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CONTENTS

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.

Unit Link Insurance Plan (ULIP)

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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


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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.

Types Of InsuranceInsurance 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


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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

29- Vision Insurance

30- Wage Insurance

31- Whole Life Insurance

32- Workers Compensation Insurance


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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 atthe 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 ofthe expectations do not become true, the original arrangement would

become inadequate and there would be difficulties. Living too long can


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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.

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 todays times, ULIP

provides solutions for insurance planning, financial needs, financial


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planning for childrens 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 doesnt 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). Whats 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 option you can move to that fund. You can do that

when the fund in which you have invested is performing poorly or you

feel the returns are high in some other fund. The funds offered by ULIPs


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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 endup 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


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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.

Says Puneet Nanda of ICICI Pru. Life Insurance, The reason whyULIPs 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.


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Theres more to the flexibility. With a ULIP you dont 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 ifyou 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

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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,

The clients 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


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company in question) option, which allows upto 35% exposure to

equities.

We have always maintained that ones interests would be best served if

he keeps his life insurance and investment needs distinct.

Given below is our solution based on the clients 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.

Rs. 5,000,000). Even if we were to consider his sum assured to be Rs

5,000,000 (as per the ULIP) for a term plan, the annual premium hewould 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 clients insurance needs, now lets shift our

focus to his investments. We took into consideration the clients currentfinancial 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


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with a 65% debt 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--vis fixed income instruments like bonds and

government securities. And given that the clients 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--vis that of a mutual fund scheme were to be

considered, the latter would still surface as the better option.


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Several mutual funds also have a track record to boast of.

Personalfns 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.

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 clients 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).


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As can be seen, term plans combined with mutual funds have the

potential to add considerable value to an investors 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 factorswherein 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.


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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.

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


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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 legalobligation 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 amountinvested in insurance policies is essentially meant to provide for

contingencies and for long-term needs like retirement; regular portfolio


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disclosures on the other hand can enable investors to make timely

investment decisions.

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 assetclasses 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


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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, 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


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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 isunlike 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

peoples mind is why they cannot buy a 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.

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But still here are some basic differences

ULIPs Mutual funds

Investment amounts- Determined by the

investor and can be

modified as well.

Minimum investment

amounts are

determined by the

fund house.

Expenses

No upper limits,

expenses determined

by the insurance

company

Upper limits for

expenses chargeable

to investors have been

set by the regulator

Portfolio disclosure Not mandatory*

Quarterly disclosures

are mandatory

Modifying asset

allocation

Generally permitted

for free or at a

nominal cost

Entry/exit loads have

to be borne by the

investor

Tax benefits

Section 80C benefits

are available on all

ULIP investments

Section 80C benefits

are available only on

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


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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.


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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.

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.

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.


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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 achild plan should not just counter inflation, it should be enough to cover

the cost of education.


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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 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.


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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.

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 goingforward. In terms of costs, term plans remain your cheapest option no

matter when you take one.


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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. Afterhaving interacted with a numberof 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


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financial Web sites, newspapers and sales literature circulated by

insurance companies.

2. Focus on Your Need and Risk Profile

Identify a plan that is best suited for you (in terms of allocation of money

between equity and debt instruments). Your risk appetite should be the

deciding criterion in choosing the plan.

As a result if you have a high risk appetite, then an aggressive investment

option with a higher equity component is likely to be more suited.

Similarly your existing investment portfolio and the equity-debt

allocation therein also need to be given due importance before selecting a

plan.

Opting for a plan that is lop-sided in favour of equities, only with the

objective of clocking attractive returns can and does spell disaster in

most cases.

3. Compare ULIP Products from Various Insurance Companies

Compare products offered by various insurance companies on parameters

like expenses, premium payments and performance among others. Forexample, information on premium payments will help you get a better

picture of the minimum outlay since ULIPs work on premium payments


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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 investmentplan 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 caseinvolved 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 surethat even our visitors will be left with a similar feeling.

Facts of the case:

1. The client is 55 years old

2. She does not have a regular source of income, so investing for a

regular income was her top priority

3. Her only investments are in fixed deposits (FDs)

4. She will inherit a huge sum of money at the age of 60 years

5. She is not very literate in matters of investment and finance

6. She is not very liquid (i.e. has less cash)

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


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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.

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.


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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, butat 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 propositionfrom day one, because she was not interested in an 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


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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 thebank 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 justwished 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


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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 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


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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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41.

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 wouldnt 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 thefour 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 theinvestment 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 LICs


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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.

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 bea 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

couldnt 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


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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-inperiod. 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 offersFuture Plus and Jeevan Plus which are unit linked plans.


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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.

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


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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 ULIPs 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.

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


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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; thisneeds 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


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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

lower side.

3. IRDA keen to ensure ULIPs transparency.

In the last two/three years the unit linked products have become verypopular 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 productsand they are not detrimental to the interests of the policyholders. Further

they have been approved by the IRDA.

http://www.moneycontrol.com/india/news/press-releases--announcements/irda-keen-to-ensure-ulips-transparency/298740http://www.moneycontrol.com/india/news/press-releases--announcements/irda-keen-to-ensure-ulips-transparency/298740

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48.

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 ULIPs 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.

http://www.moneycontrol.com/india/news/press-releases--announcements/irda-keen-to-ensure-ulips-transparency/298740http://www.moneycontrol.com/india/news/press-releases--announcements/irda-keen-to-ensure-ulips-transparency/298740

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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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Future of ULIP- The future of ULIP is pretty bright as we

can see the companies in the ULIP and mainly insurance sector is

increasing day by day. I have some information to add to this.When I had attended a seminar on Accounting standards at IMC,

(Indian merchants chamber) there the speaker , Mr. S. Clement had told

us that according to the data collected by the CMIE ( Centre for

Monitoring Indian Economy), the Insurance sector is the most capital

generating sector in the recent years, in the services sector even ahead of

banking.

As per the data published in the economic times January 3 ,2008 issue

by the Invest India Incomes and Savings Survey 2007, the demand

forecasts for life insurance products is given. In that, the distribution of

people who are planning to buy products of life insurance is given. There

the state of Bihar tops the list, where around 16, 00,000 buyers areexpected to buy life insurance products. This is followed by Andhra

Pradesh, Maharashtra, and Gujarat.

It is also to be noticed here that IRDA has planned to enhance the

penetration of insurance in rural areas. In this endeavor it has planned to

allow grocery shops to sell the insurance products in their shops like they

sell recharge coupons for mobiles

So hereby, we can say that life insurance is developing so fast that it is

now reaching rural India where 90% of population has no insurance

protection against losses.


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Bibliography

Worldwide Web Sites

www.moneycontrol.com

www.irda.org

www.personalfn.com

Newspapers

Economic Times

Times Of India

For u khushboo Thank you,
http://www.moneycontrol.com/http://www.personalfn.com/http://www.moneycontrol.com/http://www.personalfn.com/

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