UNIT LINKED INSURANCE PRODUCTS[/b]
[/b]
In today’s market, we can see a flood of investors, who are desirous of multiplying their wealth with minimal investment risk. In response to the market needs and with a view to capture the emerging risk bearing investor market segment, life insurers are offering a range of ULI products, which have a blend of risk cover and wealth maximization. Thus, emerged the USP for Unit Linked Insurance products- efficient utilization of capital with maximum transparency.
WHAT ARE UNIT LINKED PLANS?
ULI products have built-in judicious mix of providing insurance protection against death/disablement and also a provision for creating long-term savings. These are structured differently compared to the traditional ‘with-profit’ policies and also with reference to pure investment options of a mutual fund.
In ULI products, an insurer invests the premium paid by the client in diverse funds after charging the premium accounts for expenses towards life protection, administration, distribution and fund management, with a view to optimize returns based on the fund objective. The sum total of investments thus made, divided against the number of investors in a fund are called as ‘Units’.
The value of the units is determined by the market value of all the investments made by the fund divided by the number of units. The value of the fund depends on the unit price, which in turn is determined by the market value of the underlying assets. Thus,
Fund Value = Unit Price * Number of Units.
Insurers, today offer a wide range of funds such as Growth Fund, Balanced Fund, Secured Fund, Bond Fund, etc, to enable investors to choose the appropriate fund based on his need and investment objective.
It is at this juncture that an investor needs to understand the nuances of a ULI product offered by various insurers in areas of adequate disclosure and transparency in its fund management activities. One should not get carried away by the sweet coating made in various offer documents. It is here that this guidance note makes an effort to provide an investor the awareness as to what aspects are to be looked into before making an investment decision in ULI products.
THE INVESTMENT REQUIREMENTS OF AN INVESTOR
[/b]
An investor’s primary dilemma is why and how much insurance he needs and what should be his investment? Here comes in handy the services of professional investment advisors (popularly known as Agents), who with prior knowledge of various products and experience, help/guide an investor to a large extent to overcome this dilemma.
An investor’s need/investment objectives can be broadly grouped as follows:
Large investment in house/real estate property.
Children’s Higher Education Expenses.
Children’s Marriage Expenses.
Health Expenses.
Old Age Comfort Living.
General Financial/Life Protection, etc.
[/list]
Based on these needs/objectives and the guidance he receives, an investor decides his priorities. Since ULIP of various Insurers cater to these needs, we confine our selection to ULI products.
DISTINCT FEATURES OF UNIT LINKED INSURANCE PRODUCTS
A prudent investor’s minimum expectation is to minimize risk and maximize returns. Today customers are aware that the era of guaranteed returns are things of the past. The fall in interest rates in the recent past, globalization, cutthroat competition, market orientation, etc., are all indications enough to understand what lies ahead in the investment climate. What unit-linked products offer is a long-term investment option where returns are expected to be far more real and are not compromising in the life cover protection.
In the guaranteed returns regime, the guaranteed component was met by paying lower/no returns to those who did not have any guaranteed contracts on their products. This was unjust. Today, unit linked products offer greater value to the customers. Despite being exposed to market risks, customers get value for their money/investment by a judicious mix of plans/exit options. Also, it is a high probability that the returns that these ULIP offer are bound to be relatively higher compared to what similar traditional plans offer, since ‘risk bearing’ brings ‘rewards’.
[/b]
TRADITIONAL LIFE INSURANCE PRODUCTS[/b]
[/b]
There are two varieties of insurance products available to an investor-‘with profit’ and ‘without profit’.
‘With Profit’ life insurance products indicate investment gains (profits) and are distributed to policyholders in the form of ‘bonus’ announced every year .For ‘with profits’ products, the insurance company credits the premium to a common pool called the ‘life fund’, after setting aside funds for the risk premium on life insurance and management expenses.
Every year, the insurer calculates the amounts to be paid towards death and maturity claims against its earnings from premium and investment returns. The surplus is arrived after providing for various reserves and also based on actuarial valuation of life fund. The net surplus amount in the fund is credited to policyholders’ accounts in the form of ‘bonuses’.
In contrast, ’without profits’ life insurance products do not participate in the valuation exercise of the insurer and are not eligible for any benefit in the form of bonus. Only the final consideration amount, as stated in the initial contractual agreement, is paid on the happening of an event or at the end of the contractual term.
