTIN ANTONY the student of BANKING AND INSURANCE (2018 -2019) hereby
declare that I have completed the project on UNIT LINKED INSURANCE PLAN.
The information submitted is true and original to the best of my Knowledge.

Signature

AUSTIN ANTONY
44

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 ACKNOWLEDGEMENT

I wish to express my profound gratitude to Prof.

SONAM for her kind support and valuable guidance for the completion of this project. I
also express my sincere thanks to my principal and B&I Co-ordinator, who guided,
instructed and encouraged me.

I would also like to acknowledge the assistance and

encouragement of the various professionals and persons whom I visited for sharing
their insight and experience with me.

AUSTIN ANTONY

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 ACKNOWLEDGMENT

A project is the fruit of experiment and experience and it goes a long way to modeling a person
and gaining a new insight in that field of research.

In this rewarding experience, one recognizes the help and support rendered by kind heart behind
its success.

I would take this opportunity to thank all my teachers especially I would like to thank Prof
sonam my project guide, who sincerely guided and supported me in doing the project.
I would also like to show my gratitude towards my family, friends and all others who have helped
and supported me in doing the project.

AUSTIN ANTONY

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UNIT LINKED INSURANCE PLAN

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 EXECUTIVE SUMMERY

A unit-linked insurance plan (ULIP) is a type of life insurance where the cash value of a policy
varies according to the current net asset value of the underlying investment assets. It allows
protection and flexibility in investment, which are not present in other types of life insurance such
as whole life policies. The premium paid is used to purchase units in investment assets chosen by
the policyholder.

ULIP came into play in the 1960s and is popular in many countries in the world.

In 1971 the Unit Trust of India offered the Unit Linked Insurance Plan. Out of insurance premium
a small part of contribution was utilized for providing life cover and balance invested in units.

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 children’s marriage planning.

In India investments in ULIP are covered under Section 80C of IT Act. However, the concept of
having an investment and insurance by the same instrument was challenged by the market
regulator SEBI which took up the matter to the Supreme Court of India.The Indian government
brought down curtains on the two-month long tussle between the regulators by ruling that Unit-
linked Insurance Products (Ulips) will be governed by the Insurance Regulatory and Development
Authority (IRDA) On 21ST December, 2005 in India. 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.

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 OBJECTIVES OF PROJECT

 To understand the concept of ULIP.

 To identify the scheme preference of investors.
 To show the wide range of investment options available in ULIP by explaining its various
schemes.
 To know how ULIP are differ from Traditional plans means how they give better returns
than traditional plan.
 Gather and analyze the future aspirations of the customers with respect to the ULIP’s.

THE SCOPE OF RESEARCH

Researcher found the following scopes:

 To study the awareness among customers related to ULIP.

 Future prospect of ULIP.
 Importance of ULIP.

LIMITATION OF PROJECT STUDY

Researcher found the following limitations:

 Many people are not aware and don’t have any idea about ULIP’s.
 The study is limited area only.
 Sample size taken is small and may not be sufficient to predict the results with 100%
accuracy.
 Time was not sufficient to research.

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 METHODOLOGY OF THE STUDY

The collection of data refers to a planned gathering of information relevant to the subject matter
of the study from the units under investigation the method of collection of data depends mainly
upon the nature, objective and scope of the inquiry on one hand and available of resources and
time on the other hand. Data may be classified into primary and secondary data, depending upon
the nature and mode of collection.
Mainly the data is collected from:
1. Primary data
2. Secondary data
1) Primary data:
Primary data is collected from the prospective customers, agents and the collection of the data
through interaction with various respondents.
2) Secondary data:
Secondary data collected from the published magazines and websites to collect the data. The
secondary data is collected from the following sources.
 Business magazines
 Journals
 Company broachers and books
 Published books
 Website

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 TABLE OF CONTENT

Sr.No. Particulars Page

No.
1. Introduction 1.

2. Types Of Insurance 2.

3. LIC 4.

4. ULIP 5.

5. Buying ULIP--- An Important Note 20.

6. Types Of ULIP Plans 21.

7. How It Differ from Mutual Funds 23.

8. Systematic Planning Of ULIP 24.

9. 5 Points To Selecting A ULIP 30.

10. Case Study 34.

11. Is Investment In ULIP A Risky Option 40.

12. Important News 43.

13. Six Points To Note After Selecting A ULIPs 44.

14. Prominent Companies In ULIP 48.

15. Future Of ULIP 49.

16. Bibliography 50.

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 Introduction to Insurance
What is insurance –
The business of insurance is related to the economic value of the assets. Every asset has a value.
The asset would have been created through the efforts of the owner. Every asset is expected to
last for a certain period of time during which it will perform. After that benefit will not be
available.
None of them will last forever. The owner of is aware of this and so he can manage the affairs and
ensure by the end, the substitute is available. Thus he makes sure value or income is not lost.
However the asset may get lost earlier. An accident or some unfortunate event may destroy it or
make it non-functional. In that case the owner and those deriving benefits there from, would be
deprived from the benefit and the planned substitute would not have been ready. This is an
adverse or an unpleasant situation. Insurance is a mechanism to reduce such situation.

