A ULIP was something that caught the world’s fancy in the 1960s when it originated in Britain. Soon after, they became some of the most popular insurance products in Europe and then the US. India, prior to opening up the insurance sector, had no experience with these products and have only recently been exposed to ULIPs.
?ULIPs provide for life insurance where the policy value at any time varies according to the value of the underlying assets at the time. ULIP is life insurance solution that provides for the benefits of protection and flexibility in investment. The investment is denoted as units and is represented by the value that it has attained called as net asset value (NAV). ULIP is a financial product that offers you life insurance as well as an investment like a mutual fund. Part of the premium you pay goes towards the sum assured (amount you get in a life insurance policy) and the balance will be invested in whichever investments you desire: equity, fixed-return or a mixture of both. Investments in ULIP are covered under Section 80C of the Income Tax Act.
In a ULIP, a certain part of the premium is invested in listed equities/debt funds/bonds, and the balance is used to provide for life insurance and fund management expenses. Yields earned on investments ie, the value of the investment or the sum assured, whichever is higher, is paid to the insured or nominee. This varies from company to company ie, some insurance companies pay the value of the investment in addition to the sum assured.
Demystifying
?Traditional insurance products have a fixed contribution and fixed return as well. This was till the people stated the concept of unbundled products. This led to the development of unit-linked insurance plans which sense then moved into many other areas like mixed products. If a person is looking for both cover and savings both then they can choose to go in for a ULIP which offers this option. Unbundling is now possible and so if I have a risk appetite then I can fix my insurance component at, say, five times the premium and use the rest of the money for investment purposes. It was actually policy holders who initially wanted insurance companies to manage a portion of their investments as well so as to keep it safe and growing. In other products like endowment or term the insurance company has the entire risk bearing on it, however, in a ULIP the policy holders take a part of the risk as well. This is as, in the investment angle of the product the policy holder is liable to face the risks of their investment choices. Some of the funds where a policy holder can invest is in which invest in pure assets like only equity or debt. Others are mixed funds or balanced funds, and investors have the flexibility to choose a fund based on his/her risk appetite at any pint of time,? says Yash Mohan Prasad, senior vice president, HDFC Standard Life. GLN Sarma, chief actuary, Bharti AXA Life says, ?An endowment policy has an element of bonus and savings as well. A customer knows what he is paying but not what the maturity value is. Customers are also unaware of how the money they have spent is allocated and invested by the company in this case. There is a major lack of transparency on how is the premium being used. In terms of transparency, the life insurance sector decided to move to a ULIP.?
Types of ULIPs
ULIPs offer investors to invest in a wide variety of products and customise their investments constantly to better meet their needs. There are currently 112 and counting ULIP products available in India. These range from products which have funds that are invested a 100% in equity and yet from there you have the flexibility to shift to a fund that has 100% debt. This is not the case with endowment type plans- individuals can’t choose their investment avenues and have to be content with the insurance company’s investment decisions; which revolve largely around debt ULIPs are available in three broad categories. Aggressive ULIPs which invest up to 100% of their corpus in equities, Balanced ULIPs which invest up to 60% of their corpus in equities and balance in debt market and Conservative ULIPs which invest up to 100% of their corpus in debt instruments and the money market instruments.
Individuals are free to decide where they want to invest their money when it comes to ULIPs. For example, individuals with an appetite for risk can invest their entire money in equities while conservative individuals have the option to park their money in balanced or conservative ULIPs. A certain proportion of the premium paid is invested in market-linked instruments like equities and bonds and the balance is used to provide for the expenses incurred on providing the investor with an insurance cover. These are all as per the mandates of law within which these firms operate.
As far as the types of products go, Sharma explains, ?There are a wide variety of products available within the ULIP gambit as well. There is a simple ULIP, in which one can get the sum assured or sum value of the investments on maturity or death, usually whichever is higher. There is say for instance also a child ULIP wherein a child can get cover and a regular flow of income, if something were to happen to the parents. There is always a certain guaranteed amount available which is the return on premium, and usually companies either provide the return on premium or fund value based on which is higher. The intention of buying is very important and as per the local registration bodies, the cover offered should be five times the annual premium at least. However, the market can choose to offer 10 to 15 times the premium cover as well. Therefore those who are more into the insurance cover part than the investment, choosing a product and company that offers a higher multiple is better. If a person wants a lesser cover and feels like going in for higher wealth creation, then one can go for a lower multiple of premium as cover. Choosing an insurance term is important too,. Similar products across 3-5 companies should be looked at. A comparison should be done; this is easier these days since certain magazines have done this. One must however keep in mind that not all features are available for all products and hence comparisons and reading fine prints is a must. One should know what they are buying for.?
