JBFSIR

Volume 1, Issue 3 (June, 2011)

The Journal of Sri Krishna Research & Educational Consortium

ISSN 2231-4288

JOURNAL ON BANKING FINANCIAL SERVICES & INSURANCE RESEARCH

Internationally Indexed & Listed Referred e-Journal

UNIT LINKED INSURANCE PLANS A COMPARATIVE STUDY OF SELECTED INSURANCE COMPANIES IN HARYANA AND PUNJAB *NEELAM SAINI;
*Assistant Professor in Commerce, Kanya Mahavidyalaya Kharkhoda Sonepat (HR)

ABSTRACT The interest shown by people in the Unit Linked Insurance Plans is because of the many benefits these plans offer such as high growth potential, life risk cover, transparency, tax benefits and premium payment flexibility etc. It is one of the best methods of investments if one is living in an economy that is booming and is on the path to growth. The units that are part of the share market are bought with money invested by the investor and as the equity market grows, the money invested by the investor also increases and gives a good return. The present paper focuses on the evaluation of the ULIPs of sampled life insurers operating in the state of Haryana and Punjab, on the basis of the main components of the plans highlighted by the insurers and opinions of the policyholders of sampled companies collected through a questionnaire. The sample has been selected on the basis of purposive-cum-quota based non-probability sampling techniques. To make the analysis meaningful, certain simple and advanced statistical tools like averages, weighted average, percentage, mean score and chi-square test etc., were applied for analyzing the collected data. The Chi-square test was conducted at 99 percent confidence level or 1 percent level of significance. A five points Likert scale was also used to measure the intensity of the responses of different respondents from various categories towards the selected attributes. The important facts and deficiencies were found out and some viable suggestions are made to make them effective from the view point of both insurers as well as the policyholders. Key Words: ULIPs, Mutual Funds, Types of funds and Premium Break up

INTRODUCTION ULIP came into play in the 1960s and is popular in many countries in the world. Unit Sri Krishna International Research & Educational Consortium http://www.skirec.com

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linked guidelines were notified by Insurance Regulatory Development Authority (IRDA) on 21st December 2005. The main intent of the guidelines was to ensure that they lead to greater transparency and understanding of these products among the insured, especially since the investment risk is borne by the policyholder. It is the endeavor of IRDA to enable the buyer to make the most informed decision possible when planning for financial security. The Indian insurance sector has gone through a sea change after the adoption of liberalization, privatization and globalization process by the government in the last decade of 20th century. Consequently, a lot of foreign players entered into the Indian market in collaboration with the Indian companies to break the monopoly of the state owned giant the LIC of India, in the field of life insurance with a capital ceiling of 26 percent. As a result, the LICs share in total premium, which was 99.46 percent in 2001-02 decreased to 70.92 percent in 2008-09; and at the same time, its share in new life policies issued also decreased to 70.52 percent during the same time period, which is an indicator of the strong building competition against corporation. At present, there are 24 life insurance companies in India with variety of innovative and customized products including ULIPs. ULIP is an abbreviation for Unit Linked Insurance Policy. A ULIP is a life insurance policy which provides a combination of risk cover and investment. The dynamics of the capital market have a direct bearing on the performance of the ULIPs. In a ULIP, the investment risk is generally borne by the investor. The three important things to remember about a ULIP is that entry costs are high and the brokerage, commission could be as high as 30 percent of the premium in the first year. The second thing to remember is that management fee is low in a ULIP at around. The price of an insurance cover is higher in a ULIP than in a plain vanilla insurance policy. To that extent if a person has the time and inclination to research he would be better off buying separate insurance and mutual funds. The third point that one must keep in mind is that in India one gets tax benefits on investing in ULIPs. As ULIPs are an efficient tax saving instrument too. The tax benefits that one can avail in case he invests in ULIPs are described below: 1 Life insurance plans are eligible for deduction under Sec. 80C. 2 Pension plans are eligible for a deduction under Sec. 80CCC. 3 Health insurance plans and critical illness riders are eligible for deduction under Sec. 80D. 4 The maturity proceeds or withdrawals of life insurance policies are exempt under Sec 10(10D), subject to norms prescribed in that section. Most insurers offer a wide range of funds to suit ones investment objectives, risk profile and time horizons. Different funds have different risk profiles. The potential for returns also varies from fund to fund. Investment returns from ULIP may not be guaranteed. Depending upon the performance of the unit linked fund(s) chosen; the policy holder may achieve gains or losses on his/her investments. It should also be noted that the past returns of a fund are not necessarily indicative of the future performance of the fund. The following are some of the common types of funds available along with an indication of their risk characteristics. Sri Krishna International Research & Educational Consortium http://www.skirec.com

