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4 reasons why ULIPs make sense

April 05, 2005 16:01 IST Ask any individual who has purchased a life insurance policy in the past year or so and chances are high that the policy will be a unit linked insurance plan. ULIPs have been selling like proverbial 'hot cakes' in the recent past and they are likely to continue to outsell their plain vanilla counterparts going ahead. So what is it that makes ULIPs so attractive to the individual? Here, we have explored some reasons, which have made ULIPs so irresistible. Insurance cover plus savings To begin with, ULIPs serve the purpose of providing life insurance combined with savings at market-linked returns. To that extent, ULIPs can be termed as a two-in-one plan in terms of giving an individual the twin benefits of life insurance plus savings. This is unlike comparable instruments like a mutual fund for instance, which does not offer a life cover. Multiple investment options ULIPs offer a lot more variety than traditional life insurance plans. So there are multiple options at the individual's disposal. ULIPs generally come in three broad variants:
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Aggressive ULIPs (which can typically invest 80%-100% in equities, balance in debt) Balanced ULIPs (can typically invest around 40%-60% in equities) Conservative ULIPs (can typically invest upto 20% in equities)

Although this is how the ULIP options are generally designed, the exact debt/equity allocations may vary across insurance companies. Individuals can opt for a variant based on their risk profile. For example, a 30-yr old individual looking at buying a life insurance plan that also helps him build a corpus for retirement can consider investing in the Balanced or even the Aggressive ULIP. Likewise, a risk-averse individual who is not comfortable with a high equity allocation can opt for the Conservative ULIP. Flexibility Individuals may well ask how ULIPs are any different from mutual funds. After all, mutual funds also offer hybrid/balanced schemes that allow an individual to select a plan according to his risk profile. The difference lies in the flexibility that ULIPs afford the individual. Individuals can switch between the ULIP variants outlined above to capitalize on investment opportunities across the equity and debt markets. Some insurance companies allow a certain number of 'free' switches. This is an important feature that allows the informed individual/investor to benefit from the vagaries of stock/debt markets. For instance, when stock markets were on the brink of 7,000 points (Sensex), the informed investor could have shifted his assets from an Aggressive ULIP to a low-risk Conservative ULIP.

Switching also helps individuals on another front. They can shift from an Aggressive to a Balanced or a Conservative ULIP as they approach retirement. This is a reflection of the change in their risk appetite as they grow older. Works like an SIP Rupee cost-averaging is another important benefit associated with ULIPs. Individuals have probably already heard of the Systematic Investment Plan (SIP) which is increasingly being advocated by the mutual fund industry. With an SIP, individuals invest their monies regularly over time intervals of a month/quarter and don't have to worry about 'timing' the stock markets. These are not benefits peculiar to mutual funds. Not many realise that ULIPs also tend to do the same, albeit on a quarterly/half-yearly basis. As a matter of fact, even the annual premium in a ULIP works on the rupee cost-averaging principle. An added benefit with ULIPs is that individuals can also invest a one-time amount in the ULIP either to benefit from opportunities in the stock markets or if they have an investible surplus in a particular year that they wish to put aside for the future.

ULIP v/s Endowment Plan for Life Insurance
This article is a comparison between the Unit Linked Insurance Plan (ULIP) and the regular Endowment Plan for life insurance. Till some time back, if you wanted to buy insurance, the only option you had was to buy an endowment plan. Of course, there were many different plans, with many different, fancy names. Each had its own table of promised or possible returns. But the bottom line was - they were all endowment plans. This means that when you wanted to buy insurance, you were forced to also invest at the same time. On this insurance "investment", companies declared "bonuses" every year. No one knew where the money was invested, and you, the policy holder, had no control over it. All you ever knew was the "bonus" declared every year. And since Indians had been "investing" in insurance for a very long time, we started expecting "returns" from our insurance policies as a given. When the private insurance companies came into the picture, they saw a big opportunity. They made us ask the question - if it is my money that is being invested, should I not have at least some control over it? And thus, the Unit Linked Insurance Plan (ULIP) was born.

What is a Unit Linked Insurance Plan (ULIP)? It is a type of insurance, in which your premium amount is dived into two parts.

1. One part, a small fraction of your premium, is used to provide you insurance. 2. The other part, the much larger portion, is used to buy "units" of investment.

The first part (insurance part) depends on the sum insured - the higher the sum insured, the more is the money spent to buy insurance. The money from the other part (investment part) is invested based on the type of the units - it can be largely in equities, or only in debt, and all the flavours in-between. The value of these units increases depending on the returns these investments provide.

At any time, the sum insured is either the original sum insured that you chose at the time of buying insurance, or the NAV of all your units - whichever is higher. So, what is the advantage of a ULIP over an endowment plan? The answer is: Control A Unit Linked Insurance Plan (ULIP) provides you much more control over where your money is invested - You decide which kind of units to buy - they can be largely for stocks, for debt, or a combination of both. Also, you can switch between different units - usually a couple of times a year, depending on your insurance company. This means that depending on your analysis, you can move from stocks to debt to a hybrid investment - whichever way you want. This compares very favourably to endowment plans, where you have absolutely no control over where your money is invested. Another big advantage of ULIPs is that after a couple of years of buying the plan, even if you are unable to pay the premiums, the insurance cover continues. When you don't pay the premium, the insurance company sells some units to get an amount so that it can continue to provide the life cover for you!

So, that is the comparison between ULIPs and Endowment plans, and ULIPs are definitely a better choice when compared to Endowment Plans. No wonder they are so popular!! But are they the best way to buy insurance? Nope!! To find out, read the article ""Term policy" is the best policy"

We know that a Unit Linked Insurance Plan (ULIP) proves to be better than an Endowment plan. Term Insurance provides such a pure. and recommends the best option for life insurance. and it should be a risk-only policy. let's see why! Why does one buy life insurance? What is the need for life insurance? The answer is simple . For investments. do you expect any return on that "investment"? Do you expect that if the car doesn't meet with any accident. And now. it is not. (Don't know this yet? Read "ULIP v/s Endowment Plan for Life Insurance") But the real question is .Life insurance is bought so that our dependents can continue to lead a normal life even when we are not around. and they need to be treated differently. This amount should be the "Sum Insured" when you buy a life insurance policy. and make investments accordingly. It is a type of insurance where your premium amount is used only to buy insurance for you . or your home. (Please read "Goal Based Investing"). . When you buy insurance for your car.“Term policy” (term insurance) is the best policy This article compares endowment policies and ULIP with Term Insurance. and in turn pay a lot more for insurance than it actually costs? Should we not buy "pure" insurance. risk-only cover for your life. so that they can lead a normal life out of the returns generated from it.Is a Unit Linked Insurance Plan the best way of buying insurance? Let me cut to the chase and give you a straight answer . For life insurance.just like car or home insurance. why should we expect our Life Insurance to pay us back. you need to identify goals and strategies. like we do for our car or home? Yes . you need to calculate an amount that your dependents would need.that is exactly what we should do! We should understand that insurance and investments are different. you would get the money plus some interest on it back at the end of the year? Of course not! Then.No.

Endowment plan: Rs. following are the indicative market rates: 1. Here. just like insurance for your car. Are ULIPs a costly form of term insurance plus MF investments? This article compares Unit Linked Insurance Plan (ULIP) with a combination of term insurance & Equity Linked Savings Scheme (ELSS) investment. while still enjoying the benefit of adequate insurance! One perceived drawback of Term insurance plans is that you don't get back any money at the end of the term if you survive. in ""Term policy" is the best policy".MF) In "ULIP v/s Endowment Plan for Life Insurance". if you survive the term of the policy. 38. we . this saved money may be invested better in other avenues. and therefore. and judges the utility of each strategy. there is a huge difference in the premiums. As we discussed earlier. the biggest benefit of a term insurance policy is that it provides life insurance at the lowest possible price.Since the premium amount is used only for insurance. we discussed that investments should be separated from insurance. and as we discussed earlier. you get back all the premiums you have paid. This means that the money saved can be invested in other avenues to fulfill other goals.836 a year 3.and it is called Term insurance plan with return of premiums (ROP). Term plan: Rs. (ULIP versus Mutual Funds .109 per year 2. 8. 10 Lakhs for 25 years for a 30 year old male. But then. you need not get anything back! But if the fact that you don't get back any money at the end of the term bothers you. we saw that Unit Linked Insurance Plans (ULIPs) are better than traditional endowment plans. Term plan with return of premium: Rs. there is a variant of term plans available .964 a year As you can see. Please read "Are ULIPs a costly form of term insurance plus MF investments?" to know how term insurance and the money saved can be utilized effectively. And the added benefit is that this amount is tax free! But please note that the premium amounts are higher in term insurance with return of premiums as compared to regular term insurance plans. Illustration: For a sum insured of Rs. 2.

