HDFC STANDARD LIFE INSURANCE, BANGALORE

4.1 Introduction to ULIP:

In India, ULIP insurance policies are on the top in the popularity chart because it offers more Benefits than traditional life insurance plans. There are many benefits that are available such as higher returns on investment, partial withdrawal, flexibility to choose life cover, wider fund options, top up facility, free switches, tax benefits, active you are looking for long term investment and better returns, ULIP is a right option to Achieve your goal. But, you may find difficulties while purchasing the ULIP, because there are single and regular premium option. You have to choose the right option for you. In single premium ULIP, you need to pay a single payment and you will enjoy the benefits throughout the policy term. In case of regular premium, you need to pay premium on regular basis, it can be paid by annual, half annual, quarterly and monthly mode. In terms of investment, both products offer similar options like equity, debt and liquid. Under regular premium option you may ask for commitment to pay more. But, under single premium product nobody will ask you to pay more as a matter of commitment. In the initial years of ULIP, single premium product offer better returns than regular premium product. But, its balance power shifts down later. But this is not in effect; the product is sold very aggressively due to IRDA norms. Regular premium ULIP products are also good in various factors such as affordability, tax benefit and large return. There are also ULIP charges to consider than single and regular premium. It is also important to take a overview of different charges that are under ULIP plans. It includes premium allocation
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Charge, risk cover charges, policy administration charges, fund management charges, service tax charge, miscellaneous charge, etc. At the end, ULIP is a good mixture of life cover and investment. But don't buy it for investment purpose only; there are other good options available for the investment. Unit linked insurance plan (ULIP) is a life insurance solution that provides the client with the benefits of protection and flexibility in investment. WHAT IS ULIP? ULIP stands for Unit Linked Insurance Plans. As we know that insurance is for protecting our life from the any uncertain events like death or accident. The purpose of the normal insurance plan is just protecting the life but not ensuring any savings for the future. Many people wanted plan which gives protection also gives the returns for their investment. So, insurance companies come up with the ULIP plan where the premium amount is invested in the share market and returns better income on the maturity period. Unit-linked insurance plans, ULIPs, are distinct from the more familiar with profits policies sold for decades by the Life Insurance Corporation. With profits policies are called so because investment gains (profits) are distributed to policyholders in the form of a bonus announced every year. ULIPs also serve the same function of providing insurance protection against death and provision of long-term savings, but they are structured differently. In with profits policies, the insurance company credits the premium to a common pool called the life fund, after setting aside funds for the risk premium on life insurance and management expenses. Every year, the insurer calculates how much has to be paid to settle death and maturity

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claims. The surplus in the life fund left after meeting these liabilities is credited to policyholders accounts in the form of a bonus. In a ULIP too, the insurer deducts charges towards life insurance (mortality charges), administration charges and fund management charges. The rest of the premium is used to invest in a fund that invests money in stocks or bonds. The policyholders share in the fund is represented by the number of units. The value of the unit is determined by the total value of all the investments made by the fund divided by the number of units. value of the unit= total value of all the investments made by the fund number of units. If the insurance company offers a range of funds, the insured can direct the company to invest in the fund of his choice. Insurers usually offer three choices an equity (growth) fund, balanced fund and a fund which invests in bonds. In both with profits policies as well as unit-linked policies, a large part of the first year premium goes towards paying the agents commissions. 4.2 CHARGES UNDER ULIP 1. Contribution Related Charges These are the charges that are represented as a percentage of the regular or single contribution paid. In case of a regular contribution plan, it is usually high in the first year to pay for the distribution cost. This charge pays for the issuance and for distribution commissions. This charge is running for the policy.

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2. Administrative Charges These are charges that are levied for the administration of the policy and the related cost of Administration of the insurance company, itself. They are more related to the cost like IT, operational, etc cost of continuing the policy. 3. Fund Management Charges These are the charges for buying and selling debt and equity. These are the charges that are adjusted in NAV itself. 4. Mortality Charges This covers the cost of providing life protection for the insured and may be paid once at the start of the policy for a recurrent manner for example this charges Levied to provide the insurance cover under the plan. Normally these charges are one year charges as per the age of the holder. 5. Rider charges Rider charges are similar in nature to the mortality charges as they are levied to pay for the other protection benefits that the policy holder has chosen for- like the critical illness benefit Or the accident benefit, etc.

