Project On Ulip

NCRDs STERLING INSTITUTE OF MANAGEMENT

2009

WEALTH MANAGEMENT

SUBMITTED TO:PROF. KIRIT OZA

SUBMITTED BY:PRIYANKA ALEKAR

61

SNEHALATA GAIKWAD

73

DHAVAL LAGWANKAR

85

ANUPAMA SHETTY

106

INDEX SR.No.

TOPIC

1.

INTRODUCTION ON ULIP

2.

VARIOUS ULIP CHARGES

3.

TYPES OF FUNDS UNDER ULIPs

4.

WHY ULIP?

5.

How ULIP Works

6.

Types of ULIPs

7.

How to choose ULIP

8. 9.

Traditional Products V/s Unit Linked ULIP vs MUTUAL FUND

Acknowledgment We personally would like to thank our professor in charge Prof. KIRIT KIRIT OZA sir for guiding us throughout the project work. Our professor has been a helping hand since the inception till the completion of the project done.

UNIT LINKED INSURANCE PLANS Unit linked insurance plan (ULIP) is a life insurance solution that provides the client with the benefits of protection and flexibility in investment. It is a solution which provides for life insurance where the policy value at any time varies according to the value of the underlying assets at the time. The investment is denoted as unit and is represented by the value that it has attained called as Net Asset Value (NAV).

ULIPs are a category of goal-based financial solutions that combine the safety of insurance protection with wealth creation opportunities. In ULIPs, a part of the investment goes towards providing a life cover. The residual portion of the ULIP is invested in a fund which in turn invests in stocks or bonds; the value of investments alters with the performance of the underlying fund opted by the customer.

Simply put, ULIPs are structured in such that the protection element and the savings element are distinguishable, and hence managed according to your specific needs. In this way, the ULIP plan offers unprecedented flexibility and transparency.

ULIPs came into play in 1960s and became very popular in Western Europe and America. The reason that is attributed to the wide spread popularity of ULIP is because of the transparency and the flexibility which it offers to the clients.

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

STRUCTURE OF ULIPs ULIPs offered by different insurers have varying charge structures. Broadly the different types of fees and charges are given below. However the insurers have the right to revise or cancel the fees and charges over a period of time .


Premium Allocation charges These charges are deducted upfront from the premium paid by the client. These charges account for the initial expenses incurred by the company in issuing the policyeg. Cost of underwriting, medicals & expenses related to distributor fees. After these charges are deducted the money gets invested in the chosen fund.
Policy administration charges These charges are deducted on a monthly basis to recover the expenses incurred by the insurer on servicing and maintaining the life insurance policy like paperwork , work force etc.
Mortality charges Mortality expenses are charged by life insurance companies for providing a life cover to the individual. The expenses vary with the age and either the sum assured or the sum-at-risk which is the difference between sum assured and fund value of the insurance policy of an individual. Mortality charges are deducted on a monthly basis.
Fund management charges A portion of the ULIP premium, depending on the fund chosen, is invested either in equities, bonds, g-secs or money market instruments. Sometimes it is a combination of these. Managing these investments incurs a fund management charge (FMC). The FMC varies from fund to fund even within the same insurance company depending on the underlying assets in the fund. Usually a fund with higher equity component will have a higher FMC


Surrender Charges A surrender charge may be deducted for premature partial or full encashment of units wherever applicable, as mentioned in the policy conditions.


Fund Switching Charge Generally a limited number of fund switches may be allowed each year without charge, with subsequent switches, subject to a charge. But now a days many insurers offer fund switching free of cost.


Service Tax Deductions Before allotment of the units the applicable service tax is deducted from the risk portion of the premium.

TYPES OF FUNDS UNDER ULIPs Most insurers offer a wide range of funds to suit one’s investment objectives, risk profile and time horizons. Different funds have different risk profiles. The potential for returns also varies from fund to fund. The following are some of the common types of funds available along with an indication of their risk characteristics

General description

Nature of investments

Risk category

Equity Funds

Primarily invested in

Medium to High

company stocks with the general aim of capital appreciation

Income, Fixed Interest and

Invested in corporate bonds,

Bond Funds

government securities and

Medium

other fixed income instruments

Cash Funds

Sometimes known as Money

Low

Market Funds — invested in cash, bank deposits and money market instruments

Balanced Funds

Combining equity investment Medium with fixed interest instruments

WHY ULIP?

