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Chapter 2

Literature Review

Life insurance sector is highly regulated, governed by The Insurance Act, 1938 and IRDA
Regulations & Guidelines. IRDA formed under IRDA Act, 1999 is the sole authority responsible
for proper regulation, governance and functioning of the sector. It is imperative for IRDA to make
regulatory changes from time to time that it may deem necessary for protecting & promoting the
interests of the policyholders.

In this light, it is very important to first review in detail the new guidelines issued by IRDA on
ULIPs that became effective from October 2010, changing the entire regulatory landscape of the
life insurance sector and providing a detailed scope for conducting this study on ‘Structure,
Regulations & Sustainability of ULIPs in India’. These ULIP regulations form the most important
part of the literature review required for this study. They have been detailed in Section 1 below.

Section 1- New ULIP Guidelines & Regulations by IRDA

The new guidelines on ULIP structure-related changes were promulgated by IRDA after directions
from Ministry of Finance, becoming effective from October 2010. The IRDA took a holistic view
of the features and design of ULIPs and tried to address issues impacting the policyholders
including the way such products were sold/bought; how ULIPs could be better financial
instruments for providing risk coverage; how sales by unlicensed personnel and several other
malpractices existing in this market might be curbed by plugging legal loopholes and tightening
of the regulatory ambit etc. Finally, it came up with the revised changes as listed below:

(1) Lock in period increased to five years

IRDA increased the lock-in period for ULIPs from three years to five years, including top-up
premiums, thereby making them relatively long term financial instruments which basically provide
risk protection.

(2) Level Paying Premiums

All regular premium /limited premium ULIPs to have uniform/level paying premiums which was
not the case before. Any additional payments to be treated as single premium for the purpose of
insurance cover.

(3) Even Distribution of Charges

IRDA made changes in charges on ULIPs, mandated to be evenly distributed during the lock-in
period in order to ensure that high front-end loading of expenses was eliminated unlike previous

(4) Minimum Premium Paying Term of Five Years

All limited premium unit linked insurance products, other than single premium products to have
premium paying term of at least five years.

(5) Increase in Minimum Sum Assured/Risk Component

Further, all unit linked products, other than pension and annuity products, to provide an increased
mortality cover, thereby increasing the risk cover component in such products. The earlier
minimum multiplier to determine the Sum Assured was only ‘5’. In the new guidelines, it was
increased to ‘10’ for a policy term of 20 years and to ‘15’ for a policy term of 30 years as below:

The revised minimum mortality cover to be as follows:

Minimum Sum assured for age at Minimum Sum assured for age at entry of
entry of below 45 years 45 years and above

Single Premium (SP) contracts: 125 Single Premium (SP) contracts: 110 percent
percent of single premium. of single premium

Regular Premium (RP) including Regular Premium (RP) including limited

limited premium paying (LPP) premium paying (LPP) contracts: 7 times the
contracts: 10 times the annualized annualized premium or (0.25 X T X
premium or (0.5 X T X annualized annualized premium) whichever is higher. At
premium) whichever is higher. At no no time the death benefit shall be less than
time the death benefit shall be less 105 percent of the total premiums (including
than 105 percent of the total premiums top-ups) paid.
(including top-ups) paid.

(6) Minimum Guaranteed Return for ULIP Pension

As regards pension products, all ULIP pension/annuity products would offer a minimum
guaranteed return of 4.5% per annum or as specified by IRDA from time to time which was not at
all the part of specifications earlier. This would protect the life time savings for the pensioners
from any adverse fluctuations in the capital markets at the time of vesting.

(7) Rationalization of Cap on Charges

The cap on ULIP charges was rationalized to ensure that the net reduction in yield at maturity
(Gross Yield – Net Yield in %) due to premium allocation charge, policy administration charge
and fund management charge could only be a maximum of 3% for policy term up to 10 years and
2.25% for policy term above 10 years. This effectively resulted in significantly reducing the
premium allocation charge in the first year from earlier as high as 30% (Old ULIPs) to as low as

5%, which meant that the first year commission under the new ULIP regime became as low as
5%. The fund management charges were also capped at a maximum of 1.35% p.a. Maximum
capping on the difference in yield would not only detrimentally reduce the overall charges on
ULIPs for companies but it would also smoothen the charge structure for the policyholder.