4.3 BENEFITS OF UNIT LINKED PLAN

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ULIP distinguishes itself through the multiple benefits that it provides to the consumer. The plan is a one stop solution providing: 1. Life protection. 2. Investment and Savings. Market linked fund based on risk profile. Switch option. Premium redirection. Automatic transfer plan (ATP). 3. Flexibility of cover continuance. 4. Transparency. 5. Extra protection with riders. Death due to accident Disability Critical illness 6. Liquidity During the term partial withdrawals At Maturity. 7. Tax planning.

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HDFC STANDARD LIFE INSURANCE, BANGALORE

4.4 HOW TO SELECT THE RIGHT ULIP For a product capable of adding significant value to investors' portfolios, ULIPs have far too many critics. We at Personal have interacted with a number of investors who were very disillusioned with their ULIPs investments; often the disappointment stemmed from poor and inappropriate selection. We present a 5step 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 realize 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. 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. 3. Compare ULIP Products from Various Insurance Companies
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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. 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.
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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 4.5 ARE ULIPS SIMILAR TO MUTUAL FUNDS? In structure, yes; in objective, no. Because of the high first-year charges, mutual funds are a better option if you have a five-year horizon. But if you have a horizon of 10 years or more, then ULIPs have an edge. To explain this further a ULIP has high first-year charges towards acquisition (including agents commissions). As a result, they find it difficult to outperform mutual funds in the first five years. But in the long-term, ULIP managers have several advantages over mutual fund managers. Since policyholder premiums come at regular intervals, investments can be planned out more evenly. Mutual fund managers cannot take a similar long-term view because they have bulk investors who can move money in and out of schemes at short notice.

4.6 WHY DO INSURERS PREFER ULIPS?

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Insurers love ULIPs for several reasons. Most important of all, insurers can sell these policies with less capital of their own than what would be required if they sold traditional policies. In traditional with profits policies, the insurance company bears the investment risk to the extent of the assured amount. In ULIPs, the policyholder bears most of the investment risk. Since ULIPs are devised to mobilize savings, they give insurance companies an opportunity to get a large chunk of the asset management business, which has been traditionally dominated by mutual funds. Advantages
1. The accretion to the fund invested can be checked on daily basis unlike

the traditions Policies.

2. There is lot more flexibility like partial withdrawal, switching,

redirection, early contribution, etc.

withdrawal, Sum Assured reduction, top up

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

4. Almost

all companies provide riders like accidental death and

disability/dismemberment riders, critical illness rider, hospital cash benefit rider, income loss rider, etc
5. Stages in one life like education of children, marriage, and retirement

needs can be soundly planned by the help of ULIPs. 6. Tax advantages are also offered by the ULIPs.

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Disadvantages 1. Investors find it difficult to understand the nuances of capital market and therefore go by the herd mentality. i.e., they invest because their friends and family is investing without understanding how ULIPS are designed. 2. ULIPS are attractive for risk taking people and less attractive for risk adverse people. 3. Some consider taking term insurance and a mutual fund as a combination to beat the ULIP. 4. Some consider charges levied exorbitant and not commensurate to the returns offered. 5. The complicated design of the polices make them less aware of the product features and chances of misspelling by agents are very high. 4.7 ULIP AND MUTUAL FUNDS DIFFERENCE? In structure both ULIP and Mutual Funds looks similar. But, in objective they are different.Because of the high first-year charges, mutual funds are a better option if you have a five-year Horizon. But if you have a horizon of 10 years or more, then ULIPs have an edge. To explain this further a ULIP has high firstyear charges towards acquisition (including agents commissions). As a result, they find it difficult to outperform mutual funds in the first five years. But in the long-term, ULIP managers have several advantages over mutual fund managers. Since policyholder premiums come at regular intervals, investments can be planned out more evenly. Mutual fund managers cannot take a similar long-term view because they have bulk investors who can move money in and out of schemes at short notice. Unit Linked Insurance Plan, popularly called ULIP, it is to be borne in mind that ULIPs being a market linked instrument will fetch good
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returns on a long term basis. The basic advantage of a ULIP over other investment instruments is that it offers the twin benefits of life insurance as well as an investment. Apart from that, there are a number of ways in which ULIPs can prove to be advantageous over Mutual Funds, Regular Insurance Policies and Fixed Deposits. Lets analyze: 4.8 ULIP VS MUTUAL FUND 1. Flexibility on Mode of Investment/investment amounts ULIP provide the flexibility to alter the premium amounts during the policys tenure. Surplus funds can be used to enhance the contribution thereby ensuring that the funds are gainfully invested. Alternatively, lower payments can be made when faced with a liquidity crunch (the difference being adjusted in the accumulated value of the ULIP). This option of modifying premium payments at ones convenience clearly gives ULIP an edge over Mutual Funds. 2. The cost factor for altering Asset Allocation In Mutual Funds, shifting the corpus into a debt from the same fund house will involve an exit load and/or entry load. On the other hand, in a ULIP, the option to invest across asset classes as per your convenience is very costeffective. Most insurance companies allow shifting the investments across various plans/asset classes either at a nominal or no cost. This can prove to be very useful. For example, in a bull market when the ULIP investors equity component has appreciated, he can book profits by simply transferring the requisite amount to a debt oriented plan. 3. Tax Benefits

