The ULIPs....Part I

Unit Linked Insurance policies (ULIP) are the insurance policies that have a linkage with the stock market.  There has been an increased activity on this count and lets see the fundamental concepts of ULIPs and how they differ from the normal insurance products that have been offered till now called as conventional insurance policies.

In Indian financial world, the word unit was more popularized by Unit trust of India.  Units are the constituent elements of a mutual fund.  At a basic level, mutual fund is the collection (portfolio) of different securities that have differing risk characteristics aimed at maximising returns and minimizing the risk.  This is done by way of portfolio management carried out by specialized companies called as Asset Management Companies (AMCs).  The same unit is what we use in ULIPs.

In advanced countries, these are called as Variable life products and Universal Variable Life products ( VL & UVL), though at times ULIPs is also used.  

The primary difference between the conservative products and the unit link products is the transfer of risk. Other than the term insurance policies, the premium you pay consists of two elements. 1.  risk premium   2.  savings premium.   For term insurance policies, there is no savings component in general and only risk  premium will be there.  The insurance company by investing the savings premium in eligible investment avenues, generates a return on the funds. This is paid as bonus on policies after deducting the operating costs of the company.   Traditionally the insurance companies try to maintain a average return on compounding which gives a better return.  Here the missing element is, the customer does not know where his premiums are being invested.  In ULIPs, the savings premium is invested as decided by the customer. The customer has a choice of  different funds which differ in their risk character along with an option to switch the funds.    The other area of transparency is the costs.  Various charges such as administrative charges, fund management charges and all are pre declared and customer can know how much is the cost deducted.  This transparency is missing in the traditional products.    Read part II of ULIPs for why ULIPs and What you need to know about your ULIPs. 

insurance news

• After equity and MF fall investors seek relief in insurance-...
  
• India's share of world life insurance rises- Analysis-Insuran..
  
• LIC to take refuge in more conventional policies- Insurance...
  

lets take a journey... Part II

While you fill the proposal forms - you will be furnishing , your legal name, legal heirs details, communication address, (now IRDA seeks identity also), your qualification, occupation, annual income, previous insurance details, familay members details, if any member died then cause of death, your health record such as smoking habits, hospitalization information etc. also you will be mentioning the sum assured ,the term and mode of premium payment.

Pleae note: the inforation you provide here forms the basis for test of law in case of any disputes!!

Based on the information provided by you, the insurance company scrutinizes your suitability for insurance. This is the job of an Underwriting department. There are international standards for underwriting. Each underwriter will have some upper limt upto which if sum assured lies, he can underwrite the risk. The higher the sum assured, the more scientific the underwriting becomes. The insurance company can call for specific medical reports if need there be. In general, the cost of these reports is born by the insurance company only.

Upon underwriting, the insurance company may reject your proposal, accept it with some conditions or accept unconditioanlly. You may have choice to pay the first premium as a deposit along with your proposal or pay it after the confirmation. This may vary from company to company.

Once your insurance is accepted, on making required payments, you will be given a policy bond or a policy certificate. Please keep this safe. There exists a provision for issue of duplicate in case of loss of this certificate. But, the procedure may be irritating as you have to establish the cuase of loss and all. check if all the details are correctly recorded in the bond. Else, you may face problem at the end of the day.

lets take a journey... part I

In many sites you will find insurance glossary and definitions about policies and other related matters. when you read each and every term separately, the full picture may not be clear.... lets take a journey from your intention to take a policy to maturity of your policy... this shall give you a good understanding about the insurance company operations as well.

In life insurance business, the primary channel for business procurement is 'tied agents'. Not only in India, across the world, tied agents paly an important role in procuring insurance business. They are the agents whom you come across when you want to take a policy. Atleast in Indian scenario, each agent is supposed to canvas products of only one company. Apart from the tied agents, now there are alternate channels of business procurement i.e through banks (popularly know as bankassurance) , insurance brokers. Details about insurance business procurment can be found in a separate article with title " The nitty grities of life insurance agent system"

when ur agent approaches, you start listening many new words and things may seem to be complex. In the ideal situation, you should be clear about the following:

• your insurance need - safety? investment? children? pension? all of the above etc
• your ability to pay - insurance is a long term contract, how much you can pay in future?
• Your human life value - please see a description of this term give here below.

human life value is a concept which says that we should know how much we should put in life insurance, so that, the family can live the same standard of life, even after demise of the earning member, or after the earning member retires. You may not be able make provision immediately to meet this, but, one can keep this as a target and start your insurance portfolio.