Brief History of Insurance

The business of insurance started with marine business. Traders used to gather at Lloyd` s coffee
house in London agreed to share their losses to goods while being carried by ships. The losses
used to occur by pirates who robbed on the high seas or because of spoiling the goods or sinking
the ship. The first insurance policy was introduced in 1583 in England. In India the, insurance
begin in 1870 with life insurance being transacted by English company, The European and the
Albert. The first Indian insurance company was Bombay Mutual Assurance Society Ltd., formed
in 1870. This was followed by Oriental Life Assurance Co. in 1874, The Bharat in 1896 and The
Empire of India in 1897.
Later the Hindustan cooperative was formed in Calcutta, the United India in madras, the Bombay
life in Mumbai, the National in Calcutta, the New India in Mumbai, the Jupiter in Mumbai and
Lakshmi in New Delhi. By the year 1956, when the life insurance was nationalized and the Life
Insurance Corporation was formed.

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 Types Of Insurance
Insurance Are Of Various Types-
Some of Them Are –
1- Business Insurance
2- Dental Insurance
3- Deposit Insurance
4- Earthquake Insurance
5- Flood Insurance
6- General Insurance
7- Group Insurance
8- Health Insurance
9- Home Insurance
10- Keyman Insurance
11- Life Insurance
12- Loan Protection Insurance
13- Marine Insurance
14- Parametric Insurance
15- Perpetual Insurance
16- Pension Term Assurance
17- Pet Insurance
18- Protection And Indemnity Insurance
19- Return Of Premium Life Insurance
20- Reinsurance
21- Safe Funded Health Care
22- Term Life Insurance
23- Terrorism Insurance
24- Title Insurance
25- Trade Credit Insurance
26- Travel Insurance
27- Universal Life Insurance
28- Vehicle Insurance

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29- Vision Insurance
30- Wage Insurance
31- Whole Life Insurance
32- Workers Compensation Insurance

Life insurance

As the business of ULIP is linked to life insurance I would like to brief about a bit of life
insurance. A human being is an income generating asset. One` s manual labour, professional
skills and business acumen are the assets. This asset can also be lost through early death, or
through sickness or disabilities caused by accidents. Accidents may or may not happen. Death
will happen but the timing is uncertain. If it happens at the time of one` s retirement, when it
could be expected that the income of the person would normally cease, the person concerned
could have made some other arrangements to meet the continuing needs. But if it happens much
earlier when the alternate arrangements are not in place, there can be losses to the person and
their dependents. Insurance is the necessary tool to help those dependents.

A person, who may have made arrangements for the needs, after his retirement would also need
insurance. This is because the arrangements would have been made on the basis of some
expectations like, likely to live for another 15 years, or that children will look after him. If any of
the expectations do not become true, the original arrangement would become inadequate and
there would be difficulties. Living too long can be as much a problem as dying too young. Both
are the risks, which need to be safeguarded against.
IRDA (Insurance regulatory and development authority), 1999 is an act governing life insurance
and ULIP.

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 ULIP
ULIP stands for Unit Linked Insurance Plan. It 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 word. The reason that is
attributed to the wide spread popularity of ULIP 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, financial planning for children’s future and retirement planning. These are provided by
the insurance companies or even banks.

When the stock markets are volatile and unpredictability becomes a hindrance to encourage
further investment, it leaves the customers perplexed. To top it all if the debt market doesn’t
attract you because of its low interest rate, investment may seem customary. However, lately
banks have been offering an 8% interest rate per annum for investors. A reason good enough to
invest in Fixed Deposits (FD). What’s more? The investments in FDs qualify for tax benefits too
under Section 80 C of the Income Tax Act, 1961, provided the minimum tenure selected is five
years.

If the inclination to invest in stock market still persists but are still skeptical, try via Unit Linked
Insurance Plan (ULIP) route. It provides cushion to those who are risk averse. ULIPs offer
insurance protection along with the option to invest in the stock market. The best part of investing
in stocks via ULIPs is that you can choose the funds suiting your risk profile.

If you know that a particular fund is at its high and is performing well, with the switch over

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option you can move to that fund. You can do that when the fund in which you have invested is

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performing poorly or you feel the returns are high in some other fund. The funds offered by
ULIPs give the investors an exposure to both high and low equity investments. Based on your
risk profile, make your pick.

Simple Explanation Of ULIPs –

Suppose that you buy a ULIP when you are 30 years old. The sum assured is Rs 5 lakh and the
term is 20 years. The premium that you will pay over a period of 20 years will work out to around
Rs 25,000 to Rs 30,000 depending on the company you choose.

In a term policy, your premium will remain fixed throughout the term of the policy. So that
means, if you opt to invest in a mutual fund and buy a term policy, the amount of investment and
cost of insurance will not change over a period of time. For a similar example as above, if the 30
year old were to take a term insurance policy for Rs 5 lakh, he would end up paying anywhere
between Rs 40,000 to Rs 50,000 as insurance premium.

This vast difference in cost of insurance is mainly because of cost of distribution and
administration as also the margins of the insurer. In a ULIP, costs and margins are recovered
commonly between the investment portion and the insurance portion. However, if you were to
buy a term policy and a mutual fund, the insurance company will recover its costs of distribution
and administration as well as margins. The mutual fund would again recover the same costs from
your investment portion.

Flexibility

A ULIP will give you flexibility of increasing your life cover, while maintaining the same
premium. This is done by simply reducing your investment allocation. So suppose you have a risk
cover of Rs 5 lakh and would like to increase it to Rs 6 lakh, you can still continue to pay the
same amount of premium. The only difference would be that the amount deducted towards the
risk cover would be more and therefore, the amount invested would be less.