Flexibility to change your life cover: ULIPs give you the flexibility to choose your sum assured (insurance cover) at the time of policy inception. Moreover, some ULIPs allow you to increase your sum assured over the term of the plan. This is crucial as your protection needs keep on changing with time .Typically, greater the financial liabilities you have such as repayment of a home loan, greater will be your need for protection. Flexibility to change premium amount: With ULIPs you can easily change premium amount as most ULIPs provide you the option to increase or reduce premiums after a certain period of time to match your premium paying capability. Another distinguishing feature of ULIP is Top up which is an additional contribution over & above regular premium so that if you receive extra money today you can invest the amount in your policy & maximize your investment gains. Flexibility to opt for a rider: ULIPs also enable you to customize the policy with optional riders to enjoy additional protection. Riders are additional or supplementary benefits that are bought along with the main insurance policy. Some of the commonly offered riders by most insurance companies are critical illness benefit rider, accident & disability benefit rider, waiver of premium rider etc. For ex. a critical illness rider cover major critical illnesses like heart attack etc. In case of contracting any of the above illness, the insurance company pays the insured amount. Flexibility to choose your fund option: Most of the ULIPs come with an in - built range of fund options to choose from –ranging from aggressive funds to conservative funds so that you can decide to invest your money in line with your investment preferences and needs. What’s more, ULIPs even come with the option of switching between different fund options so that you are able to reap maximum benefits from your investments.

One of the key advantages that ULIPs offer is complete transparency which makes the working of a ULIP abundantly clear to the investor. Thus, you are empowered to make informed decisions on how to best use your ULIP. Benefit Illustration As a customer it is your right to ask for a sales benefit illustration. Sales benefit illustration will help you understand how premium paid by you is utilized & what are the charges deducted year by year, by the insurance company for the term of the plan . It will also illustrate how your policy will grow in accordance with the choosen sum assured & premium. In fact IRDA has mandated that all insurance companies use two scenarios with 6 % & 10 % return rate to depict future returns. Brochures and key feature documents While benefit Illustrations play a significant role in explaining the quantitative aspects of ULIPs, it is also important for you to know the other features and benefits which the ULIP offers. All insurance companies come out with brochures for prospective customers to go through & understand the plan thoroughly. You should ask your insurance advisor to provide brochure of the ULIP you intend to purchase. Once a policy gets issued, your insurer will send you a key feature document capturing all the essential features of the plan. This is to ensure complete comprehension of the plan purchased. Free-look period ULIPs also offer you a distinct feature that no other financial product offers as of now. It is called Free-look period which is a 15 day window during which you can close the policy & get paid back the entire premium less charge borne by company in issuing the policy in case you are unhappy with the product. Net Asset Value It is critical that you monitor the performance of your policy on a regular basis. This will help you ascertain whether you are on right financial track or not. To help you do so all life insurance companies publish the NAV of different fund options on their website on a daily basis so that you can track the performance of your policy on a regular basis. This will also help you make informed decisions when it comes to comparing fund performances.

Everyone needs to save for their important life goals. One of the prudent ways to do so is by investing in ULIPs which are long-term systematic investment options designed to address key financial goals. ULIPs help you cultivate a disciplined savings pattern which ensures that the money being set aside will go towards the fulfillment of the specific objective. In the absence of such a focused approach, there is a high possibility of savings towards one objective getting utilized for an immediate short-term requirement, thus jeopardizing the longterm goal. ULIPs are a potent safeguard against such a tendency.