and goes down for subsequent years. (The names for these fees may differ a little among fund houses). called "Premium Allocation Charge" every year. for our option B (combination of Term Insurance and ELSS). So. ULIPs also charge a yearly "Fund Management Fee". and you know the charges incurred by you (For more details. let's see how the benefit of Unit Linked Insurance Plans (ULIPs) can be achieved (and bettered!!) using a combination of Term Insurance and Equity Linked Savings Scheme (ELSS) mutual fund (MF).037 per year . mostly debt. These fees are charged as a percentage of money invested.Mostly equity. and various combinations in-between 2. 77. Here is a comparison of charges for a ULIP and a term plan for a sum assured of Rs. The second option is to buy insurance using a term plan. we would invest the difference .963 Thus. this fee is very high in the initial 2-3 years. Flexibility to choose the type of investment scheme . Transparency . . 10 Lakhs for a 30 year old male (Policy term is 25 years): Insurance Company Scheme Name Premium (Per Year) SBI Life SBI Horizon II (ULIP) Rs. just like mutual funds.concluded that term plans are the best form of insurance. please read "ULIP v/s Endowment Plan for Life Insurance") Here is what we are going to do: First option is to buy insurance using a ULIP. Let's recap the benefits of Unit Linked Insurance Plans (ULIPs): 1. 2. here.You know where your investments are being made.in an ELSS. Apart from this. and since term insurance is a lot cheaper than ULIPs. Let's walk through a real-life example and see how both these options compare.000 SBI Life SBI Shield (Term Plan) Rs.Rs. Generally. 80. ULIPs charge a fee. invest the difference in the premiums in ELSS.

The first is the "Mortality Charge". 75. ELSS schemes have a fund management fee of 2%.For the ULIP in our example. If we deduct the "Premium Allocation Charge" and the "Fund Management Fee". the Fund Management Fee is 1. 64. Let's say that the mortality charge for the ULIP is also Rs.5%. 68. which is the amount for insuring your life. the higher fee in the initial years has a huge impact on your final returns due to the compounding effect. amount actually invested would be Rs. 72. Thus. 2. the amount remaining for investment is also Rs.499 Rs. 77.496 per year in the case of ELSS.037 per year. This is the biggest disadvantage of ULIPs . the charge is the maximum in the initial years. Rs. which is invested in the option you choose. if we assume the rate of return to be 12% per year for both these: Download the spreadsheet for the calculations ULIP ELSS . the amount remaining for investment is: Year 1 Years 2 and 3 Year 4 onwards Rs.087 On an average. Thus.since the investment is for a very long term. (We would see it illustrated in our example) The premium of a ULIP is broken down into two components.293 Rs. The following table compares the returns generated by our two options. and the "Premium Allocation Charge" is as follows: Year 1 Years 2 and 3 Year 4 onwards 15% 10% 5% As you can see.963. The second is the remaining amount.

Amount Invested Year 1 64499 Year 2 68293 Year 3 68293 Year 4 72087 Year 5 72087 Year 6 72087 Year 7 72087 Year 8 72087 Year 9 72087 Year 10 72087 Year 11 72087 Year 12 72087 Year 13 72087 Year 14 72087 Year 15 72087 Year 16 72087 Year 17 72087 Year 18 72087 Year 19 72087 Cumulative value of investments 72239 157396 252772 363843 488242 627569 783615 958387 1154131 1373364 1618906 1893913 2201920 2546888 2933253 3365981 3850636 4393451 5001402 Amount Invested 75496 75496 75496 75496 75496 75496 75496 75496 75496 75496 75496 75496 75496 75496 75496 75496 75496 75496 75496 Cumulative value of investments 84556 179258 285325 404120 537170 686186 853085 1040011 1249368 1483848 1746465 2040597 2370024 2738983 3152217 3615038 4133399 4713962 5364194 .

154. when the insurance cover for both the schemes is the same! But that's not all . 7. the returns would be as follows: Download the spreadsheet for the calculations ULIP Amount Invested Year 1 64499 Year 2 68293 Year 3 68293 Year 4 72087 Cumulative value of investments 72239 157396 252772 363843 ELSS Amount Invested 75496 75496 75496 75496 Cumulative value of investments 85311 181712 290645 413740 . Even if it is 13%. whereas ELSS returns Rs.74.085.05. 1. There is a net gain of Rs.Year 20 72087 Year 21 72087 Year 22 72087 Year 23 72087 Year 24 72087 Year 25 72087 5682309 6444924 7299052 8255676 9327095 10527085 75496 75496 75496 75496 75496 75496 6092453 6908103 7821631 8844783 9990712 11274154 (Continued on the next page.. your investment options are limited to the 4-5 schemes offered by your insurance company.it can get even better..47 Lakhs!! This. Whereas in ELSS. you have a wide choice among fund houses. 1.) What do we see? At the end of 25 years. Thus.. With ULIPs. and you can switch between them if you feel your investment is not giving adequate returns.12. ULIP returns Rs. although we have assumed the return to be the same of ULIP and ELSS.27. the return for ELSS can definitely be better.

Year 5 72087 Year 6 72087 Year 7 72087 Year 8 72087 Year 9 72087 Year 10 72087 Year 11 72087 Year 12 72087 Year 13 72087 Year 14 72087 Year 15 72087 Year 16 72087 Year 17 72087 Year 18 72087 Year 19 72087 Year 20 72087 Year 21 72087 Year 22 72087 Year 23 72087 Year 24 72087 488242 627569 783615 958387 1154131 1373364 1618906 1893913 2201920 2546888 2933253 3365981 3850636 4393451 5001402 5682309 6444924 7299052 8255676 9327095 75496 75496 75496 75496 75496 75496 75496 75496 75496 75496 75496 75496 75496 75496 75496 75496 75496 75496 75496 75496 552837 710016 887629 1088332 1315126 1571403 1860996 2188237 2558018 2975871 3448045 3981602 4584521 5265819 6035687 6905637 7888680 8999519 10254768 11673198 .

025 . but can also switch MF houses. and you should not withdraw any amount form your corpus before time. Tax Treatment: The full amount invested in a Unit Linked Insurance Plan (ULIP) is eligible for Section 80C benefit. as you would have the most flexibility to invest your funds while using Equity Linked Savings Scheme (ELSS).have the same tax implication. both the options . and there would be no impact on the returns even if we consider income tax. Following are the benefits: • • Better returns . The full amount invested in an Equity Linked Savings Scheme (ELSS) and the amount spent to buy Term Insurance is also eligible for Section 80C benefit.The example clearly illustrates why separating investment from insurance makes better financial sense! The potential for superior returns is very high compared to a ULIP. there remains one universal condition for getting these superior returns . 1. You should invest regularly in the ELSS.Year 25 72087 10527085 75496 13276025 We see that the return generated by ELSS is Rs. 27. This is IMPOSSIBLE in ULIPs! As always.you need to be disciplined in your investments. Thus.Unit Linked Insurance Plans (ULIPs) and a combination of Term Insurance and Equity Linked Savings Scheme (ELSS) mutual fund (MF) . Happy investing! . Conclusion: The combination of Term Insurance and Equity Linked Savings Scheme (ELSS) mutual fund (MF) wins hands down as compared to Unit Linked Insurance Plan (ULIP).5 Lakhs more than the Unit Linked Insurance Plan (ULIP)! The best part about this is that this is a very likely scenario.76.You can choose not just ANY mutual fund (MF) scheme.this is around Rs.32. Full flexibility .

beyond that it becomes an investment avenue. These top-ups do not affect the sum assured. the sum assured is calculated by age and term of the policy to which premium factor is applied. .000 per annum irrespective of age and term of the policy. Normal endowment policy does not offer you these benefits. Premiums levels can be either reduced or increased if premiums have been paid regularly for three years and the unit fund value is at least Rs 15. The flexibility of increasing premium contributions in an existing account helps policyholders manage their cash flows. The minimum premium is Rs 1. Sum assured The sum assured depends on your age and the cover you take in case of ULIP. you can also make additional payments to increase the savings component. The Liquid Fund is the least risky with investments in bank deposits and short-term money market instruments. How they compare? To explain how ULIP works we will compare HDFC ULIP Endowment plan with HDFC Endowment plan. as premium remains the same for the full term. Top-ups Apart from your regular contributions. defensive. medium or high.ULIP: Is it for you? (04-May-2004 ) Unit-linked life insurance offers the interesting option of combining protection and tax advantages of life insurance with the attractive prospects of investing in equities.500 annually. you pay a minimum premium of Rs 10. You decide the amount you can contribute at regular intervals. Investment You choose the fund where you want to invest your money.low. you may choose between 3 levels of cover . Growth Fund is the riskiest with an investment of up to 100% in equities. secure managed. ULIP offers you insurance cover till your insurance needs are fulfilled. A unit-linked plan works on a minimum premium basis and not on a sum assured one. secure defensive and growth. In normal/traditional endowment plans the premium is calculated on the basis of age and the term and the amount you pay. Depending on your age at entry. in case of ULIP. Premium In case of ULIP.000. HDFC offers a choice of five funds liquid. In the traditional plan.