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ULIPs qualify for tax benefits under Section 80C of the Income Tax Act. This holds good for any kind of plan chosen by the investor. In Mutual Funds, only investments in tax-saving funds (also referred to as equity-linked savings schemes) are eligible for Section 80C benefit. 4.9 ULIP VS REGULAR INSURANCE POLICY ULIPs and Traditional policies both work alike. A part of the premium is set aside for life cover and the rest are invested in a fund after deducting charges. The main advantage of a ULIP is that the investor knows exactly about the break-up of his Premium into life cover, the fees being paid and the amount being invested in a fund. The performance of the funds can also be tracked as the returns are linked to the market performance. On the other hand, in traditional policies, no information about the break-up of a charge is shared with the investor. He also does not know whether the bonuses paid to him every year is all that his fund has made or whether the company is giving him only a share of the profits. Policies encourage savings whereas ULIPs take the investment path and hence have higher growth options. 4.10 ULIP VS FIXED DEPOSIT There is always a degree of risk, however small, involved in a ULIP. Traditionally, investors preferred investing in safer instruments like Fixed Deposits, despite the lower returns. But Fixed Deposits are able to only beat the inflation. On the other hand a ULIP is a market linked plan with an equity exposure. A plan with an equity exposure for a long term usually consistently gives better returns than any other asset like Fixed Deposit or Bonds. 4.11 ULIPS- SYSTEMATIC INSURANCE CUM INVESTMENT PLAN

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Any individual who has purchased a life insurance policy in the last year or so surely would have a Unit Linked Insurance Plan (ULIP). ULIPs have been selling like Wonder Products in the recent past and they are likely to continue to outsell their plain vanilla counterparts going ahead. A ULIP is a market-linked insurance plan. The difference between a ULIP and other insurance plans are the way in which the premium money is invested. Premium from, say, an Endowment plan, is invested primarily in risk-free instruments like government securities (gsecs) and AAA rated corporate paper, while ULIP premiums can be invested in stock markets in addition to corporate bonds and gsecs. So what else apart from this reason makes ULIPs so attractive to the individual? Here, we have explored some reasons, which have made ULIPs so irresistible. Transparency However, ULIPs offer a transparent option for customers to plan their various life stage needs through market-led investments as compared to traditional investment plans. Insurance cover plus savings ULIPs serve the purpose of providing life insurance combined with savings at market-linked returns. To that extent, ULIPs can be termed as a twoin-one plan in terms of giving an individual the twin benefits of life insurance plus savings. This is unlike comparable instruments like a mutual fund for instance, which does not offer a life cover.

Multiple investment options

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ULIPs offer variety than traditional life insurance plans. So there are multiple options at the individual's disposal. ULIPs generally come in three broad variants Aggressive ULIPs (which invest 80%-100% in equities, balance in debt) Balanced ULIPs (invest around 40%-60% in equities) Conservative ULIPs (invest upto 20% in equities), Although this is how the ULIP options are generally designed, the exact debt/equity allocations may vary across insurance companies. A ULIP policyholder has the option to invest in a variety of funds, depending on his risk profile. If one does not have the appetite to invest in equity, they can choose a debt or balanced fund. Flexibility Individuals can switch between the ULIP variants outlined above to capitalize on investment opportunities across the equity and debt markets. Some insurance companies allow a certain number of free' switches. For instance, when stock markets were on the brink of 7,000 points (Sensex), the informed investor could have shifted his assets from an Aggressive ULIP to a low-risk Conservative ULIP. They can shift from an Aggressive to a Balanced or a Conservative ULIP as they approach retirement.

