Description
Life insurance (or commonly Life assurance, especially in the Commonwealth) is a contract between an insured (insurance policy holder) and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money (the "benefits") upon the death of the insured person.
History of LIC of India
The Life Insurance Corporation (LIC) of India founded in 1956 is the largest life insurance company in India owned solely by the Government of India. Headquartered in Mumbai, which is considered the financial capital of India, LIC presently has 8 Zonal Offices and 105 Divisional Offices situated all around the country. In addition to an even distribution of 2048 branches located in different towns and cities of India, LIC also has a network of around one million agents who solicit life insurance policies from the public. The first 150 years of the British Rule in India were characterized by turbulent economic conditions. The first war of independence in 1857, the World Wars 1 and 2 (1914-1918 and 1939-45) and India's national struggle for freedom in between had adverse effect on the economy. In addition to this the period of world wide economic crisis in between the two World Wars termed as the period of Great Depression led to the high rate of bankruptcies and liquidation of most Life Insurance Companies in India that existed during that time. These occurrences led to loss of faith in insurance of the people of India. The Life Insurance Companies Act and Provident Fund Act both passed in 1912 provided regulatory mechanisms to the Life Insurance Industry in India for the first time. After undergoing several other such reforms in the following decades and nearly a decade after India achieved independence, the Parliament of India passed the Life Insurance of India Act on 19 th June, 1956 following which the Life Insurance Corporation (LIC) of India on 1 st September of the same year. The Company began its operations with 5 Zonal Offices , 33 Divisional Offices and 212 Branch Offices .
Present Status of LIC of India
Existing as a towering insurance company for over 50 years, LIC has acquired almost monopoly power in the solicitation and sale of life insurance policies in India. In addition to the summary regarding the present stature provided at the beginning, LIC has extended its
activities in 12 countries other than India with the objective of catering to the insurance needs of Non Resident Indians. The enforcement of New Economic Reforms in 1991 coupled with the formation of Insurance Regulatory and Development Authority Act (IRDA) of 2000 (which started issuing licenses to private life insurers ) has diluted the monopolistic attitude commanded by LIC. The only insurance company belonging to the public sector now has to compete with several other corporate entities of its kind which often are heavyweight Indian as well as Multinational Life Insurance Brands in themselves. LIC had 5 zonal offices, 33 divisional offices and 212 branch offices, apart from its corporate office in the year 1956. Since life insurance contracts are long term contracts and during the currency of the policy it requires a variety of services need was felt in the later years to expand the operations and place a branch office at each district headquarter. re-organization of LIC took place and large numbers of new branch offices were opened. As a result of re-organisation servicing functions were transferred to the branches, and branches were made accounting units. It worked wonders with the performance of the corporation. It may be seen that from about 200.00 crores of New Business in 1957 the corporation crossed 1000.00 crores only in the year 1969-70, and it took another 10 years for LIC to cross 2000.00 crore mark of new business. But with re-organisation happening in the early eighties, by 1985-86 LIC had already crossed 7000.00 crore Sum Assured on new policies. Today LIC functions with 2048 fully computerized branch offices, 105 divisional offices, 8 zonal offices and the Corporate office. LIC’s Wide Area Network covers 105 divisional offices and connects all the branches through a Metro Area Network. LIC has tied up with some Banks and Service providers to offer on-line premium collection facility in selected cities. LIC’s ECS and ATM premium payment facility is an addition to customer convenience. Apart from on-line Kiosks and IVRS, Info Centres have been commissioned at Mumbai, Ahmedabad, Bangalore, Chennai, Hyderabad, Kolkata, New Delhi, Pune and many other cities. With a vision of providing easy access to its policy holders, LIC has launched its SATELLITE SAMPARK offices. The satellite offices are smaller, leaner and closer to the
customer. The digitalized records of the satellite offices will facilitate anywhere servicing and many other conveniences in the future. LIC continues to be the dominant life insurer even in the liberalized scenario of Indian insurance and is moving fast on a new growth trajectory surpassing its own past records. LIC has issued over one crore policies during the current year. It has crossed the milestone of issuing 1,01,32,955 new policies by 15th Oct, 2005, posting a healthy growth rate of 16.67% over the corresponding period of the previous year. From then to now, LIC has crossed many milestones and has set unprecedented performance records in various aspects of life insurance business. The same motives which inspired our forefathers to bring insurance into existence in this country inspire us at LIC to take this message of protection to light the lamps of security in as many homes as possible and to help the people in providing security to their families. Some of the important milestones in the life insurance business in India are: 1818: Oriental Life Insurance Company, the first life insurance company on Indian soil started functioning. 1870: Bombay Mutual Life Assurance Society, the first Indian life insurance company started its business. 1912: The Indian Life Assurance Companies Act enacted as the first statute to regulate the life insurance business. 1928: The Indian Insurance Companies Act enacted to enable the government to collect statistical information about both life and nonlife insurance businesses. 1938: Earlier legislation consolidated and amended to by the Insurance Act with the objective of protecting the interests of the insuring public.