(8) Minimizing Policy Discontinuance Charges

IRDA also addressed the issue of policy discontinuance charges for surrender of ULIPs. The IRDA
(Treatment of Discontinued Linked Insurance Policies) Regulations in this regard ensured that
policyholders do not get overcharged when they wish to discontinue their policies for any
emergency cash requirement. The Regulations stipulated that an insurer shall recover only the
incurred acquisition costs in the event of discontinuance of policy and that these charges were not
excessive. The discontinuance charges were capped both as a percentage of fund value and
premium and also in absolute value terms. The Regulations also clearly defined the Grace Period
for different modes of premium payment. Upon discontinuance of a policy, the policyholder shall
be entitled to exercise an option of either reviving the policy or completely withdrawing from the
policy without any risk cover. Moreover, there was no surrender or discontinuance penalty if the
ULIP was surrendered after the expiry of the lock-in period of 5 years. Further, the regulations
also enabled IRDA to order refund of discontinuance charges in case they were found excessive
on enquiry. The discontinuance charges are as below:

Whether the Maximum discontinuance Maximum discontinuance
policy is charges for the policies having charges for the policies having
discontinued annualized premium up to annualized premium above
during the Rs.25,000/- Rs.25,000/-
policy year

1 Lower of 20% * (AP or FV) Lower of 6% * (AP or FV)

subject to a maximum of subject to a maximum of
Rs.3,000/- Rs.6,000/-

2 Lower of 15% * (AP or FV) Lower of 5% * (AP or FV)

subject to a maximum of subject to a maximum of
Rs.2,000/- Rs.5,000/-

3 Lower of 10% * (AP or FV) Lower of 3% * (AP or FV)

subject to a maximum of subject to a maximum of
Rs.1,500/- Rs.4,000/-

4 Lower of 5% * (AP or FV) subject Lower of 2% * (AP or FV)

to a maximum of Rs.1,000/- subject to a maximum of

5th and Nil Nil


* Provided that where a policy is discontinued, only discontinuance charge may be levied by the
insurer, and no other charges by whatsoever name called shall be levied.
* Provided that no discontinuance charges shall be imposed on single premium policies and on top
ups. (Guidance Notes on recent regulatory changes related to ULIPs, July 2010, IRDA Journal).
These regulations applied only to new ULIPs under the new regime, without affecting the old
ULIPs sold earlier. These new guidelines as above were applicable to all new ULIPs filed &
approved by IRDA after these regulations were notified in Official Gazette and came into effect
from October 01 2010.

After review of IRDA ULIP regulations as above, based on the research problem specified in
Chapter 1, the relevant papers on Indian ULIPs mainly focusing on Risk & Returns, Structure,
Insurance and Investment content have been reviewed and analyzed. These have been detailed in
Section 2.

Section 2 - ULIP Papers and Articles

The debate between SEBI and IRDA was first studied in detail by Varghese, J. (2010) in his paper
‘Unit Linked Insurance Products (ULIPs) and Regulatory Tangle’. He argued that the main point
of dispute was whether the ULIPs are insurance products or “collective investment scheme” as
defined in Section 2(ba)1 read with Section 11 AA2 of Securities and Exchange Board of India
Act, 1992 (SEBI Act). Even in the traditional life insurance products, the investment aspect and
the payout on maturity happens by liquidating the value of the collective investment, through a
complex actuarial calculation, and if the logic adopted by SEBI in its order dated April 9, 2010 is
applied, all life insurance products would come within the purview of SEBI.

In this paper, the author states that regulatory competition at least in the case of ULIPs was
perfectly unavoidable had SEBI took into account all aspects of law and regulation. However, it
should not go unseen that existence of multiple regulatory bodies will create such scenes in future,
since regulation means control and control means power. Hence it is important to create an
appropriate dispute resolution mechanism, which would preempt regulatory issues and resolve
them before those issues go ugly. The most appropriate mechanism should be a higher body, with
legal experts in board, which would judiciously decide on issues of regulatory competition taking
all the parties into confidence and which has powers to withhold the orders before they are issued.
It would be only appropriate that such issues are resolved before it goes public since the impact of
such regulatory issues would be much higher on individual investor than any of the regulators can
imagine. (Varghese, J., 2010).

Dash, Lalremthuangi, Atwal and Thapar (2009) in their paper on ‘Study of Risk-Return
Characteristics of Life insurance policies’ propose a methodology to measure the risk-adjusted rate

of return. They measure the unadjusted and risk-adjusted rate of return for mostly traditional
products. They use the discounted cash flow model to calculate their returns. Their study reveals
that unadjusted and risk-adjusted rates of return follow a linear relationship. Mortality is one of
biggest risk in a life insurance contract. The major factor that affects the overall return in any life
insurance contract is the probability of death and survival.