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Says Puneet Nanda of ICICI Pru. Life Insurance, “The reason why ULIPs have become popular is
because they offer huge amount of flexibility during the course of the policy. You can vary your
mix between protection and savings or within savings, your fund mix.”

If you have a term policy and would like to increase your life cover, your only option would be to
buy another term policy. This would mean paying administration charges all over again.

There’s more to the flexibility. With a ULIP you don’t have fear that your policy will lapse if you
were unable to pay your premium. The cost of insurance will be taken out of your existing
investment to keep the policy going. But if you fail to pay premium on your term policy, it will
lapse.

Expenses

If you were to look at the expenses of a ULIP as compared with the expenses of a mutual fund,
there is a difference. In a ULIP charges are front loaded, which means, most of the charges are
recovered within the first few years. That is why it does not make sense to invest in a ULIP if you
are looking at a short term. Look at a mutual fund if you are looking at a time horizon of 3-5
years. In the long term, charges of a ULIP even out and compare well with a mutual fund.

So if you are looking for a long-term investment avenue with an insurance cover that goes with it,
then ULIP is the product for you and if you are looking at a product that helps you focus purely
on investment and returns over a medium term, then go for a mutual fund. Experts say the two
products are different and ideally you should have both in your portfolio.

As financial planners, we get queries from our clients on how to go about managing their
finances. We were recently faced with a rather interesting query related to ULIPs. In this article
we discuss the query and our solution for the same.

Let us look at the information available,

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  The client’s age is 38 years and he wants a life insurance cover for Rs 5,000,000. He has
an above-average risk appetite.

 He has been recommended a ULIP (unit linked insurance plan) by his insurance agent
with a sum assured of Rs 5,000,000 till he reaches the age of 84 years. This works out to
the client being insured for a tenure of 46 years (i.e. 84 - 38).

 The premium paying term however is only ten years and the actual premium he will have
to pay per annum is approximately Rs 894,000.

The client has also been advised by his agent to consider investing his premiums in the
‘Aggressive’ (as has been defined by the insurance company in question) option, which allows
upto 35% exposure to equities.

We have always maintained that one’s interests would be best served if he keeps his life
insurance and investment needs distinct.

Given below is our solution based on the client’s needs.

The insurance component To begin with, we knew from our interaction with the client and
based on the Human Life Value Calculations that he is underinsured. An immediate action point
for him would be to buy a term plan. And considering his annual income, he would need to buy a
term plan for more than the sum assured recommended on the ULIP (i.e. ₹.5,000,000). Even if
we were to consider his sum assured to be ₹.5,000,000 (as per the ULIP) for a term plan, the
annual premium he would have to shell out would be approximately Rs.₹30,000 per annum for a
30-Yr period.

The investment component

Having taken care of the client’s insurance needs, now let’s shift our focus to his investments. We
took into consideration the client’s current financial portfolio. He had a sizable portion of his
portfolio invested in fixed income instruments like bonds and fixed deposits. Bearing this in
mind, our view was he did not need to have another debt-heavy (ULIP with a 65% debt

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component) product in his portfolio. Instead what his portfolio needed was a higher equity
component; this would not only ‘balance’ his portfolio but also ensure that the portfolio reflects
his true risk profile.

It was also relevant that the client invest in equities since he was considering his investments
from a long-term (over 30 years) horizon. This could be achieved by investing in equity-oriented
mutual funds. Mutual funds can offer several benefits:

 Several studies have shown that over the long term, equities give a higher return vis-à-vis
fixed income instruments like bonds and government securities. And given that the
client’s investment horizon is of over 30 years, this is an ideal time frame to reap the
rewards of investing in equities. Also, over a 30-Yr period, a 100% equity mutual fund is
better geared to outperform a ULIP portfolio with a 65% debt component.

 ULIP tend to be expensive propositions (vis-a-vis mutual funds) during the initial years.
However, over longer time horizons, the expenses balance out and ULIPs work out to be
cheaper as compared to mutual funds. However, even if the lower expenses of a ULIP vis-
à-vis that of a mutual fund scheme were to be considered, the latter would still surface as
the better option.

 Several mutual funds also have a track record to boast of. Personalfn’s recommended
equity-oriented funds have a proven track record extending over several years and across
market cycles. ULIPs do not have much of a track record to show for; in fact most ULIPs
are yet to experience a bear phase.

 Investing in a mutual fund portfolio will offer the benefit of diversification to the client.
The investor will reap the reward of diversifying across several fund management styles.
On the other hand, by investing all his money in just one ULIP, the client would be
committing his entire corpus to just one style of investment. This can prove to be quite
risky over the long term.

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  You can make adjustments to your mutual fund portfolio. If you believe you have made a
wrong investment decision, you can redeem your investment in a particular mutual fund
and invest in another one. Such adjustments are not entirely feasible in a ULIP.

The Tax Aspect

we also had to contend with Section 80C tax benefits. However, given the client’s annual income,
the Section 80C tax benefits were being taken care of by way of Employees’ Provident Fund
(EPF) as well the recommended term plan. The client therefore can invest in regular diversified
mutual funds and not necessarily in tax saving funds (ELSS).