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General Description 1. Equity Funds

Nature of Investments Primarily invested in company stocks With the general aim of capital appreciation. 2. Income, Fixed Interest Invested in corporate bonds, and Bond Funds government securities and other fixed income instruments. 3. Cash Funds Sometimes known as Money Market Funds- invested in cash, bank deposits and money market instruments. 4. Balanced Funds Combining equity investment with fixed interest instruments.

Risk Category Medium to High

Medium

Low

Medium

The study has been divided into five broad sections. The first section deals with introduction and in the second section working of ULIPs has been chalked out. The third section contains research methodology and objectives of the study. The analysis and interpretation is presented in section fourth and the last section by way of conclusion provides some suggestions. WORKING OF ULIPS It is critical for an investor to understand how his money gets invested once he purchases a ULIP. When he decides the amount of premium to be paid and the amount of life cover he wants 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 him. Mortality charges and ULIP administration charges are thereafter deducted on a periodic (mostly monthly) basis by cancellation of units, whereas the ULIPs fund management charges are adjusted from net asset value (NAV) on the daily basis. The pie-chart below illustrates the spilt of ulip premium:

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Volume 1, Issue 3 (June, 2011)

ISSN 2231-4288

ULIP V/S MUTUAL FUND Unit Linked Insurance Plans (ULIP) and Mutual Fund (MF) are the two most preferred options for a part time investor to invest into equity. Mutual Fund is pure investments. ULIPs are the combination of insurance and investment. This is the type of investment where the characteristics of insurance and mutual funds are combined. ULIPs V/S MUTUAL FUND ULIPs Mutual Funds Determined by the investor and Minimum investment can be modified as well amounts are determined by the fund house. Expenses No upper limits, expenses Upper limits for expenses determined by the insurance chargeable to investors have company been set by the regulators. Portfolio Disclosure Not mandatory Quarterly disclosures are mandatory. Modifying Asset Generally permitted for free or Entry/exit loads have to be Allocation at a nominal cost borne by the investor. Tax Benefits Section 80C benefits are Section 80C benefits are available on all ULIP available only on investments investment in tax-saving funds. Investment Amounts RESEARCH METHODOLOGY The present study has been conducted on the basis of primary data and is descriptive in its nature. The required primary data for the study was collected through common questionnaire for all categories of respondents. The researcher considered all 24 companies in its universe prevailing in India during 2010-11, when the sample was taken. Out of the above universe, only seven major companies- LIC of India, ICICI Prudential Life Limited, Birla Sun Life Insurance Limited, HDFC Standard Life Limited, Reliance Life Limited, SBI Life Limited and Bajaj Allianz Life Limited, which offered variety of products and created competitive market situation in the field, were identified as survey population for the purpose of research work. From the identified survey population, a sample of 450 respondents (150 executives and 300 policyholders) was selected from Haryana and Punjab which were related to the sampled companies. The sample has been selected on the basis of purposive-cum-quota based nonprobability sampling techniques. To make the analysis meaningful, certain simple and advanced statistical tools like averages, weighted average, percentage, mean score and chi-square test etc., were applied for analyzing the collected data. The Chi-square test was conducted at 99 percent confidence level or 1 percent level of significance. A five points Likert scale was also Sri Krishna International Research & Educational Consortium http://www.skirec.com

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used to measure the intensity of the responses of different respondents from various categories towards the selected attributes. OBJECTIVES OF THE STUDY The present paper carries out a comparative study of the ULIPs of different life insurers in terms of their focus, different types of charges charged by them from the insured, fund options available, and other important aspects affecting the interest of the policyholders. 1. To compare the ULIPs of different life insurers in terms of their focus. Ho: There is no significant difference in ULIPs of different life insurers in terms of their focus. 2. To compare the different types of charges charged by insurers from the insured. Ho: There is no significant difference in different types of charges charged by insurers from the insured. 3. To know the fund options available to the insured. Ho: There is no significant difference in different fund options available to the insured. 4. To know other important aspects affecting the interest of the policy holders. Ho: There is no significant difference in different aspects affecting the interest of the policy holders. ANALYSIS AND INTERPRETATION On the basis of the information collected and analysis made thereof with the help of the statistical tools, the following results were noticed as main findings. TABLE 1: AREAWISE FOCUS OF PLANS OF THE SAMPLED COMPANIES Focus/Respondents LIC of India 12(40) 18(60) 30(100) Private Players 83(69.16) 37(30.84) 120(100) Total Chi-square Value 9.32 Table Value 6.635

Urban Customers 95(63.33) Rural Customers 55 (36.67) Total 150(100) Source: Questionnaire Note: The figures in brackets show the percentage.