Parchure R., Joshi, M. (2001) in their paper ‘Life & Death in Portfolio Theory’ state that the
purpose is to augment the universe of securities and include life and death contingencies into the
framework of portfolio theoretic choice. The idea clearly is to investigate the place that life
products occupy in the optimum portfolios of customers and to identify factors that influence the
demand for them. The major objective therefore is to estimate the expected returns and risks of
life insurance products by incorporating the probabilities of death and survival in each policy year.
Based on their analysis, for a typical LIC traditional participating endowment plan, the difference
between the mortality-based IRR and survival IRR comes to approximately 1.5% p.a.

Hunt, J. (2007) in his paper ‘Variable Universal Life Insurance: Is it Worth it?’ talks about how
VULs are sold. They are projected as tax saving devices with added advantage of investments and
insurance. The tax advantage of cash value life insurance is that investment earnings credited to
the policy each year produce no taxable income to the policy owner. If the policy is later
surrendered with a taxable gain, the gain is lowered by the value of the insurance protection
received. He also talks about how a VUL works, describing it as a typical Mutual Fund.
Highlighting the only difference that deductions for charges are made on a monthly basis. The
paper focuses on hidden charges which people buying insurance fail to see. The author gives
example about a typical VUL and monthly COI.

Sunder and Venkatesh (2007) in their paper ‘Life-style Wraps: Cost-efficient Alternative to
ULIPs’ argue that ULIPs in India have higher deductions for insurance & mortality charges and
have higher investment content, when compared to traditional term insurance. The paper tries to
convey the idea that ULIPs are viewed as an investment vehicle with a small element of insurance
content. The idea discussed in the paper is that ULIPs in India are more investment product with
a supplemental insurance content. The ULIPs have lower insurance content than traditional term
insurance plans, and that former have more investment content.

Chakrabarti, R. (2009) in his paper ‘The Asset Management Industry in India’ talks about asset
management industry in India as a whole. Insurance companies and ULIPs form part of this
industry and hence they have been briefly covered.

While insurance is typically viewed as serving the need for protection, the investment motive
appears to have been dominating. Consequently Unit Linked Insurance Products (ULIPs) that are,
from an investor’s point of view, very similar to Mutual Fund offerings, with added tax protection
have been extremely popular in India. ULIPs essentially combine mutual funds with insurance and
various insurance companies have been offering several ULIP plans to suit different appetites for
risk. Broadly, ULIPs are classified into four types – equity funds; income, fixed interest and bond
funds; cash funds and balanced funds – based on the asset classes they invest in and the extent of
risk they entail for the retail investor.

The private insurance players have concentrated on selling ULIPs that have accounted for 80-90%
of their business in recent years. LIC has been somewhat slow to respond to this shift, but over
time it too went the ULIP route in a major way pushing the industry weight of ULIPs to over 70%.
The proportion declined a bit in financial year 2008-09 because of the slump in equity markets.

Sadri, S. (2009) paper on ‘Insurance Marketing Waxing and Waning of Values’ is based on the
empirical investigation conducted in Western India at a time when the Indian economy was in a
stage of transition from state capitalism to free market capitalism during the period 2004-2007.
That was the time when commission was more important than telling the truth, while selling the
products and ethical considerations were simply lost. In this paper, the author has concentrated
only on Banc assurance channels for life insurance since the executives in this channel are paid
staff and not commission-based operatives. So the need for them to be at least more ethical than
the commission based part time agents is accentuated. In particular, it has been argued that the
combination of certain structural features in the market for savings and investments products and
gaps in the regulatory regime suggest that there is potential for ethical abuses in the marketing of
savings and investment products. Public interest is sacrificed at the altar of personal gain. While
there is a considerable amount of anecdotal evidence on the nature of this problem from a consumer
perspective, little is known about industry views on the extent to which ethical problems arise in
marketing of life insurance policies. The life insurance industry, which constitutes one of the major
suppliers of savings and investments products, was selected as an appropriate environment for an

examination of managerial perceptions of the extent to which ethically questionable practices are
employed in marketing. They found that correct combination of fund allocation with respect to
investor’s age is not discussed in order to lure customers much the same way in which as ULIP
regular premium plans are sold as savings account, home loans, single premium plans and mutual
funds, simply to fulfill the targets of the company. It has been proved that at the point of sale, in
the life insurance industry, ethics does not feature high in the individual’s preferential calculus.
Based on this investigative study it was found that the Indian customer is being short changed by
the life insurance executives (paid employees). This is because for them incentives and bonuses
have a higher value premium than ethical conduct of business. What is worse is that senior
management in the industry seems oblivious of this fact. (Sadri, 2009).