As can be seen, term plans combined with mutual funds have the potential to add considerable
value to an investor’s portfolio. In our view individuals should first ensure that they are
adequately covered by opting for a term plan. Then they can either opt for ULIPs for the
investment component or as we have shown, they can consider mutual funds.

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
allotted units by the insurance company and a net asset value (NAV) is declared for the same on a
daily basis.

Similarly ULIP investors have the option of investing across various schemes similar to the ones
found in the mutual funds domain, i.e. diversified equity funds, balanced funds and debt funds to
name a few. Generally speaking, ULIPs can be termed as mutual fund schemes with an insurance
component.

However it should not be construed that barring the insurance element there is nothing
differentiating mutual funds from ULIPs.

Despite the seemingly comparable structures there are various factors wherein the two differ.

In this article we evaluate the two avenues on certain common parameters and find out how they
measure up.

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1. Mode of investment/ investment amounts

Mutual fund investors have the option of either making lump sum investments or investing using
the systematic investment plan (SIP) route which entails commitments over longer time horizons.
The minimum investment amounts are laid out by the fund house.

ULIP investors also have the choice of investing in a lump sum (single premium) or using the
conventional route, i.e. making premium payments on an annual, half-yearly, quarterly or
monthly basis. In ULIPs, determining the premium paid is often the starting point for the
investment activity.

This is in stark contrast to conventional insurance plans where the sum assured is the starting
point and premiums to be paid are determined thereafter.

ULIP investors also have the flexibility to alter the premium amounts during the policy's tenure.
For example an individual with access to surplus funds can enhance the contribution thereby
ensuring that his surplus funds are gainfully invested; 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). The freedom to modify premium payments at one's convenience
clearly gives ULIP investors an edge over their mutual fund counterparts.

2. Expenses

In mutual fund investments, expenses charged for various activities like fund management, sales
and marketing, administration among others are subject to pre-determined upper limits as
prescribed 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 expense above the prescribed limit is borne by the fund
house and not the investors.

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Similarly funds also charge their investors entry and exit loads (in most cases, either is
applicable). Entry loads are charged at the timing of making 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 prescribed by the regulator, i.e. the Insurance Regulatory and Development
Authority. This explains the complex and at times 'unwieldy' expense structures on ULIP
offerings. The only restraint placed is that insurers are required to notify the regulator of all the
expenses that will be charged on their ULIP offerings.

Expenses can have far-reaching consequences on investors since higher expenses translate into
lower amounts being invested and a smaller corpus being accumulated. ULIP-related expenses
have been dealt with in detail in the article "Understanding ULIP expenses".

3. Portfolio Disclosure

Mutual fund houses are required to statutorily declare their portfolios on a quarterly basis, albeit
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 consensus on whether ULIPs are required to disclose their portfolios. During our
interactions with leading insurers we came across divergent views on this issue.

While one school of thought believes that disclosing portfolios on a quarterly basis is mandatory,
the other believes that there is no legal obligation to do so and that insurers are required to
disclose their portfolios only on demand.

Some insurance companies do declare their portfolios on a monthly/quarterly basis. However the
lack of transparency in ULIP investments could be a cause for concern considering that the
amount invested in insurance policies is essentially 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.

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4. Flexibility in Altering Asset Solution

As was stated earlier, offerings in both the mutual funds segment and ULIPs segment are largely
comparable. For example plans that invest their entire corpus in equities (diversified equity
funds), a 60:40 allotment in equity and debt instruments (balanced funds) and those investing
only in debt instruments (debt funds) can be found in both ULIPs and mutual funds.

If a mutual fund investor in a diversified equity fund wishes to shift his corpus into a debt from
the same fund house, he could have to bear an exit load and/or entry load.

On the other hand most insurance companies permit their ULIP inventors to shift investments
across various plans/asset classes either at a nominal or no cost (usually, a couple of switches are
allowed free of charge every year and a cost has to be borne for additional switches).

Effectively the ULIP investor is given the option to invest across asset classes as per his
convenience in a cost-effective manner.

This can prove 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
requisite amount to a debt-oriented plan.

5. Tax Benefits

ULIP investments qualify for deductions under Section 80C of the Income Tax Act. This holds
well, irrespective of the nature of the plan chosen by the investor. On the other hand in the mutual
funds domain, only investments in tax-saving funds (also referred to as equity-linked savings
schemes) are eligible for Section 80C benefits.

Maturity proceeds from ULIPs are tax free. In case of equity-oriented funds (for example
diversified equity funds, balanced funds), if the investments are held for a period over 12 months,

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the gains are tax free; conversely investments sold within a 12-month period attract short-term
capital gains tax @ 10%.

Similarly, debt-oriented funds attract a long-term capital gains tax @ 10%, while a short-term
capital gain is taxed at the investor's marginal tax rate.

Despite the seemingly similar structures evidently both mutual funds and ULIPs have their unique
set of advantages to offer. As always, it is vital for investors to be aware of the nuances in both
offerings and make informed decisions.

Buying ULIPs? – An important note-

Unit linked insurance plans have caught the fancy of individuals over the past few years. In fact,
most individuals opting for life insurance now go in for ULIPs as opposed to term plans or
endowment plans. Therefore, it becomes important for individuals to understand what to look for
in a ULIP before finalising one. I outline 5 parameters that ULIPs need to be evaluated upon
before individuals zero-in on a unit-linked product.