1956: 245 Indian and foreign insurers and provident societies are taken over by the central government and nationalised. LIC formed by an Act of Parliament, viz. LIC Act, 1956, with a capital contribution of Rs. 5 crore from the Government of India. The General insurance business in India, on the other hand, can trace its roots to the Triton Insurance Company Ltd., the first general insurance company established in the year 1850 in Calcutta by the British.
Some of the important milestones in the general insurance business in India are:
1907: The Indian Mercantile Insurance Ltd. set up, the first company to transact all classes of general insurance business. 1957: General Insurance Council, a wing of the Insurance Association of India, frames a code of conduct for ensuring fair conduct and sound business practices. 1968: The Insurance Act amended to regulate investments and set minimum solvency margins and the Tariff Advisory Committee set up. 1972: The General Insurance Business (Nationalization) Act, 1972 nationalized the general insurance business in India with effect from 1st January 1973. 107 insurers amalgamated and grouped into four companies’ viz. the National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd. and the United India Insurance Company Ltd. GIC incorporated as a company.
Insurance.
Definition:
The business of insurance is related to the protection of the economic values of assets. Every asset has a value. The assets would have been created through the efforts of the owner. The asset is valuable to the owner, because it means some of his needs. The benefit may be an income or in some other form. In the case of a factory or a cow, the product generated by it is sold and income is generated. In the case of a motor car, it provides comfort and convenience in transportation. There is no direct income. Both are assets and provide benefits. Insurance companies are called insurers. The business is to bring together persons with common insurance interests (sharing risk), collect the share or contribution (called premium) from all of them, and pay out compensations (called claims) to those who suffer from the risks. In India, insurance business is classified primarily as life and non-life or general. Life insurance includes all risks related to the lives of human beings and general insurance covers the rest. General insurance has three classifications that are, Fire (dealing with all fire related risks), Marine (dealing with all other like liability, motor, crop, engineering, personal accident, etc). Personal accident and sickness insurance, which are related to human beings, is classified as ‘nonlife’ in India, but is classified as ‘life’, in many other countries. In India, the IRDA has, in 2005, issued Regulation enabling micro insurance to be done by both life and general insurers on the basis of mutual tie-ups. A policy may be issued by a life insurer covering both life and non-life risks, but premium on account of the non-life business will be passed on to a general insurer and the claim amount collected from the latter. The premium for insurance is based on exemptions of the losses. These expectations are based on studies of occurrences in the past
and the use of statistical principles. There is, in statistics, a “law of large numbers”. When you toss a coin, the chance, or probability, of a head or tail coming up is half. If the coin is tossed 10 times, one cannot be sure that the head will come up 5 times. If the coin is tossed 1 million times, the number of heads will be closer to half a million proportionately than in the case of 10. The variation will be less as a percentage. In order to be amenable to statistical predictions, insurer have to insure large numbers of risks. The large the spread of the business, the better the experience in relation to expectations. The probability of risk being the basis of premium calculation, large numbers are necessary to ensure that the premium charged is viable or adequate. The business of insurance is one of sharing. It spreads losses of an individual over the group of individuals who are exposed to similar risks. People who suffer loss get relief because at least part of their loss is made good. People who do not suffer loss are relieved because they were spared the loss.
