Insurance Planning: The ULIP Way

One of the most innovations in the field of financial product is Unit Linked Insurance Plan (ULIP). In simple terms ULIP’s are the innovative Capital Market Linked Insurance products where premium payable by the customer consists of two parts viz. the risk premium and investment premium. While risk premium takes care by providing security to the family in case of premature death of the policy owner, the second part i.e. investment premium will be invested in the capital market in form of units of investment taken by insurer. Investment will be sole concerned of the insured, as he will decide the type of fund the units should be invested in. Thus, while getting risk coverage, one is able to fetch some money from capital market investment.

Why ULIP’s??????

You need not be a close watcher of the market, bothering about your fund with swings in the market or switch between alternative investments. ULIP’s changed the concept of insurance from pure risk coverage to investment and risk coverage. The main reasons for giving ULIP’s maximum attention are as follows:

Flexibility: ULIP’s offer a host of options to individual based on risk appetite. Insurance companies offer as much as size options within ULIP with equity component differing from zero to 100%. One has liberty to select the option that best fits one’s objective and risks. Moreover it gives liberty to switch from one plan to another plan.

Investments: ULIP’s invests in various avenues with caps on each instruments such as stock, bonds etc

Transparency: The very essence of ULIP’s is in their transparency in terms of various disclosers. As ULIP’s are market linked, they are visible in terms of per price unit. Their NAV is declared on daily basis. The investors need to do simple calculation to know the status of their funds.

Liquidity: Liquidity of the financial instrument is the major characteristic that are always preferred in any type of investment. ULIP’s are more liquid as compare to endowment plans. As investments ULIP’s are NAv based, so it is always possible to withdraw some portion of one’s maturity, however with some provisions.

Apart from these benefits, as per the recent article in Economic Times dated 23^rd September 2008, it says that IRDA wants to make ULIPS more Affordable. It says that IRDA will be reviewing the cost structure which includes fund management charge, surrender charge, high agent’s commission. Due to this the ULIPS product will be available at cheaper rates and will provide comparatively high returns in the long run.

ULIP’s and Traditional Endowment Plans

Points	ULIP’s	Traditional Endowment Plans
Sum Assured	As a multiple of premium	Known upfront, premium is based on it
Investments	Allocation to equities, bonds, g-secs, money market depending on option.	Larger allocation to bonds, g-secs, money market smaller equity allocation
Expenses	Lower agent commission, higher funds management charges.	Higher Agent Commission
Flexibilities	High	Low
Transparency	High	Low
Liquidity	High	Low
Tax Benefits	Available	Available

ULIP’s and Mutual Funds:

Points	ULIP’s	Mutual Funds
Investments Amount	Determined by investors and can be modified as well	Minimum investment amount is determined by fund house
Expenses	No upper limits, expenses determined by the insurance companies	Upper limit for expenses chargeable to investors have been set by regulator.
Portfolio Disclosures	Not Mandatory	Qtly disclosures mandatory.
Modifying Asset Allocation	Generally permitted for free or at nominal charge	Entry/exit load to be borne by customer
Tax Benefits	Section 80C benefits are available.	Section 80C benefits are available.

Grueling Issues

Innovation is always welcomed if it is for the general betterment of the consumers.

Marketing of ULIPs needs to be redefined, because of its close resemblance to mutual

funds. The role played by the insurance advisor in this context is very important, and

marketing of the ULIPs should be in the hands of the person who has a good knowledge

of the movements of stock markets in addition to having in depth knowledge of

insurance. ULIPs require far greater expertise and participation on the part of

insurance advisor. A layman going for ULIPs has little capital market knowledge still

he wants to participate in the investment process, hence an expert or an insurance

advisor will help him in getting the right blend of insurance and investment coverage.

Unfortunately, the general experience suggests that insurance advisors are more

interested in fetching their commission instead of making policy selection (to counter

this habit, IRDA has come up with a new set of regulations that make training a must

for an insurance advisor marketing ULIPs). The unethical practices of the insurance

advisors while marketing ULIPs are:

• Ignoring the risk bearing capacity of the insured

• Not revealing the expenses to the clients

• Positioning ULIPs as a short-term investment thus putting little emphasis on

insurance needs of the client

• Encouraging non-payment of premium or skipping the premium.