ULIPs differ significantly from traditional endowment plans in the way they invest their monies.
ULIPs have an investment mandate, which allows them to 'shift' assets freely between equities
and debt. This is unlike saving-based plans like endowment plans, which invest pre-dominantly in
specified debt instruments like bonds and government securities. The amount of money invested
in equity has the potential to make a significant difference to the returns that the plan can generate
over the long run.

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Types of ULIP Plans – (Features)
ULIP is a contractual savings-cum-insurance plan that offers the following features:

 High returns

 Maturity bonus

 Life insurance cover

 Safety of capital

 Life protection

 Investment and Savings

 Flexibility

 Adjustable Life Cover

 Investment Options

 Transparency

 Options to take additional cover against

 Death due to accident

 Disability

 Critical Illness

 Surgeries

 Liquidity

 Tax planning

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 Who can invest in ULIPs?

It is open to any resident of India who is above 18 years of age. Individuals less than 55 years
and 6 months of age can join the plan for 10 years and those less than 50 years and 6 months for
15 years contributing 1/10th and 1/15th of the target amount every year, respectively.

ULIPs: How it differs from mutual funds

Even as ULIPs are selling like hot cakes, one common doubt in most people’s mind is why they
cannot buy mutual fund and top it up with a term insurance policy instead of buying a ULIP?
There are a number of matters to consider here – the cost of life insurance, the reason for
investment, the investment horizon and so on. Similarly ULIP investors have the option of
investing across various schemes similar to the ones found in the mutual funds domain, i.e.
diversified equity funds, balanced funds and debt funds to name a few. Generally speaking,
ULIPs can be termed as mutual fund schemes with an insurance component.

However it should not be construed that barring the insurance element there is nothing
differentiating mutual funds from ULIPs.

But still here are some basic differences –

ULIPs Mutual funds

Investment amounts- Determined by the investor Minimum investment

Expenses
Portfolio disclosure
Modifying asset allocation
and can be modified as well.
No upper limits, expenses
determined by the insurance
company
Not mandatory*
Generally permitted for free
amounts are determined by
the fund house.
Upper limits for expenses
chargeable to investors have
been set by the regulator
Quarterly disclosures are
mandatory
Entry/exit loads have to be

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 or at a nominal cost borne by the investor

Section 80C benefits are Section 80C benefits are

available on all ULIP available only on investments
Tax benefits
investments in tax-saving funds

* There is lack of consensus on whether ULIPs are required to disclose their portfolios. While
some insurers claim that disclosing portfolios on a quarterly basis is mandatory, others state that
there is no legal obligation to do so.

How ULIPs can make you rich!(systematic planning of ULIPs)- by Personal

finance.

Ever since unit-linked insurance plans (ULIPs) made their debut, they have become a subject of
much discussion and debate. On the one hand, they were a trifle too complicated for individuals
not yet exposed to the stock markets; on the other hand, they were much-maligned because of the
'unusually high' costs.

As ULIPs made their presence felt, insurers were more open to discussing the costs and how they
evened out over the long term. This and the flexibility that ULIPs offer became important points
that made individuals consider adding them to their portfolios.

Today, more individuals are open to using the ULIP-way to create wealth over the long term.
Here we outline exactly how ULIPs can help you fulfill that responsibility.

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 l3.6 TYPES OF ULIP

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 life-stages.

If you are between 25 and 35 years of age

You are young, probably married and even have kids. If you are the sole breadwinner in the
family, then you have quite a few responsibilities to fulfill right from planning for your child's
education/marriage to planning for your own retirement to providing for the family in your
absence.

The last responsibility is the most critical and ironically it is the easiest and cheapest one of the
lot to fulfill. At Personal fn, we have always been votaries of term insurance -- the cheapest way
to get a life cover for you.

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Term insurance is also insurance in its 'purest' form, in other words there is no savings element in
it, which ensures your premiums are very low. There is no better product to provide for your
family in case of an eventuality and all individuals must consider taking a term plan.

Term insurance of course takes a huge burden off your chest as also your wallet. But it still leaves
you with a problem. If term insurance is only going to take care of the 'risk' element, who is going
to take care of the 'savings' part.

This is where ULIPs come in. Of course, that is not to say that ULIPs do not have an insurance
element, they do, but it is limited largely to the earlier years and after a point they don the mantle
of an investment product.

So how can ULIPs help you save for child's education/marriage, planning for retirement and other
investment-related objectives? ULIPs can do all this and more because they come with a lot of
variety.

Consider this; except for term insurance (because it does not make sense), just about every life
insurance product has a ULIP option. So you have endowment ULIP, child plan ULIPs and
pension ULIPs. As a matter of fact, there are some life insurance companies that only have ULIP
products; they don't have traditional endowment, pension and child plans at all!

What that tells you is that if you are willing to take on some risk, a ULIP can help you meet a lot
of your financial objectives.

If you are looking to set aside some money for your child's education, the 5%-6% return on an
endowment plan may not even take care of inflation, let alone provide for a medical or MBA
degree. The return you earn on a child plan should not just counter inflation, it should be enough
to cover the cost of education.

And the way cost of education is spiralling, your insurance plan must work very hard. Given their
equity component, ULIPs are ideally placed to fulfill this role.

As we mentioned before, ULIPs are flexible; there are various options within a ULIP with the
equity component varying right from 0% to 100%. This ensures that you are able to select an

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option that best suits your risk profile. Let us understand how ULIPs can be tailor-made to serve
your financial planning needs.