Insurance Act, 1938
1. The insurance Act 1938, which came into effect from 1 st july 1939, and was amended in 1950 and later in 1999, is the principal enactment relating to the business of insurance in India. The Act contains provisions regarding licensing of agents and their remunerations, prohibition of rebates, and protection of policy holder’s interests. It also has provisions placing limit on the expenses of insurers, use of funds and patterns of investments, maintaining solvency levels, and constitution of Insurance Associations and Insurance Councils and the Tariff Advisory Committee for general insurance. 2. Till the constitution of the IRDA by the IRDA Act in 1999, the Controller of insurance was responsible for the administration of the Insurance Act. Since 1999, the IRDA has replaced the Controller of Insurance. The Insurance Act vests the IRDA with powers to • Register insurance companies and also cancel their registrations. • Monitor and certify the soundness of the terms of life insurance business. • Make regulations relating to the conduct of the business of insurance. • Inspect documents of insurers. • Appoint additional directors. • Issue directions. • Take over the management of an intermediaries or between intermediaries. insurers and
• Decide on disputes relating to settlement of claims of amounts not exceeding Rs.2000. 3. By the end of December 2006, the IRDA had issued more than 25 regulations and also issued several guidelines to insurer on a variety of matters.
Life Insurance Corporation Act, 1956
This Act was the basis for the establishment of the L.I.C. as a body corporate consisting of not more than 16 members appointed by the Central Government, one of them being Chairman. The Corporation’s duty was to carry on life insurance business to the best advantage of the community. Section 30 gave the L.I.C. exclusive privilege to transact life insurance business in India. This exclusive privilege ceased as a result of the amendments made in 1999. These amendments were made in pursuance of the Government’s policy of economic reforms. 16 insurance companies were registered and had commenced life insurance business till 31.08.2007.
Role of Insurance in Economic Development
For economic development, investments are necessary. Investments are made out of savings. A life insurance company is a major instrument for the mobilization of savings of people, particularly from the middle and lower income groups. These savings are channeled into investments for economic growth. The Insurance Act has strict provisions to ensure that insurance funds are invested in safe avenues, like Government bonds, companies with record of profits and so on. As on 31.03.2006, the total investments of the LIC exceeds Rs.520,000 crores, of which nearly Rs.300,000 crores were directly in Government related securities, nearly Rs.16,000 crores in housing loans, Rs.19,000 crores in the private sector and Rs.10,000 crores in water supply and sewerage systems. Other investments included road transport, setting up of industrial estates and directly financing industry. Investments in the corporate sector exceeds Rs.30,000 crores. These directly affect the lives of the people and their economic well-being. The L.I.C is not an exception. All good life insurance companies have huge funds, accumulated through the payments of small amounts of premium of individuals. These funds are invested in ways that contribute substantially for the economic development of the countries in which they do business. The private insurers in India are
new and have accumulated funds equal to about one-eighth of the L.I.C’s. But even their investments in the various sectors and contributing directly and indirectly to the country’s economic development, would be of similar proportion. A life insurance company’s funds are collected by way of premiums. Every premium represents a risk that is covered by that premium. In effect, therefore, these vast amounts represent pooling of risks. The funds are collected and held in trust for the benefit of the policy holders. The management of life insurance companies are required to keep this aspect in mind and make all its decisions in ways that benefit the community. This applies also to its investments. That is why successful insurance companies would not be found investing in speculative ventures. Their investments, as in the case of the L.I.C, benefit the society at large. Apart from investment, business and trade benefit through insurance. Without insurance, trade and commerce will find it difficult to face the impact of major perils like fire, earthquake, flood, etc. Financiers, like banks, would collapse if the factory, financed by it, is reduced to ashes by a terrible fire. Insurers cover also the loss to financiers, if their debtors default.
The Objectives of LIC
? Spread life insurance widely and in particular to the rural areas and to the socially and economically backward classes with a view to reaching all insurable persons in the country and providing them adequate financial cover against death at a reasonable cost. ? Maximize mobilization of people’s savings by making insurance linked savings adequately attractive. ? Bear in mind, in the investment of funds, the primary obligation to its policy holders, whose money it holds in trust, without losing sight of the interest of the community as a whole; the funds to be deployed to the best advantage of the investors as well as the community as a whole, keeping in view national priorities and obligations of attractive return. ? Conduct business with utmost economy and with the full realization that the moneys belong to the policy holders. ? Act as trustees of the insured public in their individual and collective capacities. ? Meet the various life insurance needs of the community that would arise in the changing social and economic environment. ? Involve all people working in the Corporation to the best of their capabilities in furthering the interests of the insured public by providing efficient service with courtesy. Promote amongst all agents and employees of the Corporation a sense of participation, pride and job satisfaction through discharge of their duties with dedication towards achievement of Corporate Objectives.