Though, all the life insurers are bound to achieve the prescribed minimum number of policies to be sold in rural areas of the country, but yet their focus is on the urban areas except LIC of India, as has been shown by table 1. The majority (60%) of the executives of LIC of India were of the opinion that their focus was on rural area customers with only 30.84% executives of the private life insurers. The respondents of private players were of the reverse opinion. The test of significance also signifies the difference in approach of public and private players as the table value at 1% level of significance for (degree of freedom 2) is 6.635 and Chi-square value is 9.32.

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TABLE 2: CUSTOMERWISE FOCUS OF PLANS OF THE SAMPLED COMPANIES Focus/Respondents LIC of India 24(80) 6(20) 30(100) Private Players 100(83.5) 20(16.5) 120(100) Total Chi-square Value 0.317 Table Value 6.635

Rich Customers 124(82.67) Poor Customers 26(17.33) Total 150(100) Source: Questionnaire Note: The figures in brackets show the percentage.

All life insurers plans were found to be focused on rich customers (80% for LIC of India and 82.67% for private players) as against the poor customers (20% for LIC of India and 16.5% for private players). The table value at 1% level of significance for (degree of freedom 2) is 6.635 and Chi-square value is 0.317 which indicates no significant difference between the approaches of the two types of insures. TABLE 3: MAXIMUM FUND OPTIONS IN ULIP Respondents/Score Number of Respondents 30 120 150 300 450 Total Score 114 464 578 1120 1698 Mean Score 3.80 3.87 3.85 3.73 3.77 8.820 11.345 Chi-square Value 0.932 Table Value 9.210

LIC of India Private Insurers Total Insurers Policy holders Total Source: Questionnaire

There are different fund options for the policyholders to be chosen among by them, having risk from very high to low. The minimum 3 fund options were offered by SBI Life Limited, while the 7 fund options were give by HDFC Life Insurance Company Limited out of sampled companies, ranging a very low to very high risk profile. The response on the factor shows that all respondents including the insurers are of the opinion that there should be maximum number of fund options for the policyholders to choose among them according to their choices. The analytical table 3 shows that the mean score for aggregate respondents was 3.77 followed by 3.87 for private insurers, 3.80 for LIC of India and 3.73 for policyholders. No significant difference was found among different types of respondents. Sri Krishna International Research & Educational Consortium http://www.skirec.com

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TABLE 4: CLEAR EXPOSURE OF VARIOUS CHARGES IN A ULIP Respondents/Score LIC of India Private Insurers Total Insurers Policy holders Total Source: Questionnaire Number of Respondents 30 120 150 300 450 Total Score 114 356 470 1228 1698 Mean Score 3.80 2.97 3.13 4.09 3.77 Chi-square Value 9.866 97.024 Table Value 9.210 11.345

It was observed that the different charges charged by the insurers are not shown in full in a broacher displayed by the company. The analytical table 4 points out that the policyholders favored the statement with an impressive mean score of 4.09. The mean score of private insurers was just 2.97 as against the LIC of Indias 3.80. It showed that the private insurers were not interested in highlighting different expenses and they believe in secrecy, which may harm customers, who on the other hand want that the expenses must be disclosed explicitly so that a comparison can be made between different companies to take a final decision on buying a policy. The test of significance confirms the gap in opinion between insurers and policyholders but, no significant difference was found between the insurers.
TABLE 5: THE EXISTENCE OF HIGH ALLOCATION/ FUND MANAGEMENT/MORTALITY CHARGES IN A ULIP

Respondents/Score LIC of India Private Insurers Total Insurers Policy holders Total Source: Questionnaire