You are in the 25-35 years age bracket. Your most pressing financial objectives are providing for
your child's future and your own retirement. ULIPs can help you achieve both. Although you can
take a single endowment ULIP to achieve both objectives, we think it is more prudent to make a
demarcation between the needs and take separate ULIPs dedicated to each objective.

Opt for a ULIP child plan to provide for your child's higher education, marriage and seed capital
for business to name a few needs. One way to handle this multi-faceted objective is to take a
ULIP money-back plan. This way you get monies at regular intervals to address multiple needs.

The other important plan that individuals must consider taking earlier on their lives is a pension
plan. Building a corpus to face the rigours of retirement should be given the priority it deserves.

Again, a long-term investment objective like retirement planning could do with an equity 'push'.
Here is where a ULIP pension plan can add value to your retirement portfolio. Likewise a ULIP
endowment plan can help you meet investment objectives like buying property or setting up a
business for instance.

If you are between 35 and 45 years of age

By the time you reach the 35-45 age bracket, some of your existing ULIPs are probably nearing
maturity. For instance, if you had taken a ULIP child plan earlier on, it is likely to mature in this
age bracket to coincide with the need (higher education/marriage) you had in mind at the time of
taking the ULIP.

However, if you married late or did not begin planning your finances at an early stage in your life,
now is the time. If you haven't insured yourself as yet, go for a term insurance plan.

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The advantage of taking a term plan at a slightly advanced age is that you have a better idea of
how your lifestyle is likely to pan out going forward. In terms of costs, term plans remain your
cheapest option no matter when you take one.

You can opt for some of the ULIPs we mentioned for individuals in the 25-35 years age bracket
depending on your needs. Remember, unlike endowment, which gets really expensive at an
advanced age, ULIPs because of the way they are structured, do not turn out that expensive.

If you are over 45 years of age

In this age bracket, it is likely that you are insured. However, you still need to review your
insurance cover taking into consideration the changes in your lifestyle, income, needs and
financial commitments. Beef up your insurance cover through a term plan.

By this time, your ULIP pension plan will have matured. You can then opt for an annuity,
immediate or deferred, depending on your requirements.

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 5 very important steps to selecting the right ULIP

How to select the right ULIP

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

I 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.

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.

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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.

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.

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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.

This step is very important as investors mainly go for minimum guarantee plans of any ULIPs.

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 A very famous case study on mis-selling of ULIPs.

Cases of ULIPs being mis-sold never cease to amaze us. One such case involved a 55-Yr old
client who was sold a Rs 500,000 pa premium ULIP by a private sector bank.

Even though we have seen several cases of ULIPs (unit-linked insurance plans) being sold to the
most improbable of investors, this case had us completely taken aback. One look at the facts of
the case and we are sure that even our visitors will be left with a similar feeling.

Facts of the case:

1.
2.
her top priority
3.
4.
5. rs of investment and finance
6.

It is apparent from the client's age and investment profile that a Rs 500,000 ULIP, which was
invested completely in equities, was the last thing she needed. In fact, there was no reason to
recommend anything even remotely risky. While ULIPs could be suitable to individuals based on
their risk profile and investment objectives (your financial planner is best placed to assess the
suitability of a ULIP), in our client's case there was little scope for a ULIP to add any significant
value to her portfolio. Add to this the fact, that being relatively illiquid; she could not afford to
pay the premiums for the following years.

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 Experts review

Let us examine why ULIPs were unsuitable for her.

1. To begin with, she was not explained what ULIPs are all about; this is not surprising since a lot
of clients we know have bought ULIPs without appreciating how they can contribute to their
investment/insurance objectives. Given that she was not very well versed even with the basics of
investment and insurance, we believe selling her a Rs 500,000 ULIP amounted to professional
misconduct of the highest order and coming from a reputed bank, this is even more alarming.

2. Now selling a ULIP to someone who does not need it is one thing, and selling her a Rs 500,000
ULIP is another thing that ranks as even more atrocious. We fail to understand how a Rs 500,000
ULIP could be of any assistance to a 55-Yr old lady, who has no source of income and who is just
looking to remain invested in a low risk avenue that provides a regular income until she turns 60
years when her father's sizeable inheritance will come her way.

3. While ULIPs can add value to the individual's investment/insurance portfolio, two points are
necessary to achieve this; a) the ULIP should be for a long enough tenure and b) ULIP expenses
should be competitive, else for someone who does not need the life cover, mutual funds are a
better option.

It is apparent from our client's details that she did not qualify on the tenure parameter to justify a
ULIP. With a 5-Yr time frame before she inherited her father's wealth, she just did not have the
minimum number of years necessary to wipe out the heavy initial expenses on the ULIP. ULIPs
incur high expenses (sometimes as high as 60 per cent of the premiums) in the initial years; so an
investor is not going to earn a (significant) return on the ULIP in the initial years until the high
expenses are recovered. Performance of stock markets (in the case of equity-heavy ULIPs) play a
critical role in recovering the expenses, but at the time of opting for a ULIP there is no way to
ascertain how stock markets are going to fare over the short-to-medium term (don't believe your
agent if he claims to know better, he is lying).

