ULIPs II... why ULIPs and what you need to know

as discribed in the part I, Unit Linked Insurance policies are the new variants now available in India. since the opening of the life insurance market in the year 2000, the flow of unit linked policies have increased. Parallelly the dynamics of Indian stock market have helped the growth of the unit linked policies.

Do you know, in the year 2007-08, the biggest investors in Indian stock market are not the FIIs, not the mutural funds.. but its the life insurance companies. Before investing your money in ULIPs, keep the following in mind:

• The aim of life insurance products is not profit generation but protection. You have to be clear how much is your need for protection and how much is your need for investment returns.
• Primarily your profile configuration is more important. many people, do not configure what they are looking for and based on the agents words will subscribe to a product. Though no company sells bad products, a wrong selection has always opportunity cost. By opportunity cost what I mean is that, when you choose to put your hard earned money in a wrong investment avenue say A, which gives you a return of 5%. By investing in avenue A, you have chosen not to invest in other avenues. If avenue B gives a retun of 10%, then you incur an opportunity cost of 5%.
• You are directly exposed to the vagaries of the domestic as well as international markets. At this point, Indian economy is not fully integrated with the global markets at the same time not isolated also. Due to this the stock market returns are more volatile than before. By investing in stocks your ULIPs also expose you to the volatality.
• If you are investing for your pension purpose, then think twice before choosing the product. Most of the companies provide you the choice of level of risk you would like to take. In general you will find, risk, income, secured, balanced fund options.
• Secured funds are mostly invested in government bond market and this is by far the most secured avenue. Where there is less risk, less return is the maxim. In India, the bond market is not a matured market still and is mostly limited to the institutional investors. Direct involvement of the public is not much.
• Income funds aim at a moderately higher return which is stable. The invesment avenues are mostly Fixed income securities and government bonds and some equity. Fixed income securities can be corporate bonds and other bonds issued by financial institutions.
• balanced funds balance between equity and bonds. The percentage varies from company to comapny.
• By Risk option, 80-100% investment is done in equity where the return is highest and equally risk is also high.

your agent may say.......

In the 4 years of its existence many ULIP products such as LIC's Bima plus, Future plus, and other company products have given even 30-40% during some point of time or the other. your agent may project that this is the constant return you are going to get on your investment. When you compare a traditional insurance product which gives you a maximum of 8% including your tax benefit with the 30-40% return on ULIPs, naturally there is no second thought for you.

but... please keep in mind that... these returns cannot be guranteed. In the long run over the life of your policy say 10 years or 20 years, the returns get averaged out and you may not be getting the socalled 30% or even 60% as some comapny agents canvas.

as a remedy to this, some companies started cavanssing, pay only for 3 years period. It looks very simple... invest 10000 for 3 years and at a rate of 33% at the end of 3 years you will have another 10000 which can become your 4th year premium and so on. Keep in mind, this is designed based on one year return in the high days of stock market. In the dynamic market, this is like a water in the fist.

some other canvanssing .... is that exist at the end of 3 years. Do you know why this 3 years period? For any insurance company the biggest problem is the business acquisiton costs. The first year commission paid to the agent at times ranges upto 40-60% of the premium. Insurance companies spread the acquisition costs in to first 3 years and that is why its mandated be it tradtional or ULIPs that the customer has to make premium payment atleast for first 3 years.

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. 

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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.