Advantages of Life Insurance
• In the event of death, the settlement is easy. The heirs can collect the moneys quicker, because of the facility of nomination and assignment. The facility of nomination is now available for some bank accounts, provident fund, etc. • There is a certain amount of compulsion to go through the plan of savings. In other forms, if one changes the original plan of savings, there is no loss. In insurance, there is a loss. • Creditors cannot claim the life insurance moneys. They can be protected against attachments by courts. • There are tax benefits, both in income tax and in capital gains. • Marketability and liquidity are better. A life insurance policy is property and can be transferred or mortgaged. Loans can be raised against the policy. • It is possible to protect a life insurance policy from being attached by debtors. The beneficiaries’ interests will remain secure. • Insurance is the only way to safeguard against unpredictable risks of the future. It is unavoidable. • The terms of life are hard. The terms of insurance are easy. • The value of human life is far greater than the value of property. Only insurance can preserve it. • Life insurance is not surpassed by any other savings or investment instrument, in terms of security, marketability, stability of value or liquidity. the
• Insurance, including life insurance, is essential for the conservation of many businesses, just as the preservation of homes. • Life insurance enhances the existing standards of living. • Life insurance helps people live financially solvent lives. • Life insurance perpetuates life, liberty and the pursuit of happiness. • Life insurance is a way of life.
Serve better to the policy holder
Care to be taken while completing Proposal Papers: A contract of life insurance is a contract of utmost good faith technically known as uberrima fides. The principle of disclosing all material facts is embodied in this important concept which applies to all forms of life insurance. It becomes the duty of the proposer to inform the insurer of everything likely to affect the judgment of the insurer, however unimportant it may seem to him/her (the proposer). Hence, the proposer should ensure that all questions in the proposal form are correctly answered. Any misrepresentation, non – disclosure of facts / information which is material to acceptance of risk, or fraudulent information in any document leading to the acceptance of the risk will render the insurance contract null and void. Hence it is quite important that the policy holder and his dependants provide the correct and full information to secure the precious benefits of the insurance policy for his near and dear ones. Importance of Age Admission: The rate of premium payable on a life insurance policy varies with age. Granting of some plans and consideration of proposals under Non – Medical schemes etc. depends on age. Hence prior age admission is a must. Hence, it is advisable to furnish standard proof of age. Modes of Payment of Premium and Days of Grace: Premiums, other than single premium, may be paid by the policy holder to LIC in yearly, half – yearly, quarterly or monthly installments. Policy holders are required to pay the premiums to the Corporation on the due dates. A grace period of one month but not less than thirty days is allowed for payment of yearly, half – yearly and quarterly premiums, and fifteen days for payment of monthly premiums. Revival of Lapsed Policy: When the premium is not paid within the days of grace, the policy lapses. It can, however, be revived within five years from the
date of lapse during the life – time of the assured but before the date of maturity, if applicable. The Corporation offers three convenient schemes of revival viz. the Ordinary Revival Scheme, the Special Revival Scheme and the Installment Revival Scheme for the convenience of the policy holders. Nomination/Assignment of Policy: When the policy money becomes due for payment on the death of the policy holder, it can be paid only to the person who is legally entitled to give a valid discharge to the Corporation. For quick settlement of claims, it is in the interests of the policy holders to effect a nomination in respect of their policy. Similarly, if the policy is assigned, the assignee receives the claim amount as per rules. It should be noted that an assignment of a policy automatically cancels the existing nomination. Hence, when such a policy is reassigned in favour of the policy holder, it is necessary to make a fresh nomination to avoid delay in payment of the claim. Change of Address and transfer of Policy Records: As and when a policy holder desires a change of his address in the Corporation’s record, intimation of such change should be given to the Branch Office serving his policy. Policy Records can be transferred from the Branch Office which services the policy to any other Branch Office convenient to the policy holder. The correct address and phone numbers facilitate better service and quicker settlement of claims. Care of Documents and Loss of Policy: The policy document (policy bond) is an evidence of the contract between the insurer and the insured. It has to be submitted to the Corporation at the time of loans / claims etc. Loss of the policy document should be immediately initiated to the Branch Office of the Corporation where it is serviced. Loan: At present loans are granted on unencumbered policies up to 90% of the Surrender Value under policies which are in force for the full sum assured and up to 85% of the Surrender Value on policies which are paid – up for a reduced sum assured. The minimum amount for which a loan can now be granted under a policy is