When you decide to take an insurance, the agent may inform you to sign the proposal forms. Its a common practice that the agent takes down the details like date of birth, approximate salary, family details and then takes a signature in the proposal form and he fills your details later. Please remember, insurance is a contract and its worth you fill the proposal form on your own. These forms have a legal basis and whatever your signing in the form will come into picture in case of any claim. It takes only 5 mins to fill the form. Next time when your agent comes with proposal form, insist that the same be filled by you or atleast before you. Infact, IRDA insists that the agent should give a copy of the proposal form which he has submitted in the company to the customer.. which is now under a court case. continued in Part II

Various types of life insurance

The following insurance forms are more popular in India.  The best way to understand them is to explore the different features.  

• Whole life policies
• Endowment policies
• Money back policies
• Term insurance policies
• whole life with limited payments
• the latest being  Unit linked policies - ULIPs

also based on the market segmentation, we find some more types of insurance:

• children's policies
• women's policies
• joint life policies
• mortgage redemption policies
• pension policies

LIC's Jeevan Anand

lets take a look at this product offering from Life Insuance Corporation of India.

this is a unique product in life insurance market in India that is simple but satisfies risk and return requirements of the customer. This plan is a combination of whole life and endowment features. (see different types of insurance for expalination).

Say a person aged 30 years takes this policy for sum assured of 10 lacs for duration of 20 years and premium of say Rs x needs to be paid annually. In insurance terms the same can be expressed as ...

• age at entry = 30
• sum assured = 10 lacs
• term = 20 years
• mode = yearly
• premium = x

Death benefit: say at the end of 7 years death takes place. then SA of 10 lacs (if its due to accident then accident benefit also) + all bonus will be paid to the nominee.

survival benefit: at the end of the term of 20 years the full SA and bonus for 20 years will be paid to the customer. the best part is, after that the premium need not be paid anymore, but, the policy continues as awhole life insurace. At the time of natural death later, again the family will get the full SA of 10 lacs. Also, the customer can surrender the policy after maturity and get some more benefit.

why life insurance?

why life insurance?

the highest risk to life is ceasing of life... in other words death. Death itself is not a problem or a risk, but, the consequential fallouts are the problems. such problems are of two types. one emotional and other materialistic. The emotional suffering needs no elaboration. The element of concentration for life insurance is the materialistic suffering or loss suffered by the survivors of the diseased person. By making provision for adequate insurance, we will not be able to stop the occurence of death, but, we can reduced the impact of death on the survivors. This is something like living after death... as the current investment in your life will take care of your family when your nomore there to take care of them.... if you have not yet taken a life insurance policy... think about it again.

How does it operate?

In simpler terms, when you take life insurance.... you are entering into a contract with the insurance company. As every contract has some terms and conditions, here also some terms and conditions exist. you will be agreeing to pay premium and in turn, if anything happens to you, the company promises to pay your family some agreed amount (sum assured).

But is it so simple? The insurance company is taking risk while giving this promise to you. For that reason the insurance company will do risk evaluation and undertaking which is technically called as underwriting. The company seeks some information from you to assess your insurability and for this you would be generally filling some forms. A detailed note on insurance company operations will be in place soon...

Like you there may be millions of people who want to insure themselves with a company and there the insurance company profits come into picture. of all the million people who took policies with an insurance company, only few may die in a given cycle, say , one year and rest survive. the company would have already assessed out of million cases, how many will end up in claims. say they assume to be 10% per year. If the claims are below this, then the company gains and if it is more than this then the company suffers. This is how insurance as a shared risk platform, links many people.