critical illness. What is the right strategy for you? While making an investment in ULIP get the agent to disclose the costs. there is a charge of 25% of the outstanding premiums due during this 3-year period.e. If the fund value of a paid up policy falls below Rs 15.minimum 85% in debt with the balance in equities. The risk cover continues for the sum assured even though the policy has reached the paid up status.000 then the policy is cancelled and the fund value is returned to you. too. At present this amount is Rs 15. In case you stop paying premiums? If this is in the first 3 years then in case of ULIP. apart from a flat fee of Rs 15 per month deducted by cancellation of units In case of ULIP.80% of the fund value per annum.In traditional insurance plans your money is invested keeping in view the IRDA specification i. These charges vary depending on the kind of premium payment option chosen (single or regular). In traditional plans. There is an annual fee of Rs 150 for regular premium policies and Rs 300 for single premium ones. . on cancellation of the policy before paying regular premium for 3 years. In normal endowment plan. with low liquidity and potentially higher costs. in either case you receive the same benefit i.000. the charges are not disclosed. in an eventuality you receive the sum assured or fund value whichever is higher and on maturity the fund value. provided the policy has accumulated sufficient policy value. this plan. based on the person’s age at that time. Other charges include a fund management charge of 0. accidental death) are charged for cancelling units on each monthly charge date. Returns In case of ULIP. Compare across companies. In case of normal endowment the policy lapses and nothing is paid back If you stop paying premiums after 3 years.e. Look at these costs before considering a ULIP for investment. In traditional plan the policy becomes a paid up policy. on both the funds invested by the policyholder and by cancellation of units.e. product categories and within products. medicals are compulsory. imposes charges. in ULIP you have the option to make policy paid up. for the first 2 years the investment content rate is 73% of the premium and for the remaining years 99%. Charges? As is the case with unit-linked plans. Risk cover charges (for death sum assured. Medicals In both the plans the norms for medicals are similar i. the sum assured and vested bonus. Insurance is a long-term contract.

First let’s understand the client’s profile. Individuals in quest of life insurance are often too returns-centric forgetting that they must first and foremost have adequate life cover that can provide financial stability to their dependents in their absence. This is what we concluded: 1.000! .e.e. The client. and the policy term being 46 years. So our basic objective was to ensure that the product he was being recommended provided him adequate insurance cover. The returns projected to him were calculated at a rate of 15% CAGR.000. The ULIP has an annual charge of 2%. So if the client expires before that. In this way.000. which is a pittance for an HNI.5%. To begin with.000. which amounts to a one-time premium of Rs 100. returns can come separately at a later stage. 2. In this case. annual administration charge of Rs 720 and fund management charge of 1. he would be insured till the age of 74 years. where he could have 100% equity exposure and hence earn higher returns. The client was advised to go for the equity option. The agent recommended that he opt for a single premium policy. which we would like to share with our visitors. that the investment corpus will take 12 years to exceed Rs 500. the client did not have a life cover. a 28-Yr old high net worth individual (HNI).000 would not even service the family car let alone provide financial stability to the family. Our financial planning team at Personalfn recently received one such query regarding a unit linked insurance plan (ULIP) from a leading public sector insurance company. As always we examined this case with the objective of analysing whether the product would add value to the client’s portfolio and fulfil his insurance/investment objectives.Case study: A ULIP too expensive (04-Sep-2006 ) An attractive sales pitch about a product instinctively raises queries in the audience’s mind. A brief analysis of the product and the returns generated by it over a period of 46 years (the policy term) tells us. Rs 500. The investment component i. 1. In case of an unfortunate event.000. the client was being recommended an insurance cover of Rs 500. So priority has to be given to the insurance component. was advised by his insurance agent to go for a ULIP with a sum assured of Rs 500. 2. the amount of Rs 500. he will get only the sum assured i.

Given that our client does not have the time and competence to track these markets. and was carried in its July 16. If there is a ULIP that can match the returns and the lower expenses of a mutual fund. mutual funds can play an important role in the client’s portfolio. He can then consider investing to take care of the returns.00% recurring and 1. 4. it can be an option for investors. For the investment component. the returns projected to the client have been calculated at an optimistic rate of 15% CAGR. mutual funds/stocks and fixed deposits. The annual expenses incurred on the ULIP are 3. Put simply. ULIP Portfolios: Need for more transparency (01-Aug-2006 ) This article was written by Personalfn for Business India. Moreover. mutual funds are more cost-effective than the ULIP that was recommended to our client. 3. For some strange reason. in its entirety. In terms of expenses. “Be more transparent”. the guidelines dictate that clients are to sign on the benefit illustration. We advocate that all individuals (HNI or otherwise) buy a term plan for an amount that can be considered reasonable given their life style. Over a period of 48 years. PPF (Public Provident Fund). higher net assets result in lower expenses. has been retained here. income. the client must on priority opt for term plan that.50% (maximum) of net assets. Our solution 1. Not surprisingly.50% (2. the agent did not take our client’s acknowledgement on the 15% CAGR illustration since he was violating the ULIP guidelines. there is a good chance this number could reduce since according to the expenses slab defined by SEBI. The capital appreciation can be taken care of through investments like NSC (National Savings Certificate). If you are wondering why ULIPs do not feature in our solution to the client.50% fund management charges). backed by his signature. mutual funds become an obvious choice. According to IRDA's (Insurance And Regulatory Development Authority) revised ULIP guidelines. In contrast. this would have amounted to loss of agency for the insurance agent. agents are bound to show benefit illustrations based on an optimistic estimate of 10% (simple growth or CAGR) and a conservative estimate of 6%. expenses and contingent expenses among others. a person of his financial standing should get himself insured for a much larger amount and not subject his life cover to the vagaries of the stock markets. mutual funds are managed at an annual expense of 2. 3. 2006 issue with the title. can provide adequate financial stability to his family. 2. If reported by the client.Ideally. it’s because in this particular case the ULIP was too expensive. in his absence. . The original draft. Mutual funds give investors an opportunity to access equity and debt markets in a convenient manner.

life insurance products have usually been considered as ‘safe’ investment options. A few life insurance companies also declare their ULIP portfolios on a regular basis. On the other hand. fact of the matter is that investors have a hard time accessing these portfolios It is pertinent that an investment avenue as complex as a ULIP is understood appropriately before making investments in it. we decided to analyse ULIP portfolios from across various life insurance companies. Kotak life. With the numerous variations available across products and companies. company employees). the portfolio will reveal the quality and nature of companies that form part of the ULIP portfolio. The popularity of ULIPs can also be attributed partly to the scrapping of ‘assured return’ insurance schemes and falling interest rates which rendered conventional products like endowment plans unattractive. Barring ICICI PruLife. At Personalfn however. given the disparities in ULIP portfolio disclosures. Declaration of portfolios With the growing popularity of ULIPs. While this information may be available to individuals who are ‘insiders’ (i. 2. which in turn. we found that not many companies make their portfolios available in public domain. The AUM becomes relevant in that a higher AUM helps in achieving economies of scale. For example. ULIPs can invest in the stock and debt markets in varying proportions. However. which also offer a life cover. Given below are our concerns pertaining to ULIP disclosure norms. we believe the Insurance Regulatory and Development Authority (IRDA) needs to look at various issues related to portfolio disclosure so that individuals can make informed decisions. we failed to procure the same for other companies. HDFC Standard Life and Aviva Life declared their portfolios on their websites. no one declared their AUMs. the rules and definitions of life insurance have undergone a sea change.Traditionally. While four insurance companies i.e. relevant data points like the assets under management (AUM) and the benchmark indices were missing for some ULIPs under our scanner. since unit linked insurance plans (ULIPs) burst onto the scene a few years ago. Lack of consistency across portfolios While evaluating the ULIP portfolios of life insurance companies. we feel that individuals need to understand ULIPs a lot better before they make a decision to invest in it. it becomes necessary that individuals study the portfolios to understand the philosophy adopted by the ULIP in question. we observed that the presentation of data lacked consistency. However. ICICI PruLife. could result in reducing costs like . However. Simply put. Aviva had not even mentioned the benchmark index for its ULIP. Just to cite an example. to our dismay. 1. depending on their mandate. How a ULIP can invest its money is laid down by the insurer in the product literature.e. which reveal the stock and debt holdings across their ULIP products.