Rs.1,000/- The rate of interest charged at present varies from 9% to 12% per annum payable half – yearly depending upon the type of plan. The terms and conditions printed on the policy bond reveal whether a particular policy is eligible for a loan. Claim by Maturity/Installment Payment: The Corporation strives to settle maturity claims on or before the due date. Survival Benefit Payments up to Rs.60,000/- under Money Back type plans, barring few exceptions, are released without calling for original policy documents and Discharge Voucher. Death Claim: In the event of the death of the life assured, the claimant should immediately intimate the fact of such death to the Branch Office where the policy is serviced, along with the following particulars to help the Corporation to consider the claim promptly. (a) Policy numbers (b) name of the life assured (c) date of death preferably with proof of death and (d) claimant’s relationship with the assured. The claim is usually payable to the nominee / assignee or the legal successor, as the case may be. However, if the deceased policy holder has not nominated / assigned the policy or if he / she has not made the will regarding the policy moneys, the claim is payable to the holder of a Succession Certificate or some such evidence of title from a Court of Law. Claims Review Committee: The Corporation settles a large number of death claims every year. Only in case of fraudulent suppression of material information will the liability be repudiated. The number of death claims repudiated is, however, very small. Even in these cases, an opportunity is given to the claimant to make a representation for consideration by the Review Committees at the Zonal Office and the Central Office. As a result of such review, depending on the merits of each case, appropriate decisions are taken. The Claims Review Committees at the Central and Zonal Offices have among other members a retired High Court / District Court Judge. Grievance Redressal Machinery:
Policy holders’ Grievance Redressal Cells exist in all the Offices of the Corporation, headed by Senior Officers who can be approached by policy holders for redressal of their grievance, on any day but particularly on every Monday between 2.30 p.m. and 4.30 p.m. without prior appointment. All Branch Offices Chief Manager / Sr. / Branch Manager All Divisional Offices Marketing Manager All Zonal Offices Regional Manage (Marketing) / Regional Manager (CRM) Central Office Executive Director / Chief / Secretary (CRM) The Policy holder can avail of himself / herself the facility of toll – free telephone system in Delhi and Mumbai or contact us through the LIC website www.licindia.in. LIC’s website is rich in information on products / services. Scheme of Ombudsman: The grievance machinery has been further expanded with the appointment of the Insurance Ombudsman by the Government of India at different Centers. Complaints of the following types come within the purview of the Ombudsman’s consideration. ? Repudiation of liability under claims. ? Delay in settlement of claims. ? Any dispute regarding premiums paid or payable in respect of the policy. ? Any dispute regarding the legal construction of the policies in relation to a claim; and ? Non – issue of insurance document to customer after receipt of premium.
Tips to Policy holders:
Make use of various services available with the help of Information Technology initiate elaborated. Check the nomination status under the policy and intimate changes, if any, for speedy settlement of claims. Pay the premiums in time (where possible, using facility of Metro / Wide Area Network / Internet / Online Payment / ATMs of Corporation Bank & AXIS Bank & ECS). Revive the policy in case it has lapsed, so that the valuable insurance cover is kept intact. Review periodically the insurance needs of self and the family so that adequate insurance protection is ensured. Enquire with agent about new innovative plans devised by LIC. Intimate the Email address, Telephone, Mobile No. and Fax Number for faster communication on matters relating not only to the policy services like premium reminders, claim alerts but also to update on new plan / services being offered by LIC. Maturity proceeds can be reinvested in attractive products of LIC viz. investment oriented products like LIC’s Market Plus, Profit Plus, LIC’s Bima Nivesh, Bima Bachat or pension schemes like New Jeevan Suraksha – 1, LIC’s Jeevan Akshay – VI, etc. In case of any complaint, the full policy details with the same of the serving branch may be provided for quick disposal of the complaint. LIC has launched an Enterprise portal where policy holder can register and get information about his policy as well as LIC products on portal itself.