4.12 POINTS OF PARITY

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FUNDS AVAILABLE WITH ULIP PLANS

Generally all life insurance companies have three types of fund which are Equity fund, Debt fund and Balance fund. These funds have different risk profile. Equity fund has high risk but it gives high return, Debt fund has low risk so it gives low return and balanced fund is combination of both Equity and Debt fund so risk is medium and return is also low.
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4.13 TABLES, GRAPHS AND ANALYSIS: TABLE: 1 SHOWING AGE GROUP OF SURVEYED RESPONDENTS: AGE GROUP NO OF RESPONDENTS PERCENTAGE

18-25 Years 26-35 Years 36-49 Years Above 50 years Total

26 10 10 4 50

52% 20% 20% 8% 100%

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GRAPH: 1 SHOWING AGE GROUP OF SURVEYED RESPONDENTS:

INTERPRETATION: From the chart above we find that 26 of the respondents fall in the age group of 18 25 years, 10 fall in the age group of 26 35 years, 10 fall in the age group of 36 49 years and 4 fall in age group of above 50 years. Therefore most of the respondents are relatively young (below 30 years of age). These individuals could be induced to purchase insurance plans on the basis of its tax saving nature and as an investment opportunity with high returns.

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TABLE: 2 SHOWING PROFILE OF RESPONDENT:

PROFILE

NO OF RESPONDENTS

STUDENT

10

HOUSE WIFE WORKING PROFESSIONAL BUSS/SELF-EMPLOYED

8 14 8

GOVT.EMPLOYEE

10

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GRAPH: 2 SHOWING PROFILE OF RESPONDENT:

INTERPRETATION: Above chart shows that the 28% respondents are working professional can put their money as investment and tax savings, 16% are house wife will invest their money for the family responsibility, 20% students work as financial consultants and invest their funds for building there career, 20% are government employees who plan their investments as pension schemes and finally 16% are business and self employed who are in least who ultimately look for high returns.

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TABEL: 3 SHOWING AWARENESS ABOUT ULIPS IN THE MARKET:

AWARENESS ABOUT ULIPS IN THE MARKET

YES

40

NO

10

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GRAPH: 3 SHOWING AWARENESS ABOUT ULIPS IN THE MARKET:

INTERPRETATION: This graph shows that out of total 50 respondents only 40 or 80% respondents Know ULIPS. Rest all dont know about ULIPS so there is a very big scope for life insurance companies to cover these people. So the business of life insurance will grow further in the future.

TABEL: 4
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SHOWING ANNUAL PREMIUM PAID BY INDIVIDUALS FOR LIFE INSURANCE:

PREMIUM PAID (RS)

NO OF RESPONDENTS

Rs. 5000-Rs.15000 Rs.15001-Rs.50000 Rs.50001-Rs.80000 Rs.80001-Rs.100000 More than 100000

24 12 4 6 4

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GRAPH: 4 SHOWING ANNUAL PREMIUM PAID BY INDIVIDUALS FOR LIFE INSURANCE:

INTERPRETATION:

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HDFC STANDARD LIFE INSURANCE, BANGALORE

From the chart above we find that, 48% of the respondents surveyed pay an Annual premium less than Rs. 15000 towards life insurance 24% of them pay an annual premium less than Rs. 50000 and 8% pay less than Rs. 80000. Hence we can safely say that HDFC SLIC would be able to capture the market better if it introduced products/plans where the minimum premium starts at Rs. 5000 per annum. Only 8% of the respondents pay more than Rs. 100000 as premium and most products sold by HDFC SLIC have Rs.12000 as the minimum annual premium amount. They should introduce more products like Easy Life Plus and Safe Guard where the minimum premium is Rs.6000 p.a. and Rs. 12000 p.a. respectively. This would definitely increase their market share as more Individuals would be able to afford the policies/plans offered.

TABEL: 5 SHOWING POPULAR LIFE INSURANCE PLANS:

TYPE OF PLAN Life insurance Life insurance & investment plan Pension plans & child plans Tax savings plans Total
73

NO OF RESPONDENTS 10 24 6 10 50

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GRAPH: 5 SHOWING POPULAR LIFE INSURANCE PLANS:

INTERPRETATION:

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From the chart given above we can clearly see that 10 or 20 % of the respondents hold life insurance plans and 24 or 48% of the respondents hold life insurance cum investments plans. If the policy holder dies during the policy term the nominee gets the death benefit that is, sum assured and accumulated bonus. On survival the policy holder receives the survival benefit with a bonus, 6 or 12% hold pensions plans so that they can led the life after retirement and finally 10 or 20% of respondents hold tax savings plans so that the ensure safety for their money.