ULIPs are an efficient tax saving instrument too .The tax benefits that you can avail in case you invest in ULIPs are described below:

Life insurance plans are eligible for deduction under Sec. 80C Pension plans are eligible for a deduction under Sec. 80CCC Health insurance plans and critical illness riders are eligible for deduction under Sec. 80D The maturity proceeds or withdrawals of life insurance policies are exempt under Sec 10(10D), subject to norms prescribed in that section

How ULIP Works As we know Premium money collected from the client has the following components
Expenses
Mortality
Investment

ExampleStep 1
Client pays annual premium of Rs.20,000
Deduct 40% as Premium Allocation Charge - Rs.8,000
Deduct Rs.200 per month as fixed monthly administration expense
Deduct Rs.100 on the first month as mortality charge
Balance Rs.11,700 is used to purchase units as per investment choice of the customer Step 2
Investment Fund (Rs.11,700) is used to buy units based upon NAV Values of the fund on that Day
If NAV is Rs.10 on that day then Rs.11,700/10 = 1170 units are purchased Step 3
For the first month the units are cancelled and amount deducted to pay for the risk cover and expenses, this is 1/12th of the annual amount so calculated
Every month the required no. of units are cancelled to cover mortality charges and fixed monthly administration expenses


Suppose in the second month the NAV is 12, 16.6666 units cancelled at Rs.12/-, to generate Rs.200/- so 963.3334 Units Remain
This is repeated every month till end of the year Step 4- Second year 

Client pays renewal annual premium of Rs.20,000



Deduct 20% as 2nd year Premium Allocation Charge - Rs.4,000



Deduct Rs.200 per month as fixed monthly administration expenses


Deduct Rs.80 on the first month of the second yr. as mortality charge 

Suppose in the second year beginning the NAV is Rs.14 Per Unit, so Rs.13,720/14 = 980 Units are purchased



So total units= units at end of first year + 980 units

Types of ULIPs

RETIREMENT Retirement is the end of active employment and brings with it the cessation of regular income. Today an increasing number of people have stated planning for their retirement for below mentioned reasons

Almost 96% of the working population has no formal provisions for retirement

With the growing nuclearisation of family structure, traditional support system of the younger earning members – is no longer available Developments in the healthcare space has lead to an increase in life expectancy

Cost of living is increasing at an alarming rate

Pension plans from insurance companies ensure that regular, disciplined savings in such plans can accumulate over a period of time to provide a steady income post-retirement.

Usually all retirement plans have two distinctive phases

The accumulation phase when you are saving and investing during your earning years to build up a retirement corpus And The withdrawal phase when you actually reap the benefits of your investment as your annuity payouts begin.

In a typical pension plan you have the flexibility to make a lump sum payment or a regular contribution every year during your earning years. Your money is then invested in funds of your choice. You can opt to receive the annuity at any time after vesting age (age at which you become eligible for pension chosen by you at the inception of the plan). Most of the Unit linked pension plans also come with a wide range of annuity options which gives you choice in structuring the post-retirement benefit pay-outs. Also at the time of vesting you can make a lump sum tax-exempted withdrawal of up to 33 per cent of the accumulated corpus. In a retirement plan, the earlier you begin the greater you gain post retirement due to the power of compounding. Let us take an example of Gaurav & Hari. Both of them want to retire at the age of 60. Gaurav starts investing Rs. 10,000 every year from the age of 25 till the time that he retires. In all, he would have invested Rs. 350,000. If his investments were to earn 7% return every year, at the time of his retirement, Gaurav will have a retirement corpus of Rs. 13, 82,368. Now, Hari starts investing 10 years later (i.e. at the age of 35) and in order to make up for the lost time, invests Rs.15,000 every year (which is 50% more than Gaurav’s annual investment). So, by the time of his retirement, he would have invested Rs. 3,75,000. And assuming the same annual return of 7%, he will end up with a retirement corpus of Rs 9, 48,735.

WEALTH Wealth Creation ULIPs can be primarily classified as

 Single premium - Regular premium plan : Depending upon you needs & premium paying capacity you can either opt for a single premium plan where you need to pay premium only once during the term of entire policy or regular premium plans where you can premium at a frequency chosen by you depending upon your convenience  Guarantee plans – Non guarantee plans: Today there are wealth creation ULIPS which also offer guaranteed benefit. These plans are ideal insurance-cum-investment option for customers who want to enjoy the potentially higher returns (over the long term) of a market linked instrument, but without taking any market risk. On the other hand non guarantee plans comes with an in - built range of fund options to choose from –ranging from aggressive funds (Primarily invested in equities with the general aim of capital appreciation) to conservative funds (invested in cash, bank deposits and money market instruments with aim of capital preservation) so that you can decide to invest your money in line with your market outlook, time horizon and your investment preferences and needs.  Life Stage based – Non life Stage based: Life Stage based Ulips factor in the fact that your priorities differ at different life stages & hence distribute your money across equity & debt. Here the initial allocation is decided as per your age since age is a significant indicator of risk appetite. Such a strategy ensures that the asset allocation at all times is in sync with your age and changing financial needs