Khurana, A., Goyal, K. (2010) in their study ‘Exploration & Analysis of Structure and Growth
Performance of Selected ULIPs’ have examined and analyzed the Unit Linked Insurance Plans of
selected private life insurers on the basis of policy features, diverse charges and the performance
registered by each ULIP investment scheme. They mention that every life insurer wants to capture
the maximum share in the market and is offering both Unit Linked Insurance Plans (ULIPs) and
traditional plans. ULIPs provide the customer a life cover as well as investment avenue. Today in
2010, ULIPs are the stars, accounting for 80 percent of polices sold by life insurers and their rapid
rise has been fuelled to a large extent by the last bull runs in the stock market. There is an enormous
choice of ULIPs available in the insurance market. But such a wide range of plans puzzle and
confuse the buyer.

Barbole, A.N., Niranjan, B.N. (2011) in their paper ‘Retirement Plans: Ways and Means’ state that
once the Direct Tax Code (DTC) is implemented, then the tax benefit shall be available only to
pure term insurance. Tax benefit available to ULIPs, Pension Plans will no longer be available
after implementation of DTC. They have dealt with finding alternatives for benefits like protection,
aids to savings and tax benefits as insurance, along with accumulating more and more wealth over
the period of life insured. The research is done basically to find the suitable retirement plan, for a
30 year old person, capable of investing Rs.30000 per annum for this purpose. For this they have
analyzed the ULIPs and pension plans, Term insurance with the SIP in Mutual funds, and
compared these instruments to find the best one. The study is based on secondary data, and to

avoid controversies, HDFC bank retirement plans are taken into consideration. HDFC offers the
following policies: HDFC Standard Life, Endowment Plus (ULIP), HDFC Mutual Fund (ELSS) –
SIP, HDFC Pension Plus (ULIP); and HDFC Term Plan. Returns on retirement plan are calculated
for three financial years for chosen retirement plan based on respective NAVs for ULIP, pension
plan and SIP. The returns, maturity benefit, death benefit, accumulation of wealth after a specified
time of every five years considering a term of 25 years is done. Based on all these calculations and
findings for all plans, the results are drawn. Calculation of returns based on historical data, future
value of money using time value concept and effective rate of interest are used as tools. The
analysis of the study shows the returns for the retirement plan of the same amount for the same
policy term.

The maturity benefit is higher in the case of Pension plan as compared to ULIPs and Mutual fund.
The death benefit in case of term insurance and a Mutual fund Systematic investment plan fetches
more than the retirement plan in ULIP or a pension plan for the same premium paying term. Here
the analysis also highlights the benefit in terms of sum assured or fund value. If the death of assured
takes place he will get Sum Assured or Fund value whichever is higher. If death of person occurs
during premium paying term then the nominee will get more benefit through a retirement plan
option of Term Insurance plus a SIP in mutual fund but maturity benefits are more in ULIP and
Pension Plan. A pure term plan will not give any maturity benefit, but the amount invested along
with the term insurance in SIP will fetch more or less equal benefits to common man. The study
suggests that Common man can opt for the option of term Plan along with a monthly SIP if he/she
is interested in long term retirement plan and ample returns. After maturity period one can
withdraw amount by availing option of SWP (Systematic Withdrawal Plan) which will enable the
beneficiary to earn a regular income from his retirement plan. Insurance companies can think of
designing the product which can insure the benefits combining the features of term plan and a
Monthly SIP. (Barbole, A.N., Niranjan, B.N., 2011).

Siddiqui (2008) in his paper ‘Indian Life Insurance Sector: An Overview’ has observed the status
of Indian life insurance sector and also studied various economic indicators related to life insurance
companies. This report has been based on the secondary data available. From the research report,
the author says that life insurance sector in India has enlarged by more than twice after the
formation of IRDA. It is also observed that LIC is losing its market share in favors of new entrants

or private companies. While analyzing the data of various countries, a clear picture has emerged
that developed countries have higher rate of insurance penetration whereas developing and under
developed nations have relatively lesser rate of it. Being the largest insurance company in India, It
is obvious that LIC has the largest strength of insurance agents. It is further seen that LIC is well
ahead of private insurers in terms of premium collected. It is worth noticing that all private
companies suffered huge losses, but again, only LIC earned profits.

Siddiqui also gives few suggestions to improve the life insurance sector in India. These include
improvement of insurance density and penetration in India, consumer awareness campaigns,
requirement of more extensive market research, awareness amongst policy holders regarding their
rights and obligations, grievance redressal etc. duly supported by statistics and data in his report.
(Siddiqui, 2008).