So for our client, a high-expense investment like ULIP, which is a suitable proposition over the
long-term, was a loss-making proposition from day one, because she was not interested in an

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investment that was longer than 5 years (i.e. until she turned 60 years old). She simply needed a
one-time low-risk interval investment (providing an income) that would serve her well over 5-Yr
tenure. And since she was not in a position to pay the premium even in the second year,
effectively she lost out on her capital as well. Not to mention that there was no monthly income
being generated by the product!

Bank washes hands off the mis-selling

When Personal finance met the client and learnt about the mis-selling of the ULIP, we urged her
to take this up strongly with the bank, which sold her the ULIP. To her dismay, the bank shirked
responsibility over the mis-selling and professed helplessness in view of the fact that the agent
(who mis-sold the ULIP) had been transferred to another city! To those who agree with the bank's
excuse, we would like to state that any selling (or mis-selling) that happens on the bank's premise
is the bank's business whether that person is the bank's employee or a third-party employee or
whether he is still with the bank or has been transferred or has quit the bank altogether. If the
bank disagrees with what we have said, then they should put up a notice to that effect in the
branch.

How we would have done it differently?

As financial planners, a big advantage with this particular case was the clear-cut time frame (i.e. 5
years) that the client had in mind. She just wished to be invested in an avenue for 5 years that
would generate regular income; after 5 years she would inherit her father's money. Also it was
abundantly clear to us from our interaction with the client that she had a lower risk appetite. In
view of these two points, we would have recommended that:

1. The client invested in an FMP (fixed maturity plan) over shorter tenures and roll over at the
end of the tenure. To provide for a source of income she could opt for the dividend option. Being
market-linked FMPs provide an opportunity to generate higher returns (than FDs) depending on
how debt markets are placed at a point in time.

2. A structured mutual fund product would have been suitable for the client. These mutual funds
are predominantly invested in debt to provide capital preservation; the smaller equity component
(usually 15-20 per cent of assets) provides for capital appreciation. These funds, although not

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capital-guaranteed investments, offer low-risk investors the opportunity to clock higher returns
than debt funds at marginally higher risk. Again, she could opt for the dividend option.

3. The Post Office Monthly Income Scheme is an option for investors looking for regular income.
Among all fixed income investment options, POMIS is one of rare avenues that assures a monthly
income. We would have recommended that the client make the most of this opportunity to earn an
assured monthly income.

4. She could enhance her investments in FDs. Many companies (like HDFC for instance, have a
monthly income option on their FDs. The client could invest in FDs of such companies to avail of
the monthly income option.

In our view, investing in ULIPs was a pointless exercise that should never have been
recommended to the client. It neither fulfilled her investment objective nor coincided with her
investment tenure. As we have shown, both these critical parameters could have been fulfilled
better by low-risk FMPs, debt funds & FDs.

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 Is investment in ULIPs a risky option?

Has the recent performance of the stock market left you with a regretful feeling for not being a
part of the soaring market? Do you have a flavour for the market but also want some wise
investment at the same time? If yes, then Unit Linked Insurance Plans (ULIP) is the answer.

ULIPs also known as investment plans is a perfect package that comes with insurance coverage
and investment options. So that leaves you with the opportunity of investing in equities. But you
do need to keep in mind that the investments in stocks are subject to the vagaries of the market.
The volatility in equity markets can keep you uneasy and disturbed since you wouldn’t like to see
your reserve being affected. You need to know your risk appetite and then make a choice
accordingly by choosing an appropriate fund. ULIPs offer you the option to invest in anyone of
the four funds. If you are not inclined to take a lot of risk then you can certainly invest in secured
or balanced fund.

However the best part of having an investment plan is that you can switch from one fund to
another, which you find less risky. For example if Mr. Patil has invested in growth fund and has
found that the investment in this particular fund is going to fall then he does have the choice of
switching over to another fund which he finds safer, it could be a growth, balanced or any other
fund. For example if you choose LIC’s ‘Jeevan Plus', the policyholder has to choose any one from
the four funds, which are Bond, Secured, Balanced and Growth funds. Within a given policy year,
four switches are allowed free of charge. After the completion of one year, Rs.100 is charged for
per switching of the fund.

Two factors considered responsible for the advent of ULIPs are firstly- the entry of private
insurance companies in the insurance sector and the second factor being the decline of assured
returns on endowment plans.

Private players proved their innovation with the introduction of ULIPs. The performance of these
plans has also been quite impressive with the recent figures revealing that the private insurers
have acquired a business of Rs 4,768 crore whereas LIC managed to obtain Rs 2,758.6 crore.

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The performance of stock market especially in the last few months has made ULIPS all the more
popular. It is the only option that lets you to be a part of the stock market and at the same time
offers insurance cover. It is like the best of two things clubbed 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 annual premium of the policy. This feature works well
when you have a surplus that you are looking to invest in a market-linked avenue. ULIPs also
have the facility that allows you to skip premiums if you have paid your premiums regularly for
the first three years. For instance, 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 make sure
that the policy remains active. But it is always advisable to pay the premiums regularly to avoid
troubles. Such facilities are not available with any other policy. This makes it a differentiating
factor when compared to policies like endowment, term or money back policies.

Another important feature is that ULIPs disclose their portfolios regularly. This gives you an idea
of how the money is being managed. Another important aspect is its ‘liquidity’ factor. Since
ULIP investments are NAV-based it is possible to withdraw a portion of your investments before
maturity. It is possible only after the completion of the lock-in period. Such facility is not
available with in a traditional endowment policy. With ULIPs one can also avail the tax benefits
which is offered under Section 80C. This is subject to a maximum limit of Rs 1, 00,000.