The benchmark on the other hand. serves as a yardstick for understanding how well a ULIP has performed during a given timeframe. This helps the investing community in understanding the investments better and take an informed decision. past performance among others in one place. Most mutual fund houses on their part however. They also display the portfolios on their company websites. Standard format Another problem we faced while analysing ULIPs was the manner in which the data was presented. there was no sign of a portfolio beyond the one declared for March 2006.we had to ‘hunt’ for them. our research team noticed that while ULIPs from HDFC Standard Life. For example. while most ULIP portfolios declared their holdings alongwith the percentages held in each individual stock. 2006). In fact. We believe that ULIPs should have an explicit investment mandate. Kotak Life and ICICI PruLife invested predominantly in large cap companies. insurance companies haven’t been proactive as far as declaration of portfolios is concerned. . 4. 3. this in turn will educate investors about how their investments will be managed. For example Bajaj Allianz clearly states that one of their ULIP options can invest in companies in the mid cap segment. Mutual funds have a guideline.transaction and brokerage. which requires them to declare their portfolios (‘fact sheets’ in mutual fund industry parlance) once every quarter. While the IRDA needs to be commended for its efforts to modify the basic structure of ULIP products. While it is not ‘wrong’ to invest in midcaps. we feel that insurance companies should ideally reveal the investment mandates for their products. benchmarks. Mid cap stocks tend to be high risk high return investment propositions vis-à-vis their large cap peers. Investment mandate Another important factor is the investment mandate. At least the individual knows what he is getting into while buying life insurance. Unfortunately. A risk-averse investor may be unwilling to participate in a ULIP that is heavily invested in mid cap stocks. For example. at the time of writing this article (June 23. Aviva Life invested liberally in midcaps. ULIPs should ideally give out a consolidated portfolio that contains all the relevant information and data points like net assets. ULIPs can take a leaf out of the books of mutual funds. Another observation was that the benchmarks were not made available alongside the ULIP portfolios under review . HDFC Standard Life still had the April 2006 portfolio on their website while in case of Aviva. it’s time the authority took steps to ensure that sufficient guidelines for the declaration of ULIP portfolios are in place and that information is made easily available to the retail investor. declare their portfolios on a monthly basis. MetLife in their quarterly portfolio update chose to declare only the names of stocks invested in without any information on how much it had invested in each stock. It is critical for individuals to know the investment mandate of ULIPs before they consider investing in it.

in ULIPs. And take off they did in an unprecedented manner. "IRDA makes a start". not just fund managers. even insurance companies were rather excited by the sharp rise in stockmarkets. they had a product that was more geared towards a offering a return than insuring lives. The reason is because the expenses in the initial 3 years premium are so high that insurance companies recover the entire cost of the policy (including life cover charges) and can do without the remaining premiums. unlike mutual funds where you get a tax benefit only on the ELSS (equity-linked savings scheme) category.ULIP Guidelines: IRDA makes a start (25-Sep-2006 ) This article was written by Personalfn for Business India. in its entirety. And this anomaly was put to good use by insurance agents. First some background a ULIPs made an entry at a rather opportune time for insurance companies. In fact. insurance companies should be more concerned about insuring lives than the vagaries of stockmarkets. the BSE Sensex surged furiously to over 12.000 points) markets could go in only one direction . From 3. Why are we talking of stockmarkets in an insurance article where we propose to discuss the latest ULIP guidelines? Because unfortunately. After being witness to rampant misrepresentation of ULIPs (unit linked insurance plans).up.000 points leaving investors breathless. The mood in equity markets was very pessimistic. The original draft. the regulator a Insurance Regulatory and Development Authority (IRDA) finally introduced some much-needed guidelines to lend an element of insurance to an otherwise investment product.000 points. 2006 issue with the title. However. Moreover. at those levels (BSE Sensex less than 3. When you come to think of it. ULIPs were shown to be a short-cut investment/insurance avenue – for instance. investors were encouraged to pay premiums only for the first 3 years and not necessarily over the entire tenure of the policy. has been retained here. we maintain that there is still more to be done to make ULIPs more transparent and make it even more insurance oriented. . ULIPs were spoken of in the same breath as mutual funds. and was carried in its September 24. however. many agents even went as far as projecting ULIPs superior to mutual funds because they attract tax benefits (under Section 80C) on all options. However.

. we say some because much is yet to be achieved. the IRDA. For one IRDA has given the new ULIP a face. then the life cover would have to continue at the option of the client. 3. to their credit. The sum assured is treated as sacred under the new guidelines. then the term will be defined as 70 minus the age of the client. did intervene at regular intervals to infuse some much-needed sanity. have seen on the mutual fund side. The old ULIP lacked both and individuals did not have an inkling about either even after taking the ULIP. However. at Personalfn. at times the regulator must come down heavily as financial service providers can take quite a while to get the hint. The ULIP must have a minimum tenure of 5 years. in insurance a face can be taken as the sum assured and the tenure. the life cover will lapse and policy will be terminated by paying the surrender value. Term/Tenure   The ULIP client must have the option to choose a term/tenure. now there is a sum assured that clients can associate with. On July 1. If no term is defined. Premium payments If less than first 3 years premiums are paid. 2006.  2. The latest guidelines dictate that: 1. it cannot be reduced at any point during the term of the policy except under certain conditions like a partial withdrawal within two years of death or all partial withdrawals after 60 years of age. if at least first 3 years premiums have been paid. but more on that later. The minimum sum assured is calculated as: (Term/2 * Annual Premium) or (5 * Annual Premium) whichever is higher. For example if the client is opting for ULIP at the age of 30 then the policy term would be 40 years. But as we. Sum Assured On the same lines. This way the client is at ease with regards to the sum assured at his disposal.While these marketing gimmicks were glaring. the IRDA introduced revised ULIP guidelines to correct "some" of these anomalies. There is no clarity with regards to the maximum sum assured.

6. Benefit Illustrations The client must necessarily sign on the sales benefit illustrations. . 2007. if the ULIP matures on January 1.Partial withdrawals The client can make partial withdrawals only after 3 policy years. Top-ups Insurance companies can accept top-ups only if the client has paid regular premiums till date. 2012. Agents are bound by guidelines to show illustrations based on an optimistic estimate of 10% and a conservative estimate of 6%.4. Now clients will have to sign on these illustrations. If the top-up amount exceeds 25% of total basic regular premiums paid till date. Top-ups have a lock-in of 3 years (unless the top-up is made in the last 3 years of the policy). 7. then the client has to be given a certain percentage of sum assured on the excess amount. Settlement The client has the option to claim the amount accumulated in his account after maturity of the term of the policy upto a maximum of 5 years. Charges The insurance company must state the ULIP charges explicitly. Loans No loans will be granted under the new ULIP. 9. Surrender The surrender value would be payable only after completion of 3 policy years. However. These illustrations are shown to the client by the agent to give him an idea about the returns on his policy. because agents were violating these guidelines and projecting higher returns. 10. They must also give the method of deduction of charges. For instance. the client has the option to claim the ULIP monies till as late as December 31. 8. value 5. life cover will not be available during the extended period.

Investment guidelines for ULIPs must also be crystallised. On the same lines. In a recent clean-up drive enforced by IRDA to make ULIPs more investor friendly. In other words will it be managed aggressively or conservatively? Will it invest in large caps. What has made life tougher for the insurers is that the existing products cannot be modified to make them compliant. we have our own wish list with regards to ULIP portfolios: 1. insurers have been forced to halve commissions and cut expenses. 2. Exposure to a stock/sector in a ULIP portfolio must be defined. ULIPs (especially the aggressive options) need to mention their investment mandate. ULIP may 'Slip' in September (27-Aug-2010 ) Addressing their concerns over what is considered as a sea change in Unit-Linked Insurance Plans (ULIPs) coming into effect from September 1. some agents are using this (change in regulations) as a sales pitch for their existing high commission policies. Regular disclosure of detailed ULIP portfolios. which will be noncompliant next month.While what the IRDA has done is commendable. we believe that since ULIPs invest so heavily in stockmarkets they must have very clear-cut investment guidelines. the private life insurers fear that sales in September might come to a halt. . 2010. 3. At the same time. it has attempted to distinguish ULIPs from mutual funds by forcing insurers to incorporate life cover that is at least 10 times the premium. Diversified equity funds have a limit to how much they can invest in a stock/sector. All insurers have been asked to file completely new products with fresh unique product identification number from IRDA. Our interaction with insurance companies indicates that there is little clarity on this front. This is a problem with the industry. other data points like portfolio turnover ratios need to be mentioned clearly so clients have an idea on whether the fund manager is investing or punting. To sustain the lower charges. a lot more needs to be done. by positioning them as a limited period offer. the insurance regulator has directed the insurers to reduce charges and consequently improve return for policyholders. Secondly. mid caps or across both segments? Will it be managed with the growth style or the value style? 4. for all their talk on being just like (or even better than) mutual funds. At Personalfn. ULIP portfolios are nowhere near their mutual fund counterparts in frequency as well as in transparency. is it going to aim for aggressive capital appreciation or steady growth.