Various forms of traditional life insurance covers offered by insurers can be broadly classified into:
Whole Life Insurance Policy
Endowment Assurance (risk + savings)
Term Insurance (pure risk coverage)
[/list]
TRADITIONAL INSURANCE VS. UNIT LINKED INSURANCE
[/b]
Traditional Insurance [/b]
Unit Linked Insurance[/b]
Choice of ‘with profit’ or ‘without profit’ products
Choice of investment in various funds under unit-linked plans.
Assured benefit after the end of the contract.
Benefit based on capital market performance.
Liquidity in the form of surrender value available only after three years of policy commencement.
Liquidity in the form of surrender value available after year one of policy commencement with or without a levy.
Option to raise loan available
No option to raise loan
Guaranteed addition offered, as per contract.
Returns directly proportional to the capital market
Returns based on contractual terms/actuarial valuation/insurance companies experience
Returns based on funds underlying assets NAV as on maturity/withdrawal date.
WHY UNIT LINKED PLANS ARE POPULAR IN THE MARKET?
[/b]
The reason why ULI products are popular is because the investor need not closely follow the market, monitor his funds on day-to-day basis, or switch between the plethoras of alternatives on offer. The investor’s money is in safe hands of experts. It ensures that the investor’s hard earned money grows without the bother of overseeing his investments.
The growing demand for ULIPs is on account of the boom on the bourses and the northward journey of the sensex. There has been a lot of compulsive selling of unit-linked policies by insurance advisors. Often, ULIPs are compared with mutual fund schemes. This fact cannot be denied that they are akin to mutual funds. A perceptible mass migration is seen today from the traditional endowment policies offered by insurers to unit linked plans. The reason is not far to seek-reaping the dividends by way of two-in-one benefits that these new-generation offerings promise: Insurance cover and market-linked returns.
Internationally, till the 1960s life insurance policies were sold as traditional or non-linked policies. ULIP came into prominence in the mid 1960s and became exceedingly popular in Western Europe and the US. In England, ULIPs share of the life insurance market pool increased from 28% in the mid 1970s to 40% by the turn of the century; while in the US, the market share of variable ULIP policies increased to 48% during this period. This impressive growth was primarily against the backdrop of the increasing popularity of equity as an investment medium and the trend of reducing bonuses on traditional life insurance policies. The widespread popularity of ULIP is also attributed to its transparency and flexibility.
[/b]
In today’s market, we can see a flood of investors, who are desirous of multiplying their wealth with minimal investment risk. In response to the market needs and with a view to capture the emerging risk bearing investor market segment, life insurers are offering a range of ULI products, which have a blend of risk cover and wealth maximization. Thus, emerged the USP for Unit Linked Insurance products- efficient utilization of capital with maximum transparency.
WHAT ARE UNIT LINKED PLANS?
ULI products have built-in judicious mix of providing insurance protection against death/disablement and also a provision for creating long-term savings. These are structured differently compared to the traditional ‘with-profit’ policies and also with reference to pure investment options of a mutual fund.
In ULI products, an insurer invests the premium paid by the client in diverse funds after charging the premium accounts for expenses towards life protection, administration, distribution and fund management, with a view to optimize returns based on the fund objective. The sum total of investments thus made, divided against the number of investors in a fund are called as ‘Units’.
The value of the units is determined by the market value of all the investments made by the fund divided by the number of units. The value of the fund depends on the unit price, which in turn is determined by the market value of the underlying assets. Thus,
Fund Value = Unit Price * Number of Units.
Insurers, today offer a wide range of funds such as Growth Fund, Balanced Fund, Secured Fund, Bond Fund, etc, to enable investors to choose the appropriate fund based on his need and investment objective.
It is at this juncture that an investor needs to understand the nuances of a ULI product offered by various insurers in areas of adequate disclosure and transparency in its fund management activities. One should not get carried away by the sweet coating made in various offer documents. It is here that this guidance note makes an effort to provide an investor the awareness as to what aspects are to be looked into before making an investment decision in ULI products.
THE INVESTMENT REQUIREMENTS OF AN INVESTOR
[/b]
An investor’s primary dilemma is why and how much insurance he needs and what should be his investment? Here comes in handy the services of professional investment advisors (popularly known as Agents), who with prior knowledge of various products and experience, help/guide an investor to a large extent to overcome this dilemma.
An investor’s need/investment objectives can be broadly grouped as follows:
Large investment in house/real estate property.
Children’s Higher Education Expenses.
Children’s Marriage Expenses.
Health Expenses.
Old Age Comfort Living.
General Financial/Life Protection, etc.