Investment plans are particularly for those looking for security with an inclination for the share
market. To make it easier to choose, LIC offers ‘Future Plus’ and ‘Jeevan Plus’ which are unit
linked plans.

To sum it up in all we can say that investment in a ULIP is not that risky as insurance part is
covered and the risk is just that of a stock market.

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 Important news in print media regarding ULIPs

1. IRDA Keen to Ensure ULIPs Transparency.

In the last two/three years the unit linked products have become very popular among customers
and the share of this product in the total portfolio of the life insurance companies has increased
significantly. The IRDA is keen to ensure that all unit linked products are transparent and that
customers from every walk of life can compare features and charges across products and across
companies. The ULIP guidelines issued over the last two years are the steps initiated by the
Authority towards achieving this. As a continuation of the process, we have decided that actuarial
funded products be phased out so that products across companies could be compared and
understood easily by the customers.

Technically there is nothing wrong with the actuarial funded products and they are not
detrimental to the interests of the policyholders. Further they have been approved by the IRDA.

Companies having actuarial funded products have been asked to withdraw them over a period of
time. They can continue to sell the products till then and customers, both existing and new, can
continue to enjoy the benefits of these products and have no reason to feel concerned.

To reiterate, our objective is to remove complexity in all unit linked products and ensure
comparison across ULIP’s of all companies. The existing/new customers who have purchased
these products need not worry under any circumstances as policyholder interests will be protected
by the insurers and the Authority.

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2. Six Points to Note, After Selecting To Investing In A ULIP-
Since ULIPs offer a lot of flexibility, you need to keep some points in mind to optimize the
benefits associated with them.

 Notice we have recommended ULIP child plans/pension plans and even term insurance
for most individuals. When you opt for these plans it is important you do this after taking
your insurance consultant into confidence. He is the one who is going to help you with the
numbers, so you need to tell him exactly what you are looking for in an insurance plan.
 Remember there is an insurance cover associated with ULIPs. Since it is also likely that
you have other insurance plans like term and/or endowment, it is important you have a
clear idea of exactly how much your insurance cover is worth after considering all your
insurance plans. This number will prove helpful when you review your insurance cover at
regular intervals.
 Likewise, ULIPs also have an investment element. You are likely to have investments in
mutual funds, stocks, bonds and fixed deposits as well. You need to add up the market
value of all these investments while calculating your investment worth. This number will
prove useful when you wish to beef up your investments in a particular asset.
 ULIPs derive their 'power to perform' from equities. When you have a lot of aggressive
ULIPs in your portfolio it means that you are overweight on equities. Add to this your
investments in stocks and equity funds, and your exposure to equities increases even
further. To temper your equity exposure, it is generally advisable to opt for
conservative/balanced ULIPs (maximum 50% equity exposure).
 Even if you are a high-risk investor, you must gradually shift your assets to a conservative
ULIP option as your age advances. Financial prudence dictates that risk reduces as age
increases; this needs to reflect in all your investments including ULIPs.

Like with all investments, it is prudent to diversify your ULIP investments. This is necessary due
to several reasons with financial prudence being the most important reason. Varying flexibility
levels in ULIPs across insurance companies is another factor that should make you opt for a ULIP
from more than one insurance company. Varying level of expenses in ULIPs is another reason to
opt for ULIPs across insurance companies to keep expenses on the

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 COMPARISION OF ULIP WITH TRADITIONAL PLAN

Unit Linked Insurance Product:

ULIPs have gained high acceptance due to attractive features they offer. These include:

 Flexibility
o Flexibility to choose Sum Assured.
o Flexibility to choose premium amount.
o Option to change level of Premium /Sum Assured even after the plan has started.
o Flexibility to change asset allocation by switching between funds
 Transparency
o Charges in the plan & net amount invested are known to the customer
o Convenience of tracking one’s investment performance on a daily basis.
 Liquidity
o Option to withdraw money after few years (comfort required in case of exigency)
o Low minimum tenure.
o Partial / Systematic withdrawal allowed
 Fund Options
o A choice of funds (ranging from equity, debt, cash or a combination)
o Option to choose your fund mix based on desired asset allocation

Traditional Plans :

These are the oldest types of plans available. These plans cater to customers with a low risk
appetite. Some of the common features of traditional plans are:

 Steady Investment
o Major chunk of investible funds are in debt instruments
o Steady and almost assured returns over the long term
 Features
o Death benefit is Sum Assured + guaranteed & vested bonus
o Helps in asset creation as they are for a long tenure

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 o Premium to Sum Assured ratios are fixed for each plan and age.
o Generally withdrawals are not allowed before maturity.

Point of difference ULIP Traditional Policy

Market related (May be stock IRDA? Determined
Investment
market or debt market) investments
Transparency in costs Yes No
Flexibility in payment Yes No
Assured Bonus No Yes
Assured Sum on survival No Yes
Option to increase
Yes No
investment/premium

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Prominent companies in the ULIP-
1- Reliance life insurance
2- SBI life insurance
3- Aviva life
4- Bharti AXA life
5- Birla sun Life
6- HDFC Standard life
7- ICICI Prudential life
8- ING VYASA
9- Kotak mahindra (old)
10- LIC life
11- Met life
12- Sahara life
13- Shriram life

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