other insurance companies have a cap (like 35% of corpus for instance) on the ‘aggressive’ option. Let us take an example of an individual wanting to invest a sum of Rs 100 (as premium) each year in ULIPs. The regulations seek not only to redesign the product but also change the operational model as the existing cost structures will be meaningless. brochures printed and agents trained”. This would also make investors comfortable in understanding such changes and their impact. Add more zip to your ULIP! (14-Mar-2006 ) The past couple of years have seen ULIPs (unit linked insurance plans) emerge as overwhelming favourites with individuals wanting to buy life cover complemented by a flavour of equities. which can invest a portion of their corpus in equities. the pace at which it has come up is the point of concern. The Indian bourses too have played a part in fuelling the demand for ULIPs. “We need a couple of weeks to get a completely new product from approval stage to market as we have to get our systems updated. Rather the IRDA should have come up with changes in a phased manner giving detailed clarifications in order to smoothen the process of change. His investment tenure is 30 years. The other option offers him 100% exposure to equities. While some companies have a mandate to invest upto 100% of their corpus in the ‘aggressive’ option. CEO of a life company said. the percentage of equities in a ULIP can make a significant impact on the returns over the long term.one which offers him a maximum of 35% exposure to equities and the remaining 65% in debt instruments. cited another CEO of a private life company.Reacting to this. An illustration will help in understanding this better. which we feel individuals should consider before they commit their money to ULIPs from any life insurance company. Simply put. Given the edge equities can provide to your portfolio. He has two options to consider. We believe that though the changes brought about by the IRDA were absolutely required. there is one important aspect. However. Let us also assume that he is expecting a . The percentage of investments in equities though differs across insurance companies. ULIPs are life insurance plans.

903.570 12.570. Which is approximately 40% higher than the returns that the individual would have received had his investments been ‘limited’ to a 35% equity exposure! So what does this mean for an individual who wants to invest in ULIPs? To begin with. For example. several studies have shown that equities tend to outperform other asset classes like bonds and gsecs over the long term. As can be seen from the table. the maturity amount works out to Rs 6. if the individual were to invest the entire amount of Rs 100 in equities. other variables remaining the same.094. The total amount that the individual stands to receive on maturity is Rs 12. Add to this the fact that the 100% equity ULIP option also allows the individual to shift his money to debt in varying proportions (which range from 0%-100%). other parameters (tenure. Of course.333 on maturity. As opposed to this. and one has a potent combination. then the individual stands to gain Rs 6. Tenure is 30 years. the returns amount to Rs 18. The individual is assumed to have a high-risk appetite and hence. then the difference in returns between the 35% equity option and 100% equity option would be 107%! . Therefore it also follows that a ‘maximum 35%’ equity exposure will not be able to power the individual’s portfolio returns like a 100% equity exposure would. It therefore makes sense for the risk-taking individual to invest a sizable portion of his corpus in equities.094 CAGR on equities is assumed to be 10% and on debt to be 7%. the return figures will change with a change in the assumptions considered above. receivable on maturity (Rs) 100 35 6. he decides to invest his entire corpus in the aggressive option throughout the tenure.094 0 0 18. The power of equities ULIP from Company A ULIP from Company B Amount invested(Rs) Equity exposure (%) Amt receivable on maturity from equity (Rs) Debt exposure per annum (%) Amt receivable on maturity from debt (Rs) Total amt.10% growth year-on-year CAGR (compounded annual growth rate) from the equity component and a 7% growth CAGR from the debt component.903 100 100 18. expected returns.333 65 6. had we assumed a 15% return on equity without changing the other parameters. Also assuming that the remaining Rs 65 is invested in debt instruments for the same period and this yields 7% CAGR. if a sum of Rs 35 is invested each year (out of the Rs 100 paid as premium) in equities for a period of 30 years and the rate of returns is assumed to be 10% CAGR. premium amount) remaining the same.

Check the fund’s performance over the past six months. 3. Enquire about the charges you will have to pay. Individuals therefore need to bear in mind that a ULIP needs to be evaluated on various parameters before zeroing in on a particular life insurance company. For example. Enquire about the premium payments as ULIPs work on minimum premium basis as opposed to sum assured in the case of conventional insurance policies. Your risk appetite should play an important role in the plan you choose. Very often it was poor selection that was responsible for the investors’ woes. Gather information on ULIPs. then the difference in returns would have been approximately 22%. 5 steps to selecting the right ULIP (10-Aug-2004 ) Unit Linked Insurance Plans (ULIPs) were seen as a “wonder product” that simultaneously fulfilled an individual’s needs for investment and insurance. However the recent downswings in the markets have forced investors to do a rethink. it goes without saying that many factors other than the equity exposure affect ULIP returns. In ULIPs the costs involved are a big deciding factor. Read the literature available on ULIPs on the websites and brochures circulated by insurance companies. if we compare a 35:65 (equity: debt) portfolio versus a 70:30 (equity: debt) portfolio without changing the other parameters. Our experience suggests that many a time people do not realise what they are getting into (in fact we have been approached by several people who wanted to cancel the ULIPs they had been coerced into taking by unscrupulous agents). go in for a more aggressive investment option and vice-a-versa. expenses and the quality of fund management are two very important factors that need to be evaluated before taking the plunge into ULIPs. the various options available and understand their working. 2. Focus on your requirement and risk profile Identify a plan that is best suited for you (in terms of allocation of money between equity and debt instruments). . 1. Find out how the debt and equity schemes are performing and how steady the performance has been.Conversely. Understand the concept of ULIPs Try to do as much homework as possible before investing in an ULIP. Of course. So if you have a high risk appetite. We present a 5-step strategy for investing in ULIPs. This way you will know what you are getting into and won’t be faced with unpleasant surprises at a later stage. Opting for a plan that is lop-sided in favour of equities when you are a risk-averse individual might spell disaster for you (this is true in most cases currently). Compare ULIPs of different insurance companies Compare products of the leading insurance companies.

of which the fund management charges shall not exceed 1. but also independent and unbiased. it is the turn of ULIPs (Unit Linked Insurance Plans) to face the music from the regulatory body. 2009.e. The companies give you the option to increase the premium amounts. This will enable you to make an informed choice. Insurance advice at all times must be unbiased and independent and your agent must be willing to inform you about the pros and cons of buying a particular plan.Ask about the top-up facility offered by ULIPs i.25%. you have invested Rs 50. of which fund management charges shall not exceed 1.000 per year for 10 years in a ULIP. Consider. Find out if the ULIP you are considering offers a minimum guarantee and what costs have to be borne for the same.e. Does your ULIP offer a minimum guarantee? In market linked product if your investment’s downside can be protected. additional lump sum investments you can make to increase the savings portion of your policy. thereby providing you with the opportunity to gainfully utilise surplus funds at your disposal. change the asset allocation of the money in your ULIP account) from one investment plan to another.50%.25%. Also enquire whether he has serviced clients like you. The difference between the gross and the net yield to investors should not exceed 3% incase of insurance contracts less than and equal to 10 years. ULIP charges capped at 3% Impact After Mutual Funds. Lets understand what this means. it would be a huge advantage. He should keep a track of your plan and inform you on a regular basis. When your agent recommends a ULIP of X company ask him a few product-related questions to test him and also ask him why the other products should not be considered. For contracts more than 10 years the difference should not exceed 2. Insurance Regulatory and Development Authority (IRDA) has issued a circular stating that the charges on ULIPs will be capped at 3% from October 1. Some insurance companies offer you free switches for a 2-Yr period while others do so only for 1 year. His job should not just begin by filling the form and end after he deposits the cheque and gives you the receipt. 5. Go for an experienced insurance advisor Select an advisor who is not only professional and informed. The key is to go for an advisor who will offer you value-added products. 4. Assuming it generates a return of 10% CAGR and the overall expenses for 10 years is 3% . Enquire about the number of times you can make free switches (i.

it’s largely because ULIPs are a mixture of insurance and investments. the overall expenses of these plans work out to 3.180.75%-4.00 698. there are investors who are fully aware of the fact that ULIPs are facing the heat as much as other equity-linked investments. Gross Yield in CAGR (%) From Oct 1.CAGR. and sold under varying (marketing) guises depending on the situation.598.582. If too many visitors haven’t given a thought to the fact that ULIP investors have considerable investments in equities. 2009 Current 10 10 Overall Expenses in CAGR (%) 3 4 Net Yield in CAGR (%) 7 6 Total Savings Maturity Value (Rs in lakhs) 739. ULIP (unit linked insurance plan) investors. There is yet another category of investors to rival both these categories in terms of equity investments i. Having second thoughts about your ULIP? (31-Jul-2008 ) The turbulence in equity markets has impacted more investors than one would have initially thought. direct equities). this category of investors has also felt the heat from the stock market turbulence. However.Overall expenses = Net Yield) A Step in the right direction! Such steps taken by regulatory bodies like SEBI and IRDA will encourage investors to invest their money as they will pay lower expenses and this will result in higher returns. With the cap of 3% your invested amount will rise by Rs 40.180. The hardest hit are those who invest directly in the stock markets (i.00 (Gross Yield . There is more than a fair chance that these are the .e. At present.582. Then there are investors who aim at diluting the risk of investing directly in equities by routing their investments through mutual funds.00 40.e. then the maturity value of your investment would be Rs 739. This results in maturity value of Rs 698.00% on an average. Expectedly.598.