[/list]
Based on these needs/objectives and the guidance he receives, an investor decides his priorities. Since ULIP of various Insurers cater to these needs, we confine our selection to ULI products.
DISTINCT FEATURES OF UNIT LINKED INSURANCE PRODUCTS
A prudent investor’s minimum expectation is to minimize risk and maximize returns. Today customers are aware that the era of guaranteed returns are things of the past. The fall in interest rates in the recent past, globalization, cutthroat competition, market orientation, etc., are all indications enough to understand what lies ahead in the investment climate. What unit-linked products offer is a long-term investment option where returns are expected to be far more real and are not compromising in the life cover protection.
In the guaranteed returns regime, the guaranteed component was met by paying lower/no returns to those who did not have any guaranteed contracts on their products. This was unjust. Today, unit linked products offer greater value to the customers. Despite being exposed to market risks, customers get value for their money/investment by a judicious mix of plans/exit options. Also, it is a high probability that the returns that these ULIP offer are bound to be relatively higher compared to what similar traditional plans offer, since ‘risk bearing’ brings ‘rewards’.
[/b]
TRADITIONAL LIFE INSURANCE PRODUCTS[/b]
[/b]
There are two varieties of insurance products available to an investor-‘with profit’ and ‘without profit’.
‘With Profit’ life insurance products indicate investment gains (profits) and are distributed to policyholders in the form of ‘bonus’ announced every year .For ‘with profits’ products, the insurance company credits the premium to a common pool called the ‘life fund’, after setting aside funds for the risk premium on life insurance and management expenses.
Every year, the insurer calculates the amounts to be paid towards death and maturity claims against its earnings from premium and investment returns. The surplus is arrived after providing for various reserves and also based on actuarial valuation of life fund. The net surplus amount in the fund is credited to policyholders’ accounts in the form of ‘bonuses’.
In contrast, ’without profits’ life insurance products do not participate in the valuation exercise of the insurer and are not eligible for any benefit in the form of bonus. Only the final consideration amount, as stated in the initial contractual agreement, is paid on the happening of an event or at the end of the contractual term.
Various forms of traditional life insurance covers offered by insurers can be broadly classified into:
Whole Life Insurance Policy
Endowment Assurance (risk + savings)
Term Insurance (pure risk coverage)
[/list]
TRADITIONAL INSURANCE VS. UNIT LINKED INSURANCE
[/b]
Traditional Insurance [/b]
Unit Linked Insurance[/b]
Choice of ‘with profit’ or ‘without profit’ products
Choice of investment in various funds under unit-linked plans.
Assured benefit after the end of the contract.
Benefit based on capital market performance.
Liquidity in the form of surrender value available only after three years of policy commencement.
Liquidity in the form of surrender value available after year one of policy commencement with or without a levy.
Option to raise loan available
No option to raise loan
Guaranteed addition offered, as per contract.
Returns directly proportional to the capital market
Returns based on contractual terms/actuarial valuation/insurance companies experience
Returns based on funds underlying assets NAV as on maturity/withdrawal date.
WHY UNIT LINKED PLANS ARE POPULAR IN THE MARKET?
[/b]
The reason why ULI products are popular is because the investor need not closely follow the market, monitor his funds on day-to-day basis, or switch between the plethoras of alternatives on offer. The investor’s money is in safe hands of experts. It ensures that the investor’s hard earned money grows without the bother of overseeing his investments.
The growing demand for ULIPs is on account of the boom on the bourses and the northward journey of the sensex. There has been a lot of compulsive selling of unit-linked policies by insurance advisors. Often, ULIPs are compared with mutual fund schemes. This fact cannot be denied that they are akin to mutual funds. A perceptible mass migration is seen today from the traditional endowment policies offered by insurers to unit linked plans. The reason is not far to seek-reaping the dividends by way of two-in-one benefits that these new-generation offerings promise: Insurance cover and market-linked returns.
Internationally, till the 1960s life insurance policies were sold as traditional or non-linked policies. ULIP came into prominence in the mid 1960s and became exceedingly popular in Western Europe and the US. In England, ULIPs share of the life insurance market pool increased from 28% in the mid 1970s to 40% by the turn of the century; while in the US, the market share of variable ULIP policies increased to 48% during this period. This impressive growth was primarily against the backdrop of the increasing popularity of equity as an investment medium and the trend of reducing bonuses on traditional life insurance policies. The widespread popularity of ULIP is also attributed to its transparency and flexibility.