CHILDREN’S EDUCATION One of the most important responsibilities you have as a parent is to ensure that your child gets the best possible education that can be provided. Apart from conventional schooling, it becomes important to expose your child to different activities such as dance, painting and sports training for holistic development. As a parent, you want to ensure that their development is not hampered either due to rising costs or unforeseen circumstances.

HEALTH Today there are ULIPs that offer money at key milestones of your child's education thus ensuring that your child’s education continues unhampered even if something unfortunate happens to you. While, the death of a parent is an irreparable emotional loss, child education plans safeguard the child against the financial ramifications of the death of a parent.When you are young and working you save for various goals like marriage, education, retirement etc. but saving for health care is never considered or left for later. During these years we have various sources of income or savings on which we can rely for health emergencies. But with increasing cost of healthcare, proportion of this spend is increasing at an alarming pace. This is forcing families to borrow or sell assets to meet expenses during medical emergencies. And during old age health care expenses increase due to health deterioration because of age and higher incidence of chronic illness. Thus it is important for you to invest in health insurance today so that tomorrow you are fully prepared to meet rising healthcare expenses, which would be incurred during old age, with the right health insurance plan. Health ULIP is a recent innovation from the health insurance industry. In a health ULIP part of your premiums are allocated for investment designed specifically to build a health fund to meet future health related expenses. It aims to create a health savings kitty by investing in a long term flexible savings plan with multiple fund options. The health fund thus created allows you to claim for health related expenses of any kind and also fund your future health insurance charges. You can also avail of tax benefit on premium paid u/s 80D.

How to choose ULIP which is BEST for you? The wide range of ULIPs available in the market might make it difficult for a consumer to choose the correct ULIP. However if you were to follow a few simple steps choosing the right ULIP can be a smooth process. ⇒ Understand the concept of ULIPs thoroughly

Do your homework well and read as much as you can about ULIPs as you can before investing. Read the literature available on ULIPs on the web sites and brochures circulated by insurance companies. This will help you know the benefits and structure of the ULIP.

⇒ Focus on your requirements and risk profile

Identify a plan that is best suited for you keeping in mind your risk appetite. In case you have a high-risk appetite, opt for a more aggressive fund option (an option that invests higher percentage in equities) and vice versa.

⇒ Understand the peculiarities of the plan

Understand all the charges levied on the product over its tenure, not just the initial charges. A complete charge structure would include the initial charges, the fixed administrative

charges,

fund

management

charges

and

mortality

charges.

⇒ Examine the performance of the plan

Compare the performance of the plan with benchmark indices like BSE Sensex or Nifty in the past two or three years to get a better idea about the performance. Ensure that you can easily get information about your NAV when you need it. Thoroughly understand

the

flexibility

and

redemption

conditions

of

an

ULIP.

⇒ Understand the charges levied on the product

Understand all the charges levied on the product over its tenure, not just the initial charges. A complete charge structure would include the initial charges, the fixed administrative charges, the fund management charges and mortality charges. You not only need to understand the charges in the first year but also through the term of the policy.

⇒ Compare ULIP products of different insurance companies

Compare products of different insurance companies in terms of premium payments, cost structure, performance of the scheme (equity as well as debt schemes), additional facilities such as top-up premium and free switch between different fund options, flexibility in terms of increasing or decreasing protection, reporting structure and flexibility in redemption.

