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ULIPS
K.SAI VINAY KUMAR(14)
ULIPS ULIPs are a category of goal-based financial solutions that
combine the safety of insurance protection with wealth creation opportunities
ULIPS , it is an investment option provided by Insurance Companies. It is a single contract comprising of insurance cover with an investment benefit. The insurance company allots units to the ULIP investors and the net asset value (NAV) is calculated and declared on a daily basis. An investment in ULIP is divided into two parts - a) Life Cover Premium b) Investment. Premium paid in ULIP, certain portion goes for life cover and the remaining portion goes for investment.
TYPES OF ULIPS
SOME TYPES OF ULIPS
Retirement
Health
Children Education
Wealth
ULIPS FOR THE RETIREMENT PLAN
Retirement: Almost 96% of the working population has no formal provisions for retirement, Cost of living is increasing at an alarming rate.
Pension 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.
ULIPS FOR THE LONG TERM WEALTH CREATION
Single premium - Regular premium plan
Life Stage based – Non life Stage based
LIFE STAGE BASED
Status Risk profile Asset allocation
Age 25 - Single Can take on high risk 85% equities5% bonds10% liquid assets
Age 30 - Married with no kids
Can still take on high risks as you are still young
80% equities10% debt10% liquid assets
Age 33 - Married with dependent kids
Must balance risks 60% equities20% debt20% liquid assets
Age 58 – Kids are not dependent anymore
Cannot afford to take risks
30% equities20% debt50% liquid assets
Children Education
Health Insurance
DIFFERENT VENUES OF INVESTMENT IN ULIPS
Usually, every ULIP has at least 4 funds to choose from. The most common fund options are –
Debt funds
Balanced funds
Secure/ Liquid Fund. The objective of each fund would differ and you as a investor
would get to choose from one or more funds.
STEPS FOR SELECTING YOUR ULIPS
Decide the amount of premium to be paid
The amount of life cover you want from the ULIP, the insurer deducts some portion of the ULIP premium upfront. This portion is known as the Premium Allocation charge, and varies from product to product.
The rest of the premium is invested in the fund or mixture of funds chosen by you.
Mortality charges and ULIP administration charges are thereafter deducted on a periodic (mostly monthly) basis by cancellation of units, whereas theULIP fund management charges are adjusted from NAV on a daily basis.
CHARGES STRUCTURE ON ULIPS
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.
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 policy- eg. Cost of underwriting, medicals & expenses related to distributor fees. After these charges are deducted the money gets invested in the chosen fund.
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
WHY BUY ULIPS?
Flexibility
Tax Benifits
Flexibility to change your life cover: ULIPS give you the flexibility to choose your sum assured (insurance cover) at the time of policy inception.
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
NEW ULIPS NORMS(BY IRDA EFFECTIVE FROM
SEPTEMBER 01) The lock-in period for ULIPs from 3 to 5 years. All Top Up Premiums to have insurance cover. No partial withdrawals for ULIP Pension/Annuity products. ULIP Pension to offer guarantee of 4.5%/Year. This will protect the life
time savings of pensioners from any adverse market fluctuations at the time of maturity.
All limited premium Ulips, other than single premium products, shall have premium paying term of at least five years.
ULIP charge structure evened out over tenure of product. Charges on Ulips are mandated to be evenly distributed during the lock-in period to ensure that high front-ending of expenses is eliminated.
IRDA has also amended regulations to further tighten the code of conduct of corporate agents to ensure that a customer does not deal with any unlicensed person
For policies < 10 yrs, 3% p.a can be levied as charges For policies > 10 yrs, 2.25% can be levied as charges
IMPACT OF NEW NORMS Ulip pension or annuity products will offer a minimum
guaranteed return of 4.5 per cent per annum or as specified by the IRDA from time to time will protect the life time savings of pensioners from any adverse market fluctuations at the time of maturity.
This measure will reduce the expenses of the insurer, thereby lowering premiums to be paid by the policyholder.
Small regular premium policies will become unviable as agents will not be interested to sell the policies due to
lower absolute commissions. We can expect launch of e-policies from Insurance
Companies which can be purchased directly on Internet with low Upfront charges like Bajaj Allianz I Gain, HDFC Standard Life Super Series, Aegon Religare I-Term Plan etc
ULIPS FROM DIFFERENT INSURANCE COMPANIES
AEGON Religare Growth Plan AEGON Religare Wealth Protect Plus Plan Aviva New Sachin Century Plan Aviva New Lifeline Aviva New LifeBond Plus Bharti AXA Life Swarna Bhavishya Bharti AXA Life Merit Plus EDGE Reliance Life Highest NAV Guarantee Plan Reliance Life Money Guarantee Basic Plan Max New York Life Fortune Builder Plan Max New York Life SMART Xpress Kotak Single Invest LIC Wealth Plus
RECENT ARTICLES REGARDING ULIPS
Govt moves bill to let insurers sell Ulips without Sebi nod (business –standard ,New Delhi July 27, 2010)
The government, on Tuesday, introduced a bill in parliament to allow insurers to sell unit-linked insurance plans (ULIPS), without seeking the capital markets regulator's approval.
ULIPS VS MUTUAL FUNDS Expenses - Expenses incurred in a MF is lesser than the expenses of ULIPs. The
reason is expenses in a mutual fund is capped, there is a pre-set upper limit, whereas for ULIPs no upper limit in terms of controlling the expenses is set by the insurance company.
Tax benefits - Any investment made in ULIP qualifies under 80 C of income tax act, where an investor can save tax on Rs 1,00, 000. In case of MF, only investment in ELSS (equity linked tax savings scheme) a specific type of mutual fund scheme qualifies for tax benefits under section 80 C.
Portfolio disclosure - MF houses are required to statutorily declare their portfolios on a quarterly basis, however there is no such statutory requirements for ULIPs.
Return on investment - As both the products are long term investment products, these products have given good returns to its investors. Many analysts' feels, from a long term view ULIP provides better return than MF. However this is not true in all cases, it all depends on the type of investment and the fund manager's skills in managing the funds.
Investment amounts: In ulips the investment amounts are determined by the investor and can be modified as well.
In mutual funds Minimum investment amounts are determined by the fund house.