Baldwin (2008) challenges the conventional thinking about life insurance. He advocates that the
change is beneficial for today’s consumer, who are more sophisticated and longer-living. He
addresses eight issues, which the life insurance company is confronting in 21st century. In first
issue he talks about life insurance semantics, which refer to the categories “term” and “permanent”,
and holds that these terminologies mostly used in USA are no longer accurate. Secondly, the
general account of insurance companies, being the reserve account with its various important
functions, requires strict rules and regulations from authorities for their proper control and
management. Thus the author says that companies can fail, and for an advisor to believe that the
general account-only life insurance policies of the well-rated company hey are dealing with today
will remain aloof from headline risk for the rest of the insured s potentially very long lifetime is
an unnecessary risk to take. Thirdly, he advocated for a separate account for the insurance
companies issuing variable life contracts to hold the policy owner-directed variable investment
options. The separate account is not subject to the risks in the general account of exposure to the
insurance company's general creditors. Then in fourth issue, he explains certain rights that the
policyholder holds for various insurance contracts but only three rights in case of VULs. Also
these three rights are synthetically created, if desired by the policyholder as a result of the
flexibility of the contract. In the fifth issue, he has talked about various life insurance guarantees’
advantages and disadvantages, like guaranteed premiums, guaranteed death benefit and guaranteed
cash value. In sixth issue, he says that pages long life insurance illustrations which give projections

about the policy regarding charges and credits are subject to change and cannot be used for
comparison purposes. Once a policy is issued, tracking actual insurance company and policy
results and expenses is far more effective for policy management than studying multiple
hypothetical and error-prone insurance company illustrations. In the seventh issue, he has talked
about the various charges and expenses like surrender charges, M&E charges, and tax deductions.
He has also talked about managing the flexibility of advisor-friendly VUL Insurance, managing
the death benefit by addressing the mortality risk management and the life insurance advisor’s role
in its management, managing general account, VIOs, Capital investments in VULs. In eighth issue,
Baldwin has said that forces of change in VUL in future are Regulators, Compliance, media,
clients, information and misinformation, availability of acceptable products, ability of advisors and
consumers and disclosure for product transparency. In the end the article says that for the trustee
who has the agreement and concurrence of all beneficiaries, the life insurance strategy may well
increase the size of the grantor's legacy, reduce risk, and increase the likelihood that a trust can
accomplish its objectives, because it provides a completely transparent and an easily monitored
and managed trust investment. (Baldwin, 2008).

Kapoor, P. (2009) in her article ‘Time to take on responsibility’ talks about the investor-friendly
measures which have been introduced in insurance sector. This refers to the overall charges of unit
linked insurance plans and also the fund management charges. It also talks about the Swaroop
Committee’s suggestion to phase out insurance agents’ commission by April 2011, which will
reduce costs but at the cost of convenience. She says that the recent changes make it necessary for
the investor to have complete knowledge about the policy and investment. She says that the draft
of the Direct Taxes Code released in August 2009, has immense implications for policyholders.
Insurance is a product for protection, but unfortunately, it is also popular because the income is
tax-free. The bill proposes to remove this benefit on the income from all insurance plans, except
those that have a premium lower than 5% of the sum assured and a tenure of more than 20 years.
If this bill is accepted in its current form, most insurance policies will lose lustre in favour of other
debt products that enjoy tax exemptions. The extension of the minimum premium-payment term
of ULIPs from three to five years is a good move as ULIPs give best returns in the long run. Thus
the author suggests the customers/insurers to play a more responsible part in this respect. (Kapoor,
P., 2009).

Varma, T. (2010) in her article ‘A ULIP with 100 per cent allocation is a myth’ presents an excerpt
from interview of Andrew Cartwright, Chief Actuary of Kotak Life Insurance, in which he tells
why unit-linked insurance plans are a hit among policyholders in India. According to him,
insurance has various advantages over other products, including the flexibility to switch
investments and realise gains without tax implications. Unit-linked insurance policies offer a
transparent approach along with several investment choices. Unlike traditional endowment plans,
most ULIPs do not offer guaranteed returns, but they score in terms of tax advantages and net
yield. All insurance companies have adequate disclosures in place, but a 100 per cent allocation
plan claimed by ULIP is a myth. Although all costs are stated upfront, it is not easy to compare
policies based on cost as it can be expressed in many ways. The code will reduce the advantages
of investments in general, but there is no indication that it will happen retrospectively. In India,
investment in insurance is mainly driven by tax savings. Earlier, investments were predominantly
in endowment plans, but with the introduction of ULIPs and the interest in equities, many people
are investing in this category too. Unlike the international trend, where much of the investment is
in pension products, in India it is limited as the taxation of these products is not so conducive.
Two-thirds of the maturity proceeds are taxed irrespective of how they are withdrawn, and
contributions are exempt from tax only up to Rs 1 lakh. Talking about the factors that the investor
should consider before investing in ULIPs, The most important factor is the reduction in yield,
which has been regulated after the new cap on charges. Secondly, investors must buy the ULIP
that is most suitable for their objective. Finally, they must consider the level of cover that they