Add to this the fact that many investors have invested in ULIPs for their children’s education (child ULIPs) or retirement (pension ULIPs) and one can better understand their anxiety. The buoyant stock markets coupled with attractive sales commissions on ULIPs played key roles in the rampant mis-selling of ULIPs. Consequently. Two. Their nervousness can be traced to two reasons in particular. Just as worryingly. ULIP investors want to know if they should continue with their policies. On the contrary. investors are not sure if they should be investing in equities at this stage. This is mainly because stocks and equity funds have been in existence for several years. they were major beneficiaries of the secular rise in stock markets. with markets in a decline. Double whammy Expectedly. equity fund investors and ULIP investors. The story so far with ULIPs ULIPs were launched at an opportune time when stock markets had just taken off. most ULIP investors unfortunately do not know what it is to be in a downturn and are very worried to see a huge hole in their ULIP investments. It’s not surprising therefore. a lot of investors chose the aggressive (and riskier) option in a bid to clock higher returns. A certain proportion of the premium paid is invested in market-linked instruments like equities and bonds (in line with the stated mandate) and the balance is used to provide for the expenses incurred on providing the investor with an insurance cover. the expenses on ULIPs (which can be quite steep.investors who have invested in ULIPs (especially in the aggressive option that invests heavily in equities) and often without truly appreciating the ULIPs’ market-linked nature. but were overlooked in the rally). What are ULIPs Simply put. Investments in ULIPs are eligible for tax benefit under Section 80C. the latter are most stunned by the sudden turn of events (read market downturn). investors have seen a cycle and know what a downturn can do to their portfolios. Why ULIPs investors are shocked now Of the three categories we mentioned earlier – stock investors. ULIPs combine the benefits of an insurance policy and a market-linked investment. many investors ended up buying ULIPs for all the wrong reasons. One. are beginning to pinch the investor now. as a result. to find investors complaining that their ULIPs have fallen to such . Being marketlinked.

Case 2: Investors who do not belong to the above category will find themselves in a rather unenviable situation. child’s education. To find out more about the latter. Such investors must take a call on whether they should continue the ULIP. tenure of policy among other details are unique to him. we recommend that they should not make a hasty decision. While the instinctive reaction could be to exit the ULIP. have a long-enough investment tenure (at least 10 years) and can take on the risk involved must stay the course and remain invested in the ULIP. of course. The insurance advisor designs a policy based on these inputs and the individual opts for the policy based on his advisor’s recommendation. But for that he must be prepared for the intermittent volatility like the one at present. The key lies in minimising the damage. What does your ULIP portfolio reveal? (22-Jun-2006 ) . has a responsibility towards his client in terms of addressing his concerns with regards to the policy both before and after the sale. equities can add considerably to the investor’s portfolio. The individual’s age. The fact remains that over the long-term. Also. they must interact with the insurance advisor and explore all available options. They have probably opted for a ULIP either because they were projected attractive returns or merely for the tax benefit or for some other lesser objective. among others). If you are wondering why the insurance advisor features prominently in both the options. This is a result of the cumulative impact of high ULIP costs and market volatility. investors should compare the performance of their ULIPs with that of their benchmarks and similar offerings from other insurance companies. the reasons are obvious. What investors must do now Case 1: Investors who have opted for a ULIP with a clearly defined investment objective (retirement. if carefully selected. investors would do well to study the portfolios of their ULIPs and find out if the investment style is in line with the stated mandate. as a ‘representative’ of the life insurance company. the underlying assumption is that the ULIP is a well-managed one. investors must shoulder part of the blame for investing in a ULIP without conducting due diligence. The insurance advisor/insurance company can help investors in procuring the required information. Clearly. A life insurance policy can be tailor-made to the individual’s needs. The insurance advisor. Instead.levels that do not even cover the premiums paid so far. also soliciting information about the surrender value will help in making a decision. premium amount.

50 2%-7% of premium*** 10. We would have liked to include more insurers. mirror to a large extent.76 80 62. ULIP snapshot HDFC Growth ICICI Pru Kotak Guaranteed Aviva Growth (Unit Linked Maximiser Growth (Safe Invest. we have considered the Aggressive ULIP plans from four life insurance companies whose portfolios were available to us (as on March 31. being market-linked. but lack of data and inconsistency in presentation of data forced our hand on that front. Not surprisingly.07 1.20 1. Nevertheless. In this note we evaluate the portfolios of some leading ULIP plans on offer today by applying yardsticks that we apply to portfolios of mutual fund schemes.50 Rs 720 pa S&P CNX Nifty 64.The popularity of unit linked insurance plans (ULIPs) has increased considerably over the past few years. the gains/losses of the stock markets. this has coincided with the attractive returns posted by the stock markets over this period.000 NA* 61.26 100 94.500 . For our evaluation. in our view.15 1. Of course.62 86. ULIPs. 2006).00 Rs 779 pa Minimum Premium (Rs) 10.81 BSE 100 66. such a study will help individuals select ULIPs that suit their profile and needs better.000 18.22 85 80.72 0. That is why it’s important for investors to evaluate a ULIP portfolio objectively before considering investing in it.80 Rs 180 pa BSE 100 66.56 49. ULIPs have been marketed as instruments that basically are ‘a mutual fund and more’. (LifeSaver) endowment (Regular) Plan/ Flexi Plan) & Child plan) Upper limit for equity investments (%) Percentage of assets in equity (most aggressive option)** (%) Benchmark Performance of Benchmark (%)** 1-year NAV Appreciation (%)** Fund Management Charges-FMC (%) Administration charges 100 100.000 3. there is no denying that ULIPs are inherently different from mutual funds as they offer a life cover also.62 68.

58 10. Another insurer – Birla Sun Life Insurance Company (whose portfolio for the ‘Flexi Save Plus endowment plan’ we failed to acquire) can invest only upto 35. This can be gauged from the fact that close to half of its equity portfolio (i. which is necessarily invested upto 100. the most aggressive ULIP 'Growth' option is compulsorily invested in 100% equities.8% (mandated to invest upto100% in equities) and 80. True to its investment mandate.e. However. we have considered the most aggressive plans with the regular premium option from the said insurers. However. you have a HDFCSL.0% of its assets in the top ten stocks.000 0. This may not be the most prudent feature of a ULIP that is investing individuals’ insurance monies. it invests liberally in mid caps. Top 10 Stocks At Personalfn.000 5. HDFC Standard Life (HDFCSL) had invested 100. we have observed that the ULIPs under review invest predominantly in large cap companies. In case of HDFC. we have always maintained that a diversified stock portfolio should hold no more than 40. approximately 42%) is invested in midcap companies. it is apparent that investment mandates for the Aggressive ULIP plans vary significantly across insurers.0% in equities.0% in equities.000 - 5.8% (mandated to invest upto 85%) respectively. On one hand. Investors would do well to appreciate that mid cap stocks typically tend to be high risk – high return investment propositions vis-à-vis their large cap peers. Kotak Life Insurance (KLI) had invested 62.0% of its corpus in equities. ICICI PruLife and Aviva. the investment mandate is flexible. Opt for a plan that suits your risk profile and expectation of return over the life of the policy. The other two companies. 2.0% of assets in equities in its Aggressive ULIP plan.0% of its assets in equities. 2006. 1. In terms of market capitalisations.Minimum Additional Premium (Rs) Buy-Sell Spread (%) 5. ** As on March 31. For the purpose of our study. For other Aggressive ULIPs.2% of its corpus in equities against a mandate to invest upto 80. All four insurers under review have invested in line with their investment mandates. This helps the portfolio counter turbulence in stock . Allocation to Equities The allocation to equities differs across the four companies under study. while on the other hand there is a KLI that can invest upto 80. This kind of disparity in “similar-natured” ULIP offerings from various insurers underscores the need for investors to make an informed decision while buying ULIPs.00 * Not Available. Aviva is an exception. *** Please refer to the article for further details.000 - 10. have adhered to the limits set out for them with 94.