TABEL: 6 SHOWING CONSUMER WILLINGNESS TO SPEND ON LIFE INSURANCE PREMIUM:

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WILLINGNESS TO SPEND ON PREMIUM < Rs.6000 Rs.6001-Rs.10000 Rs.10001-Rs.25000 Rs.25001-Rs.50000 Rs.50000-Rs.100000 NO OF RESPONDENTS 8 14 14 8 6

GRAPH: 6 SHOWING CONSUMER WILLINGNESS TO SPEND ON LIFE INSURANCE PREMIUM:

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HDFC STANDARD LIFE INSURANCE, BANGALORE

INTERPRETATION: From the graph above, we can clearly see that 16% of the respondents would Be willing to spend < Rs. 6001 for life insurance. 28 % would be willing to spend between Rs. 6001 Rs. 10000 per annum. Only 28% would be willing to spend Rs.10001- Rs. 25000 p.a premium. We could say that the maximum premium payable by most consumers is less than Rs. 25000 p.a. HDFC SLIC is facing with a large amount of competition. There are 18 insurance companies in India inclusive of LIC. Hence to capture a larger part of the market the company could introduce more reasonable plans with lesser premium payable per annum.

TABEL: 7 SHOWING CHART SHOWING IDEAL POLICY TERM:

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IDEAL POLICY TERM 3-5 YEARS 10-15 YEARS 16-20 YEARS 21-30 YEARS WHOLE LIFE POLICY

NO OF RESPONDENTS 22 10 4 8 6

GRAPH: 7 SHOWING CHART SHOWING IDEAL POLICY TERM:

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INTERPRETATION: From the chart given above it can be seen that 22 or 44% of the respondents prefer a policy term of 3 5 years, 10 or 20% prefer a term of 10 15 years and 4 or 8% prefer a term of 16 20 years. This means that HDFC SLIC could introduce more plans where in the premium paying term is less than 15 years. The outlook of insurance as a product should be changed from something which you pay for your whole life (whole life policy) and do not receive any benefit (the nominee only receives the benefit in case of your death) to an extremely useful investment opportunity with the prospects of good returns on savings, tax saving opportunities as well as providing for every milestone in your life like marriage, education, children and retirement. TABEL: 8 SHOWING FACTORS THAT MOTIVATE RESPONDENTS TO

PURCHASE INSURANCE:
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PARAMETER ADVERTISEMENTS HIGH RETURN ADVICE FROM FRIENDS FAMILY RESPONSIBILITY TOTAL

NO OF RESPONDENTS 8 28 8 6 50

GRAPH: 8 SHOWING FACTORS THAT MOTIVATE RESPONDENTS TO

PURCHASE INSURANCE:

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INTERPRETATION: From the chart above it can be seen that 12% of the respondents purchase life insurance to secure their families, 56% take life insurance to get high returns, 16% purchase insurance on the advice of their friends and 16% purchase insurance because of the influence of advertisements. The main purpose of insurance is to cover the financial or economic loss. But now a day this trend is changing. Along with protection (life cover), a savings with the introduction of the new unit linked plans in the market is playing major role.

TABEL: 9 SHOWING PREFERRED COMPANY TO PURCHASE INSURANCE:

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TYPE OF COMPANY GOVT.OWNED

NO OF RESPONDENTS 16

PUBLIC LTD CO

10

PRIVATE CO

16

FOREIGN CO

GRAPH: 9 SHOWING PREFERRED COMPANY TO PURCHASE INSURANCE:

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INTERPRETATION: From the graph above we find that 32% of the respondents preferred to purchase insurance from a government owned company and private company, 20% of the respondents preferred to purchase insurance from a public limited company, and only 16% of the respondents preferred a foreign based company. Heavy advertising through television, newspapers, magazines and radio is required.

TABEL: 10 SHOWING MINIMUM EXPECTED RETURN ON INVESTMENT:

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EXPECTED RETURN LESS THAN 5%

NO OF RESPONDENTS 4

10%-20%

24

21%-30%

12

31%-40%

MORE THAN 50%

GRAPH: 10 SHOWING MINIMUM EXPECTED RETURN ON INVESTMENT:

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INTERPRETATION: From the chart above it can clearly been seen that 8% of the respondents would like < 5% returns, 48% would like returns between 10 20% and 24% would like returns of 21 30% on their investments. Therefore the average return on investment should be at least 10 30 %.Most consumers are willing to adapt to some amount of risk but still want some guaranteed returns. Therefore the bulk of investment should be made in the balanced fund with 50% debt and 50% equity. The returns on the Secure Fund are guaranteed as these involve investment in government securities and the debt Market. But the returns on these instruments are low (8 10%).If the company invests in shares, returns are higher (39%) but correspondingly risk Borne by the policy holder is also higher. Therefore a good combination of the two instruments is often a wise choice.

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