Number of Respondents 30 120 150 300 450

Total Score 76 336 412 1260 1672

Mean Score 2.53 2.80 2.75 4.20 3.72

Chi-square Value 2.578 163.804

Table Value 9.210 11.345

Table 5 expresses the responses on premium allocation charges, fund management charges and mortality charges. The mean score of the aggregate respondents was 3.72 which favored the statement, the policyholders affirmed that the expenses charged by the insurers are very high (mean score 4.20), contrary to it, the response of the insurers was against the statement (mean score 2.75). The corporate respondents including the LIC of India denied the statement collectively and, the test of significance expressed the difference of opinion between the insurers Sri Krishna International Research & Educational Consortium http://www.skirec.com

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and the policyholders. It is one of the problems due to which the ULIPs were objected by SEBI to be issued without its permission. The LIC of India charges 3.3 to 5 percent as Premium allocation charges on single premium plan which is higher than its competitors who charge 2 to 2.5 percent generally, excepting the ICICI Prudential whose charges are 0 to 6 percent. The products of LIC of India are much economical as compared to private players for policy administration charges as it charges Rs. 60 in the first year of the policy and then Rs.20 per year only in the later years, whereas the private players charge Rs.40-50 per year as fixed charges. The study reveals that mortality charges are charged by all the insurers at monthly basis, but are calculated at fixed percentage of per thousand premiums per annum. These charges are very low 1.42 percent at the age of 25 years and 10.76 percent at the age of 55 years, in case of LIC of India while they are up to 15.56 percent in case of private life insurers. The LIC of India is very cost effective as against its competitors as far as the above said two expenses are concerned. The fund Management charges are charged at fixed rate by the insurers on per annum basis. The rates are different on different types of funds selected by the insured and are charged on daily basis by all insurers. The lowest rate of charges is being charged by the SBI Life (0.25 percent), while the maximum rate is charged by the ICICI Prudential (2.25 percent). The LIC of Indias charges are moderate. The study also reveals that the commission to be paid to the agents is never visible to a customer and, the agent may sell a product to get the maximum return out of that and the product may unsuitable to the customer, hence the commission should be disclosed. If the commission paid is apparent, then a customer can be saved from possible inconvenience and financial loss. In this way, the possibilities of mis-selling of products by the agents are always there. The major problem identified was that the plans of different insurers are not even comparable up to a great extent due to different formats of brochures and material therein. The policyholders found that the plan documents to be difficult, besides the fact that the plans of different companies were not even comparable. A very large number of policyholders (Appox-78 percent) agreed with the statement that there should be a uniform formats for all insurers to express their plans to the consumers to bring a high degree of comparison. CONCLUSION Unit Linked Insurance Plans (ULIPs) are the creation of the innovative minds of the insurers in the post reform period. The plan renders two benefits at the same time investment and safety cover to the insured. The maximum business of all the life insurers is coming out of the sales of these products now days. The responsibility of the insurer is very limited in this type of insurance agreement, but lured by high growth opportunities in the investment, the customers go for them. But there must be transparency in functioning of the life insurers and product must be economical for the customers. The plan should not be focused on urban areas and rich customers Sri Krishna International Research & Educational Consortium http://www.skirec.com

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only, rather they should also take care the rural folks who are poor, as India is a rural country whose approximately two third population lives in villages. If the shortcoming shown by the study are removed from the products by the insurers, they van become more effective and will be benefited by them. The regulators should see to it that more transparency should be brought out as far as the different types of expenses relating to the plans are concerned in the interest of the policyholders. REFERENCES
Bharathi, Y. B (2008), Mis-selling of ULIPS: Time to Clamp Down: Insurance Chronicle, ICFAI University Press Hyderabad, January, p.63. Boora, S.S (2001), Insurance Sector: Plunging into Uncertainty, National Conference Paper, IMSAR Maharishi Dayanand University, Rohtak, November 5, p.183. Chuganee, B.B (2001), New Routes, Business India, August 20, September, pp.15-19. Gupta, L.P (2007), Special Discount on Insurance Premium in Lieu of Agency Commission: Consumer View, Insurance Chronicle, ICFAI University Press, Hyderabad, July,p.53 Insurance Companies Rebalance Portfolios (2008), The Economic Times, New Delhi, October, p.7. IRDA, Annual Report, 2007-08 and 2008-09. http://www.rimborsolicenza.org/ulips-optimal-to-slice-insurnce-investmnet-decisopn/ www.icicicprulife.com. http://nseguide.com/market-news/ulips-vs-mutual-funds-whos-better/ http://www.rediff.com/getahead/2007/mar/23ulip.htm File://c:/documents and settings/adninstrator.desktop.ulipvsmutualfund.htm http://www.reddif.com/money/2007/apr/19perfin.htm

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