Advantages
Sharma says, ?The advantage to the customer in a ULIP product is that one can see everything. All the charges which are deducted for various reasons are shown and once can judge fairly accurately how much money can they expect back on the maturity of their investment, based on the NAV returns. There is also a lot of transparency on how is the money being utilized by the company. The nature of the contract itself offers a great deal of transparency and flexibility both to the policy buyer. One can hence choose the type of investment they would like to go in for based on their risk appetite. Customers also have the advantage of shifting from debt to equity in whatever percentage they like at anytime. In insurance one gets both a cover towards insurance and an investment. The percentage of a person?s premium that goes towards insurance is approximately Rs 150 per lakh per annum.?
Prasad says, ?Since these policies are for a longer term, say if one is 25 years or so and is earning well, then he/she may have high equity content. However, with age as a persons profile changes and responsibilities increase, one can always switch asset classes in the percentage they would like to rebalance their investment. This is an extremely useful tool. A ULIP also has no exit or entry loan and hence are a lot easier and cheaper to manage then a mutual fund.” He goes on to add, ?All the liabilities of ULIP?s are completely attributed to the asset class allocation one chooses and hence one has a fair degree of control over their investment. One can also easily track ULIP?s via their daily net asset value (NAV) which is published. Any changes in the funds portfolios are also visible and this product offers a very high degree of transparency.?
Investors can select a ULIP with an equity-debt combination that is in line with their risk profile. A risk-taking investor would typically select one with a high equity component, while a risk-averse investor would opt for a debt-heavy one. Investors also have the opportunity to manage their money, therefore when equity markets seem murky, investors can shift their corpus into a debt-oriented portfolio, protecting it from volatility in the equity markets. There are advantages like the top-up facility (which is like a one-time premium payment) that can be used to gainfully utilize surplus monies.
?Our focus right now is on good products and continuing to support the premium in case on the holders dies and a child is left unsupported especially. For high net worth individuals (HNIs) there us a one time payment option product available as well,? says Sharma.
Risks and returns
?There is no fixed returns one has in a ULIP as it is entirely dependent on when one enters and exits the investments. Timing is a key factor here and a lot also depends upon what sort of investments the fun partakes in,? feels Prasad. ?A ULIP is a very good product for those who are familiar with the markets, who can ride the volatility and who have a risk appetite. If as an holder one is not aware of the markets and one is only looking for an insurance cover, then a ULIP may not be the most convenient plan. Upturns and downturns or slowdowns will not affect a traditional insurance product. A ULIP is also useful in getting middle men or distributors and agents to connect and engage with the client more, as there is constant advice and instructions being passed on to move the investment allocation? concludes Prasad.
?ULIPs give good returns, however, customers are unaware of the expected returns while purchasing the product. However, illustrations show that even in 2008 an IRR of 3.5-7% was gotten. This can even go beyond the 10% mark, however an average of 7-8% is common? feels Sharma.
The average returns of most ULIP products is said to be 8% but one can use the effectively to earn a lot more than that. In the short term a ULIP is very cost effective way of investing in the markets, but in the longer run, the expenses one pays in a ULIP is more than that in a mutual fund and one should not substitute one investment for another.
Prasad adds an interesting point when he says, ?The commitment one has towards the insurance part of ones plan is the only constant amount that has to paid up as premium compulsorily, the remainder going in for the insurance part can be paid or not as per your own decisions on how much do you wish to invest.?
He also felt that in a ULIP policy insurance companies have to manage the fund and premium value both. The exact value that the policy holder will receive on maturity is not known or guaranteed.
Fine points
?If a person who is not that involved with markets and they still want to invest in a ULIP then they should choose a highly responsive and intelligent intermediary to guide them. A constant checking of the funds NAV and checking the performance record is a useful practice too for such investors. The main choosing point for such investors who have a risk appetite but are not so involved with the markets is having a good advisor who is both responsible and market savvy? warns Prasad.