She says that if the tenure is over 15 years and the investor is proactive in switching between debt
and equity, ULIPs can be a rewarding option. It states a rule that funds give better returns because
they don't have high charges like ULIPs. Then it gives the exceptions to this rule as, if the tenure
is over 15 years and the investor is proactive in switching between debt and equity, ULIPs can be
a rewarding option. They offer insurance, investment and tax-free returns. ULIP income is tax-
free while there is tax on capital gains from stocks. ULIP investors are free to switch their corpus
from one option to another. ULIPs also provide minimal life insurance cover to investors. (Varma,
T., 2010).

Krishnamurthy (2008) in his article ‘The ULIP Puzzle’ talks about a common debate if it is better
to have one product that does many things or have many products that do one thing each. For long,
people considered life insurance a multi-function product: it covered your life, it worked as a tax-
saving scheme, and it was a savings instrument, but it isn’t. There is a debate if ULIPs are mutual
funds or insurance products. Because ULIPs are offered by life insurance companies, they are
treated largely as insurance plans. However, there are calls for ULIPs to be treated at par with
mutual funds, and regulatory changes seem to be levelling the playing field. For instance, after a
recent move by the Insurance Regulatory and Development Authority (IRDA), the premium on
pure risk term plans has come down by 40%. Lower insurance premiums mean more money for
investment. That's definitely good news for investors, because an insurance agent gets a higher
commission than a fund distributor, his commission will reduce due to this. Lack of knowledge
among investors is a big problem in case of ULIPs. To check mis-selling, IRDA has insisted upon
15 days free look up period and also providing the investors a policy illustration with a 6% and
10% return, standardising all charges across insurers, and a sales guideline that every agent had to
follow. One of the great advantages ULIPs have over traditional insurance is the flexibility of
switching within plans. The author tells about four common mistakes by ULIP investors: they treat
it as investment, not insurance, for short term planning, by ignoring charges and partial withdrawal.

ULIPs are different from traditional insurance policies in terms of risk cover, costs and returns.
Insurance is not about tax breaks or returns; it's about protecting your financial dependants. ULIPs
offer you the best of both worlds - insurance cover as well as investment returns and tax savings.
Since these products are market-linked, it's essential that investors keep tabs on the bourses even
if they don't understand completely what's going on. Traditional plans have never offered
policyholders the kind of choice and flexibility of investments that ULIPs give and go for low risk
investments. Whereas, apart from providing adequate and appropriate life insurance, ULIPs allow
you to modify your cover with changing circumstances and external factors. ULIPs differ from
traditional insurance structurally also. Instead of fixing the extent of cover, it looks at the annual
premium that one can pay and works on the minimum sum assured based on this value. There are
three important features that set apart ULIPs from traditional insurance products. Life cover:
ULIPs offer a choice between basic death benefit, death benefit plus fund value, or the higher of
the death benefit and fund value, various riders and an option to increase the sum assured.
Investment: ULIPs are powerful, long-term wealth creation tools since they invest a specified

amount in market-linked instruments. Premium: Even though you commit an annual premium for
the tenure of the policy, you can make additional premiums during the years that you have surplus
money (subject to limits) while retaining the same cover, or by proportionately increasing the
cover. (Krishnamurthy, 2008).

Suyash (2008) in his article ‘Wrappers: Better than ULIPs?’ says that currently regulation in India
does not allow for a wrapper structure, but once in place, insurance firms and fund providers can
jointly offer as near a customised product as possible by allowing clients to choose the right mix
of risk cover wrapped around funds. ULIPs are good combination of insurance and investment but
there is a drawback in the way they are structured the customer has effectively no choice in the
investment that comes bundled with insurance, except to define the proportion in which it is
invested in debt and equity. This is where wrappers come in. Wrappers are extremely popular in
more mature markets like the US and the UK because of the twin benefits they offer. The wrapper
structure provides ample choice of mutual funds for the underlying investment, and places, or
wraps, these investments around a life insurance policy. Issued by insurance companies, these
contracts allow investors to accumulate assets on a tax deferred basis for retirement or other long-
term goals. While the ULIP structures in India appear similar, the big difference is that the investor
has no say in choosing the funds or fund providers. Moreover, such products score low on cost

Sheth (2008) in his article ‘The Dark Side of ULIPs’ expresses his frank opinions about ULIP as
an insurance product, mostly in a critical way. He says that ULIPs force you to buy investment
along with the life insurance.