⇒ Know about the Company

Last but not least, insure with a brand you can trust to honor its commitment and service in accordance to your requirements

Traditional Products V/s Unit Linked

INSURANCE V/S MUTUAL FUNDS Both these instruments are designed to serve different purposes and are not comparable. A unit-linked plan from an insurance company is an insurance policy designed to pay a lump sum on maturity or on death if earlier. Premium paid under these plans is eligible for tax deduction under Section 88 of the Income Tax Act. On the other hand, mutual funds are investment avenues to participate in the growth of financial markets and do not provide any tax deduction (except ELSS and pension funds). For a unit-linked insurance plan, providing life cover is the most important function; returns are just an added benefit, which gets magnified, given the tax rebates. Though unitlinked plans offer transparency in returns in terms of net asset value and flexibility in investment options in debt, equity or a mix of both, these advantages remain secondary. Whereas for a mutual fund, the main objective is to provide returns. Moreover, unit-linked plans are not as liquid as mutual funds. There is a lock-in of three years. Even if one redeems after three years, you would be at a loss because of higher initial administrative charges. For example, the upfront charges for the first two premium amounts are as high as 20-27 per cent. Then there is an annual management fee of 0.8-1.25 per cent and a flat fee of Rs 15-20 per month. Finally, there is a deduction for risk cover. This goes towards contribution to the sum assured or the life insurance cover, which is based on mortality rates as calculated by actuaries. Though mutual funds too have entry and exit loads (maximum 2 per cent) and expenses (maximum 2.5 per cent), these costs are lower than unit-linked plans.

MFs Vs Unit-linked Plans: A Comparison

Equity Mutual funds Initial load/ administrative charges

0-2%

Equity-linked Insurance Plans 20-27% of premium for the initial few years

1.0-2.5% (including

A flat charge of Rs 180-240 per

mgmt. fee)

year

0.8-1.5%

0.80-1.25%

Life cover

Nil

Yes

Lock-in

Nil

3 years

Annual expenses/ adm. Charges Management fee

From your perspective, consider unit-linked plans only if you want insurance cover and not as an investment avenue to participate in the equity or debt market. If you want an exposure to the stock or bond market, mutual funds are better investment avenues. Don't go by the performance of these unit-linked products. Both unit-linked plans and mutual funds invest in the same financial markets. If the equity market is doing well, both equity-linked insurance plans and equity mutual funds will do well. But as an investment tool, you would be better off investing in mutual funds rather than unit-linked plans due to high fees charged by insurance companies. However, one has to forego that for the life cover that they offer. Thus, by design, unit-linked plans and mutual funds are not comparable and are meant to suit different objectives As competition hots up between insurance companies and mutual funds, both are finding innovative ways of getting business. First it was insurance companies who launched ULIP plans to snatch away business from mutual funds by promising returns and risk cover end assured customer that his/her long term goals would be achieved even if he/she was not there to contribute. He/she would be convinced that his loved ones will not be put to hardships after he/she was no more. Although the unsuspecting client is never made aware of the high cost of ULIPs.

Mutual funds could not keep quiet for long and see their business snatched under their nose by insurance companies. MFs came up with the novel idea of offering capital growth along with free insurance cover (there is maximum cover cap) with no medicals and disclosures to be made as demanded by insurance companies. The insurance premium to be completely born by the asset management company (AMC). Mutual funds offer cover for unpaid installments of a systematic investment plan (SIP). If the term of SIP is 10 years and if investor dies after 3 yrs then 7 yrs unpaid SIP is risk cover. Risk cover ends as soon as the SIP stops or any withdrawal is made from investment. A fund house has come out with new plan which offers cover (100 times the monthly SIP amount) through out the tenure of the SIP provided at least 3 years of installments have been paid. The cover reduces from the original value to the fund value of SIP installments paid. One would wonder how come MF have become so generous and offering free risk cover when there is no free lunch. Through these plans, MFs are committing investors to pay for long periods. The tenure of such plans is age 55 minus current age. If an investor is 30 yrs old he has to pay for 25 years to avail of risk benefit. In this manner, MFs have ensured that in case they have to pay death benefit, the customer will pay regularly pay for 25 years, thus ensuring regular cash flows, Part of this additional business generated can be parked in safe instruments to pay for insurance payouts. One needs to be very sure of his/her paying capacity for such long periods because no partial withdrawals or switchovers are allowed. If either of these is done, the risk cover ends. It means one can not use his money in case of emergency. In my opinion term plans along with MF investments (where there is no long term commitment) are still the better choice.