As long as when goes in with their eyes open and fully aware one is safe within this world of ULIPs.
?A mixed asset class fund like a balanced fund or stable funds too have pure asset classes within them, and one can change the percentage between equity and debt as per the proportion they are most comfortable with. Since a ULIP investor is suppose to be more market savvy, they can use these too their benefits and generate better returns,? says Prasad. Sharma says, ?Generally in finance one can diversify ones portfolio. This is as it is flexible andguarantees earnings. One must have a certain amount of life insurance always and a term insurance product is good for that. A ULIP too is a good option and the combination of the too is rather useful.?
While last week FE delved into understanding term and endowment policies, this week we round up the most popular options while discussing ULIPs and conclude both are equally useful if used correctly.
Here is a list of ULIP riders
Riders are the additional benefits that you may buy and add to your ULIP. The addition of riders helps you to customize the ULIP to match your present and future needs.Riders or add-ons are additional benefits that you can opt for with your ULIP for an extra amount. Riders are optional contracts that offer additional benefits for policyholders. They are always attached to a basic policy. They cannot be bought separately or independently of the basic policy. Each rider will have its own premium rate and separate policy conditions.
•Accidental death and dismemberment rider
• Term rider
• Critical illness rider
• Waiver of premium rider
• Critical illness plus rider
• Critical illness – woman rider
Here is a list of charges applicable on ULIPs
• Premium allocation charge:
This charge takes care of the sales and distribution expenses, marketing expenses, and the agents brokerage. This charge is high in the first year and gradually becomes lesser and lesser as the ULIP tenure goes on.
• Fund management charge:
This is the charge levied to manage the ULIP which involves day-to-day fund management activities.
• Surrender charges:
These charges are applicable only in case the subscriber wants to surrender the policy before the term of the policy.
• Mortality charges:
This charge goes towards buying the life insurance cover for the insured.
• Fund switching charges:
ULIPs have various funds options with different asset allocations. The subscriber can move his/her money from one fund to another. Usually four to six switches are free of cost. After the free switches are over, every switch attracts a fund switching charge.
There are some other charges, such as:
• Partial withdrawal charges: Charges levied on partial withdrawals from the accumulated fund after the specified period mentioned in the plan.
• Policy administration charges: Charges levied on general administration and policy maintenance.
• Revival charges: Charges levied when a lapsed ULIP is revived.
• Miscellaneous charges
Legal documentation
The death of the insured needs to be informed to the insurance company either directly or through the insurance agent who sold the policy to the insured. Contact details are usually given on the insurer’s official website. The insurance companies have death claim forms that need to be filled up and submitted to them along with a list of documents. A general list of documents is mentioned below:
•Claimant’s statement
•Medical Attendant’s Certificate
•Proof of age e.g. passport no., birth certificate
• Death certificate duly certified
• Post mortem report duly certified
•Police reports for accident/suicide
•Certificate of hospital treatment
•Burial/cremation report
•Consent letter duly signed
•Original policy contract
•Employer’s certificate
•Newspaper cuttings, if any
•Hospital reports
•Investigation report
Tax savings
A ULIP is an investment tool, first and foremost, with a life insurance component attached. That alone allows you to claim income tax benefits against your ULIP premium payments, by way of both deduction and exemption.
Deductions from gross income (Under Section 80C of the Income Tax Act)
You can deduct from your taxable income to a total of Rs. 1 lakh in certain instances, such as your insurance payments. This benefit for life insurance premium under this section is restricted to a maximum 20% of the actual capital sum assured. If you surrender the insurance plan before premiums have been paid for two years, your tax benefit will be reversed and you will have to pay that tax retrospectively.
Exemption from gross income (Under Section 10 (10) D of the Income Tax Act)
Any sum received from insurance policy as maturity proceeds, death benefits are exempt from tax. On the other hand, proceeds from key man insurance payouts are taxable. For single premium policies, the portion of the single premium that exceeds 20% of the sum assured is not exempt from tax, and is considered part of taxable income. For insurance policies issued after 01 April 2003, where the premium payable for any of the years during the term of the policy exceeds 20% of the sum assured, the insured will not be eligible for Sec 10(10) D benefit.