The article ‘Unravelling the ULIP’ (Money Today, 2008) suggests that comparing two different
plans for costs and benefits to choose that one that suits your needs is important. Look at the types
of covers on offer, compare the policies that provide only death benefits (higher of the sum assured
and unit values) or only net asset value, or both. The costs and premium allocation varies for
products that offer both the sum assured and unit values, those that guarantee capital and those that
offer higher of the sum assured and unit value. Once you have the insurance angle covered, move
to investment. The choice of fund type helps one select a fund closest to one's risk profile. The
choice to shift funds is an important feature when comparing funds. Insurers have their own
versions of why they charge different amounts for premium allocation, fund management, policy
administration and the like. Some levy charges annually, others monthly and several are fixed
charges that vary from year to year. This is why the Insurance Regulatory and Development
Authority (IRDA) has standardised the policy illustration across all insurers. This helps in
calculating and comparing policies more objectively. For more evolved investors, a fund's
benchmark is a better measure of its performance. Active fund management is a tool that is in the
hands of the investor in ULIPs and you can exploit the free fund-switching option. Finally, the
yield or internal rate of return (IRR) that the policy earns is a consolidated figure that takes into
account the charge structure of the product, bringing every product benefit to the same base.
Whenever you have inflows and outflows in a product (like ULIPs), the correct way to compute
returns involves using the IRR or one of its variants. The article gives the buyer’s checklist as,
Check the charges, illustration matters, death claim, exit charges, continuing cover, partial
withdrawals and taxation. (Money Today, 2008).

The industry and potential purchasers love ULIPs, and most of the people who have them tend to
hate them. Accusations of mis-selling and hard-selling are hurled at the industry. Most investors
admit that they don't understand how it works, but they keep buying ULIPs more than any other
insurance product. As a part of Money Today Round Table, six industry specialists were invited
to brainstorm and discuss where the ULIPs are headed and what are the problems the industry is
facing today. The experts admitted that agents push potential buyers to opt for ULIPs instead of
other insurance products that might suit the latter better. Even the product manufacturers were
blamed for not being able to realise the opaqueness in the manner in which they operated. An
additional complication arose since it is extremely difficult to compare different ULIP products.
Surveys show that Indians plan retirement with life insurance and bank deposits and often too late
in 40s and 50s. Nowhere in the world does this happen. Our entire distribution service is a pure
transaction model and it often happens that a consumer is sold a product that he later realises was
not what he wanted. Distributors are largely responsible for rampant mis-selling. They are not
advisers and many are not qualified because our testing is not stringent. Charges, costs and returns
are very important because they indicate the tangible benefits of a product. Product standardisation
is essential for ULIPs. There has to be a way to compare performance, something that the mutual
fund industry has successfully done. Investors must consider two important factors: asset
allocation and costs incurred to get the best allocation. The capital structure of insurance firms is

such that they are tightly regulated. An insurance agent is tied to an insurer and so is bound to sell
its products, which may not serve the purpose of the client. This is a huge stumbling block as it
discourages agents from selling the best product. An intermediary's role is to protect the
consumers' interests. The biggest challenge is to explain why they must understand their insurance
needs before looking for a product. (Money Today, 2008).

Money Today (July 2010), ‘All ULIPs are safe and will be supervised by IRDA’
This article talks about the safe investments in ULIPS and recent developments in regulations and
its features. Mr. A. Giridhar, Executive Director (Admin), IRDA confirms that the ULIPs are
insurance contracts that provide benefits on death or disability and can be used for treating certain
medical conditions. Money can also be withdrawn as pension or annuity as per the Insurance Act.
About the investors he said ULIPs are long-term products. It is important that those who buy ULIPs
don't foreclose the contracts before the end of five years. The customers interested in short-term
investments should refrain from buying an ULIP. All ULIP contracts in existence and possible
future contracts are safe and will be supervised by IRDA. He also discussed that IRDA will manage
all mergers or acquisitions of Indian insurance companies and will fully protect the interests of the
policyholders. (Money Today, July 2010).