higher the charges. something as relevant and important as the net assets/corpus was not mentioned for all ULIPs. 4. Both Aviva and KLI fare better as compared to HDFCSL and ICICI PruLife with 41. So too is the case with HDFCSL which holds 64. For instance. this comparison has to be seen in light of the lower equity allocation for both these insurers.2% of its assets in 5 sectors. Given that KLI and Aviva have an equity cap in the 80%-85% range.0% is well diversified. ICICI PruLife emerges as the most concentrated one with 65. their top 10 stock holdings are very well diversified. Likewise.7% of its assets in its top 10 stocks. Again.0% of its assets in the top 5 sectors.4% in its top 10 stocks.6% and 30. Fund Management Charges (FMC) Charges play an important role while calculating the returns on a portfolio . It holds 42. . One problem we faced while evaluating portfolios is lack of relevant data points. it is likely to expose investors to higher volatility when the markets witness a downturn. With respect to the concentration in the portfolios. HDFCSL is well diversified. they are able to therefore take.7% of its total holdings in the top 10 stocks. While such a strategy can help the ULIP clock attractive returns during a market rally. The total number of stocks it held (51 stocks) was the highest in its peer group. Aviva with an allocation of 28. Since their inflows are committed and ‘locked in’ they are able to invest with greater freedom and also not excessively worry about near term volatility. ICICI PruLife had the most concentrated portfolio with 50. With respect to holdings in the top 10 stocks. KLI comes across as the most diversified ULIP portfolio with only 25.markets more effectively. say a 10-year call or a 20-year call on a company or a sector. As a matter of fact. Concentrated stock portfolios can be sitting ducks during stock market volatility and their wayward performance can be very upsetting for investors. However. insurance seekers need to appreciate that insurance companies invest monies from a very long-term perspective. it remains the most concentrated with a total of 34 stocks in its portfolio. 3. we believe that sectoral concentration can expose a portfolio to above-average volatility. Like with stock allocations. in terms of number of stocks held. apart from ICICI PruLife no other ULIP had this information.6% of assets in the top 5 sectors respectively. Sectoral Allocation In terms of sectoral allocation.

The quality of data and its presentation need to improve significantly. are to be able to study portfolios and make intelligent decisions.50%) and Aviva (FMC 1. although it just about managed to outperform its benchmark. Simply put. For KLI. the charges are 7% for premium upto Rs 20. the buy-sell spread is the difference between the buying price and the selling price at which the life insurance company buys and sells its units.7% for FY06 (financial year ending March 2006).2%). 5.2% returns over FY06. KLI (FMC 1. Such a performance is not surprising given that the policy invests its entire corpus in equities vis-à-vis peers. if investors. Second year onwards. (BSE 100). Over the long term (over 15 years). ICICI PruLife (Rs 720 pa) and Aviva (Rs 779 pa) fare poorly on this front.000 pa and 3% for that portion of premium exceeding Rs 20. The reason you are seeing only four ULIP portfolios is because others either don’t disclose it or disclose it only ‘selectively’. Kotak with 49. charges have the potential to significantly impact the returns generated by the ULIP portfolio.000 pa. towers head and shoulders over the competition. KLI too fails to impress on this parameter. Here too. ICICI PruLife too fared well on this front with 68.6%).00%) with additional expenses in the form of a buy-sell spread fare poorly compared to the others alongside it. Despite our best efforts. ULIPs also levy administration charges. One reason for the under-performance could be the ‘controlled’ equity exposure (62. HDFCSL with an FMC of 0.2% returns over the said period fared poorly as compared to its peers as well as its benchmark.ULIP portfolios need to be disclosed regularly. the BSE 100 (up 66. Aviva (61. .1%) managed to post reasonable returns vis-à-vis peers.80% surfaces as the most cost effective ULIP. by a wide margin. HDFCSL with charges of Rs 180 per annum (pa) emerges as the clear leader.000 pa). It has also managed to outperform its benchmark. 3.000 pa) and 2% (for premium exceeding Rs 20.for the first year.2% as on March 31. the S&P CNX Nifty (up 64. both existing and potential. 2006) as compared to its mandate (upto 80%). In addition to FMC. 2. Our evaluation of ULIP portfolios throws up some interesting learnings: 1. however we would like to see more diversification at the sectoral level. these charges drop to 4% (for premium upto Rs 20. the administration charges are levied as a percentage of the annual premium. ICICI PruLife (FMC 1.lower is the value of the investments. Policy Returns HDFCSL with a return of 86. As we have learnt with mutual funds.50%) fails to redeem itself on this front. we failed to solicit information about the policy’s benchmark from the insurance company. By and large ULIP portfolios are well diversified in terms of stock allocations.

As per a senior IRDA official. . while ruling the matter in their favour: Increase in life cover . SEBI 0 Impact The two-month long tussle between the two regulators .Securities and Exchange Board of India (SEBI) and Insurance Regulatory and Development Authority (IRDA). SEBI Act 1992 and Securities Contract Regulations Act 1956 thus clarifying that life insurance business will include any ULIP or scripts or any such instruments. Insurers will also be given more time to redesign these products".Offering in minimum guarantee at maturity. IRDA Chairman.one without the other is of little use during a market downturn like the one we are witnessing at present. The ULIP GAME: IRDA 1. Mr.Set the minimum life cover for ULIPs to Rs 1 lakh • Minimum guarantee . alike pension products • Reacting to this ruling. Hari Narayan said. The Law Ministry issued an ordinance amending the RBI Act 1934. which ruled that Unit Linked Insurance Products (ULIPs) will be regulated by IRDA.Increase the life cover to 10 times of premium paid. Insurance Act 1938. J. "We will revise the guidelines for ULIPs to make it attractive for investors. finally came to an end as the Government settled the tussle by issuing an ordinance. as against the present practice of 5 times of premium paid • Minimum Life cover . the Finance Ministry has asked the IRDA to take the following steps.

but benefit policy holders in the long-term. Accordingly. IRDA gave a facelift to the structure of ULIPs Impact The Insurance Regulatory and Development Authority (IRDA) introduced sweeping changes to the structure of Unit-linked Insurance Plans (ULIPs). thus. Will there be two versions of ULIPs – pre September 2010 and post September 2010. that these new guidelines came almost immediately after the Government issued an Ordinance to clarify that ULIP’s will continue to be regulated by IRDA.000 or so a year will suffer. Country Manager & CEO of Bajaj Allianz Life Insurance said. when the dust settles on the jurisdiction issue. “The capping of expenses guideline has been made very stringent. We believe the guidelines framed by IRDA.We think that although the ruling is in favour of IRDA. We also feel that the above guidelines may compel insurance companies to slash commission rates for agents. But now it appears that the insurance industry is not too happy with the changes. How will the new avatar for ULIP be treated from a taxability perspective? Now and also when the DTC is introduced. . We also think that such regulations may also make ULIPs attractive for investors as it is aimed to encourage long-term savings and help policyholders build a nest egg to cater to their needs. investors will gain from a more investor friendly ULIPs being introduced. as they grow old. I hope we don’t land in a situation where a product is very good but no one is willing to sell it”. Small regular premium policies will become unviable.5% on pension plans A 10-times increase in the minimum risk cover Even distribution of charges across the increased lock-in period (5 years) A ceiling on net and gross yields Mortality or health cover Risk cover on top-up premiums It is not a coincidence. Second. with effect from September 1. Kamesh Goyal. are a step towards making ULIPs an attractive insurance-cuminvestment proposition. with different features and different tax treatments? . 2010. thus putting to rest. supposedly in 2011? 2. a fairly ugly and unnecessary public spat between IRDA and SEBI on turf issues. the capital market regulator SEBI has been successful in making its point that ULIPs have a very low element of insurance cover. the commission structure can’t sustain an agent’s income. ULIPs will offer the following: • • • • • • A minimum guaranteed annual return of 4. the agency channel will suffer badly. which would be detrimental for insurance agents. a large proportion of people who were paying premium of less than Rs 15. we had always maintained that. In our earlier issues. Two issues on which there is silence are: 1.

we have taken ULIPs of ICICI Prudential and HDFC Standard Life. There is another class of individuals who take insurance to provide for their family in case of an eventuality. Since ULIPs manage a portfolio of investments for clients. ‘Unit-linked products are designed to put control in the hands of the customer. debt funds. To be sure. Moreover. Abhishek Bhatia (Head – Marketing ICICI Prudential Life Insurance) explains.’ In this backdrop let’s understand the costs of owning a ULIP. While some customers are comfortable with this. To put it simply.… And the confusion continues!!!! ULIPs: Does the marriage work? (14-Jun-2004 ) This article written by Personalfn was carried by Business India in the May 24. there are others who require some more explanation about the features. investor/insurance-seekers rarely understand the cost implications of the marriage between investments and life insurance. ULIP as a product combines both these products (investments and life insurance) into a single product. two leading private insurers. All the charges are clearly disclosed in the product brochures that are given to customers. This is provided by the insurance agent. . investment and mortality charges that are levied on the premium. ULIPs work on the premise that there is class of investors who regularly invest their savings in products like fixed deposits (FDs). and shows how the monies will grow over time. For illustration purpose. it is intricate and not everyone is able to unravel it. We will start with the investment costs. couponbearing bonds. under a certain set of assumptions. Novel and noble as it appears. ULIPs attempt to fulfill investment needs of an investor with protection/insurance needs of an insurance seeker. Unit-linked insurance plans (ULIPs) have become something of a rage with their 'promise' of market-linked returns combined with the dual benefit of insuring your life from eventualities. This saves the investor/insurance-seeker the hassles of managing and tracking a portfolio of products. In this regard. which clearly illustrates the up-front. This is similar to a mutual fund that incurs costs on managing the equity and debt portfolio for investors. 2004 issue with the title ‘Lip Service’. Investors need to understand that this should only give them an indicative idea about the costs associated with a ULIP as different insurers have varying cost structures. they incur a cost known as the fund management cost. So typically both these categories of individuals (which also overlap to a large extent) have a portfolio of investments as well as life insurance. customers get a benefit illustration. diversified equity funds and stocks. ICICI Prudential ULIP has a three-tier cost structure.