Money Today (July 2010), ‘Cheap and Better’

This article details the new regulatory changes in ULIPs and investment benefits to the investors.
It explains that, the Insurance Regulatory and Development Authority (IRDA) imposed a limit on
the charges by capping the difference between the gross yield and net yield of a ULIP to 2.25-3
per cent. The gross yield is what a ULIP would earn if no charges are deducted, while the net yield
is what it would earn after all charges are deducted. According to the writer if the difference
between the two yields is capped at 3 per cent, it means insurance companies will have to reduce
the charges on ULIPs or distribute them evenly over the term of the plan. To do this, they would
also have to launch longer duration plans. Right now, 10-15 years is the norm, but the change
might lead to the launch of 25-30-year plans. The writer also makes it clear that lower costs are
only one of the several changes that have made ULIPs more attractive and income from all ULIPs
bought before the DTC comes into effect will be tax-free. He further explains about the other major

investor-friendly proposal - the cap on surrender charges. Till now, besides the heavy deductions
in the initial years, ULIPs also levied fat surrender charges. These acted as a strong deterrent for
anyone attempting to surrender in the first three years. So, instead of surrendering their policies,
most customers just allowed their ULIPs to lapse and waited for the lock-in period of three years
before withdrawing the balance. The quantum of the charge and the method of computation also
varied across insurers. Surrender charges were either levied as a percentage of the paid up premium
or as a percentage of the fund value. (Money Today, July 2010)

He further discusses about the standardization of the surrender charges and the imposed limit.
According to him, this helps because the investor gets a clear picture at a glance and comparing
plans becomes easier. However, there is no reason for elation. ULIPs are a long-term investment
and surrendering them early is not a good idea. Moreover, most ULIPs still have high upfront
charges and would probably give negative returns in the first three years. Add to this the surrender
charges and the disincentive to surrender is almost as strong as before. About the minimum lock-
in period of three years for ULIPs to be increased to five years he thinks, on the face of it, this
seems an unfriendly move for the investor as it curbs the liquidity for the policyholder. But this
actually helps investors by cutting down on chances of miss-selling. The lure of high commissions
often motivates unscrupulous agents to push ULIP investors to stop paying premiums and
withdraw the amount after three years. This is a costly strategy for the investor because he has
already suffered high charges levied in the initial years. By increasing the minimum lock-in period
to five years, IRDA has aligned ULIPs with a long-term horizon. Greater transparency will come
due to regulation of putting commission details by the agents. In its zeal to expand insurance
coverage, IRDA also proposes to make it compulsory for unit-linked pension plans to offer life or
health cover. According to the writer this is bad news for investors. A compulsory mortality charge
in the pension plan will reduce the amount of investment flowing into retirement savings. Till now,
pension plans were cheaper than ULIPs because they didn't have an insurance component. If the
proposal goes through, pension plans will become just as costly. (Money Today, July 2010)

Money Today (2010), ‘Before you invest’

This article discusses the essentials one should consider while investing in ULIPS. It talks about
the investor, suitable plan choice, features to be chosen, buy the ULIP before 31st March. Writer
thinks that the foremost requirement of ULIPs is that the buyer should be willing to invest in
equities. If he opts for a debt or liquid fund, the ULIP will lose its edge over a traditional policy.
Investor needs to be proactive also. If the buyer doesn't know the basics of the capital market, he
should steer clear of ULIPs. ULIPs are insurance plans that cover the risk of death. According to
the writer, ULIPs should be ensured for this insurance objective. Also simpler the plan in ULIPs
better it is. For features the writer says that choosing long term maturity plan is good investment
in ULIPs. Also it’s a good idea to choose a plan that gives you the flexibility to increase or decrease
the risk cover any time during the term of the plan. Due to changes in direct tax code rules, ULIPs
are now considered as tax saving investment. ULIPs will emerge as the best instrument for
financial protection, covering a wide gamut of financial needs, including wealth generation.

Money Today (2009), ‘The benefits of investing in ULIPs’

This article talks about the simple structure and dual nature of unit-linked insurance plans work to
women's advantage. For women, who are less interested in complicated financial products, unit-
linked insurance plans or ULIPs are good options. For, besides a life cover, they offer advantage
of the upside of the stock market. These are long-term products, wherein money is invested in a
systematic manner over a period of time. The length of the tenure ensures that the investors enjoy
the benefits of compounding. For women, who tend to be passive investors, such a product means
they can get the best of both worlds. The product offers the policyholder the sum assured and the
fund value, so that she receives at least one, when required. Another advantage of ULIPs is the
switch feature. This enables the policyholders to adjust their asset allocation between debt and
equity depending on their life stage, risk appetite and the market conditions.