.30% 1.30% (the balance 1. this can be attributed to the fact we have not factored in the marketing costs of ULIPs.00% plus about 0.80% of net assets regardless of the plan one chooses (there are five of them). investors need to note that while ULIPs are more economical on fund management costs. 2003). This is how it would work for a fund house as large as PruICICI. administration costs). ICICI Pru’s fund management costs Plan ICICI Pru ULIP (Equity) ICICI Pru ULIP (Balanced) ICICI Pru ULIP (Debt) Fund management cost 1. in addition to the investment component. which adds upto 1. HDFC Standard Life’s ULIP has a flat fund management fee of 0. So HDFC Standard Life’s ULIP (0.50% 1.30% in terms of the share brokerage and custodial fees. The expense ratio typically includes fund management fees.00% is accounted for by marketing. marketing/advertising fees.30% Compare this to Prudential ICICI’s Growth Plan’s expense ratio (2.PruICICI’s fund management costs Plan PruICICI Growth PruICICI Balanced Fund management cost 1.30%. the costs are significantly higher because there is a life insurance component in it as well. Remember we have isolated the fund management costs of a mutual fund to segregate it from the marketing costs. brokerage and custodial fees. Let us see how HDFC Standard Life’s ULIP compares with HDFC Mutual Fund schemes in terms of fund management costs. The flagship equity fund – HDFC Equity Fund’s fund management expenses (indicative) works out to 1. However. So ICICI Pru’s ULIP (equity plan) is more expensive than PruICICI Growth Plan while ICICI Pru’s ULIP (balanced plan) is more economical than the PruICICI Balanced Plan.00% 0.30% given the size of HDFC Mutual Fund – likewise for HDFC Prudence Fund (the flagship balanced fund).75% (Please note that fund management costs are indicative) Likewise PruICICI Balanced Fund’s expense ratio is also 2. With a ULIP. If one had to isolate fund management costs it would be in the region of 1.3% as on March 31.80%) stands cheaper than both HDFC Equity Fund and HDFC Prudence Fund. Unlike ICICI Pru’s ULIP which has a graded fund management fee structure.

So if insurances-seekers/investors play their cards right. Ideally they need to avoid taking the aggressive 100% equity ULIP. Also policyholders with regular endowment plans who are not satisfied with the 4-6% returns can consider taking a ULIP with a lower equity component. ‘The switch option allows customers to switch between fund options. with Rs 100 at every additional switch after that. Buying ULIPs? Read this first (30-May-2006 ) . which is actually the job of the investment advisor/consultant. the structure of a ULIP takes care of quite a bit of the uncertainty in the markets. While it is fine and even sensible to let your investable assets get an equity flavour. The volatility in equity markets can disturb the calmest of minds and the last thing you want to see is your nest egg being eroded by the latest slide in equity markets. Insurance companies understand the need to give insurance-seekers the flexibility to rethink their investment strategy in view of market histrionics. If one does not have the appetite to invest in equity. which means Rs 9. Rs 2. thereby making adjustments to any perceived risks.700 in the first and second years each will be set aside to meet ULIP charges. So should investors opt for ULIPs? First and foremost. However. Only Rs 7. only 1% of the premium will be charged to the ULIP. in the first and second years. which to a large extent should be sacred. So if you have a ULIP invested in equities. It is best if insurance-seekers tread the middle path and choose balanced plans (with about 50-60% equity component). they can make this marriage work. From the third year onwards. ‘A ULIP policyholder has the option to invest in a variety of funds. 27% of the premium constitutes ULIP charges. ULIPs are suitable for individuals who are already adequately insured and are reasonably wellinformed and savvy to take active investment decisions by using the ‘switch option’ that is provided to a ULIP policyholder. There is an option for the insurance-seeker to switch to another plan with a lower or zero equity component to stem the loss in a falling equity market. So if you have taken a Rs 10.’ ICICI Pru allows policyholders to make this switch four times a year at no cost. you are exposing your life insurance monies as well as your investable surplus to the vagaries of equity markets. for investors to make the right switch they need to track markets actively and be well-informed. Abhishek Bhatia elaborates. Abhishek points out. depending on his risk profile.300 will be invested in the first and second years each. with HDFC Standard Life ULIP.900 will be the amount invested. they can choose a debt or balanced fund.For instance.’ However.000 ULIP from HDFC Standard Life (which is the minimum amount to start with). which could needlessly expose their assets to market volatility. the same cannot be said about your life insurance monies. investors need to understand that a ULIP is a bundled product of their investments and their insurance proceeds. HDFC Standard Life allows policyholders to make as many switches as they like.

which gets invested. Therefore. that part of the premium which is net of annual expenses is invested.  Click here to understand how a ULIP’s equity component makes a difference However. ULIPs with a higher equity component can prove to be very volatile customers during stockmarket turbulence. This is unlike saving-based plans like endowment plans. In fact. which invest predominantly in specified debt instruments like bonds and government securities (gsecs). While annual expenses are high in the initial years. We outline four parameters that ULIPs need to be evaluated upon before individuals zero-in on a unit-linked product. ULIP expenses A lot has been written about ULIP expenses in the past. Expenses take a toll on the returns by way of reducing the amount. they even out in the long run (typically 15 years and above). . If you are a conservative investor then you can opt for a ULIP option that has a smaller equity allocation of about 20%. is levied on the corpus till date. You can select the option that best fits in with your risk profile and helps you achieve your investment objective.  Click here to understand how ULIP expenses affect returns FMC on the other hand. 2. ULIP expenses are broadly classified into annual expenses (excluding fund management charges. A lower amount will yield lower returns. The amount of money invested in equity has the potential to make a significant difference to the returns that the plan can generate over the long run. make a note of the maximum equity allocation the ULIP can take on. The annual expenses are deducted from the premium amount and hence. A higher FMC therefore means a reduction in the corpus that can generate returns going forward. ULIP expenses do make a difference to the returns. This gets more evident over the long run. At the cost of sounding repetitive. 1. So investors have to be sure that their risk appetite coincides with that of the ULIP. For this. most individuals opting for life insurance now go in for ULIPs as opposed to term plans or endowment plans. Investment mandate ULIPs differ significantly from traditional endowment plans in the way they invest their monies. FMC therefore makes a sizable difference to the returns in the long run.Unit linked insurance plans (ULIPs) have caught the fancy of individuals over the past few years. If you are an aggressive investor you can go for a ULIP with the maximum equity allocation – this varies from insurer to insurer but is usually in the range of 70%-100% of assets. There are several options within a ULIP. it becomes important for individuals to understand what to look for in a ULIP before finalising one. ULIPs have an investment mandate. which allows them to ‘shift’ assets freely between equities and debt.FMC) and fund management charges.

000. the minimum premium for one insurance company is Rs 10. Such differences need to be considered before individuals zero-in on a ULIP product. then the individual can consider investing in a ULIP with a significant equity allocation. 4. then what the individual may really need is a term/endowment plan.50%. It has been noticed that ULIPs are often bought by individuals without having an understanding of the value that they bring to their financial portfolio.50% as top-up charges. Conversely. some insurance companies let individuals alter their equity: debt allocation 5 times a year at no additional cost while other companies allow alteration only twice during the year (without additional costs). For example. investing the remaining 97.a certain insurance company invests 99% of the top-up amount (1% is deducted as top-up charges) while another company deducts 2. it is Rs 18. If their current asset allocation is skewed towards equities (i. mutual funds/ stocks). Miscellaneous features ULIPs offerings also differ across companies in terms of the flexibility offered across various parameters.000 while for another.e. if the portfolio is debt-heavy. Focusing on your asset allocation Individuals also need to stick to their asset allocation plan at all times. . Also.3. The charge on top-ups also differs.