People’s Money for People’s Welfare
The Life Insurance Corporation of India has been a nation – builder since its formation in 1956. True to the objectives of nationalization, the LIC has mobilized the funds invested by the people in life insurance for the benefit of the community at large. The Corporation has deployed the funds to the best advantage of the policy holders as well as the community as a whole, true to the spirit of nationalization. National priorities and obligation of reasonable returns to the policy holders are the main criteria of our investments. The total funds, so invested for the benefit of the community at large accumulated to Rs.6,13,266.58 crore as on 31 st March, 2007. The investment of the Corporation’s funds is governed by section 27A of the Insurance Act, 1938, subsequent guidelines / instructions issued there under by the Government of India from time to time, and the IRDA by way of regulations. As per the prescribed investment pattern approved by IRDA, the controlled funds are invested as follows:Not less than 50% is invested in Government Securities or other approved investments. Not less than 15% is invested in infrastructural and social sector investments. Not exceeding 35% in others to be governed by exposure prudential norms.
Profile of LIC
Organisation Set – up
(All over India)
Central Office Mumbai
8 Zonal offices
105 Divisional offices
2048 Branches
Organisation Set – up
(Bhavnagar)
Western Zone
Bhavnagar Divisional Office
1- Bhavnagar City Branch 1st 2- Bhavnagar City Branch 2nd 3- Bhavnagar City Branch 3rd
4 – Savarkundla 5 - Mahua 6 – Botad 7 – Amreli 8 – Surendranagar 9 – Sihor 10 –Limbdi 11 - Dhrangadhra
The Life Insurance Corporation of India has been a nation-builder since its formation is 1956. The performance LIC has been exemplary and it has been growing from strength be it customer base, agency network, branch office network, new business premium and the like. It has played a significant role in spreading life insurance widely across the country. True to the objectives of nationalization, the LIC has invested the funds mobilization from policy holders for the benefit of the community at large. In the current scenario, LICs vision is to emerge as a world class customer centric organization. Some highlights of LICs performance are as follows:
New Business during the Year 01/04/07 to 31/03/08 (Individual Assurance)
Policies (in lakh) Composite Growth 375.90 -1.62% Sum Assured (in crore) 2,75,457.65 -9.12% First Premium Income(in crore) 43,812.86 10.80%
Pension and Group Business and Social Security Schemes Achievement from 01.04.07 to 31.03.08
Pension & Growth Group Rate Schemes New 153.71 lac 83% -9% Social Securities Schemes 113.67 lac 192.56 Growth Rate 98% 91%
No.of Lives Premium 10356.94 Income(Rs In Crore)
Business in Force as on 31.03.08
Policies (in crore) Individual Assurances Group Insurance(lives) 23.39 5.10 Sum Assured (Rs. In crore) 17,28,679 3,06,711
Other Parameters 01/04/07 to 31/03/08 Provisional (in crores)
1. 2. 3. 4. 5. Total Income Total Premium Income Total Policy Payments Total Life Fund (as at 31.03.08) Total Assets (as at 31.03.08) Rs. 2,06,363 Rs. 1,49,706 Rs. 57,623 Rs. 6,86,616 Rs. 8,03,820
Investment in Government & Social sector (Rs. In Crores)
Type of Investment As on 31.03.06 236959 58928 31.03.07 272498 64285 31.03.08 298157 89195
01. Central Government 02. State Government & Other Government Guaranteed Marketable Securities. Sub Total (A) 295887 336783 03. Infrastructure and Social Sector Investment (a) Housing 19807 22451 (b) Power 29740 37881 (c) Irrigation/Water supply 8288 7500 & sewerage (d) Road, Railways, Port & 725 1516 Bridges (e) Others 3954 4398 Sub Total(B) 62514 73746 Total(A+B) 358401 410529
387352 24325 41120 6649 1154 8774 82022 469374
Linked policy
Definition:
Insurers have developed plans that combine the benefits of life insurance as well as giving various options of participating in the growth of the capital market. Such plans are called Linked Life Insurance Plans. They are also called Unit Linked Insurance policy or ULIPs, in short. A ULIP is a life insurance policy which provides a combination of life insurance protection and investment. ULIPs contribute nearly 50% of the premium for some insurers and more than 85% of the premium for some others. We all know that investment in share market offer maximum returns. Many of us have the temptation to invest in share market to maximize our returns; but due to the high volatility of the share market and the high risks associated with the market, we hesitate to risk our funds in the share market. This has resulted in the emergence of ULIP market wherein several like minded people pool their resources and entrust the job of managing the funds to an expert called ‘Fund Manager’ and share the risks and returns associated with the investments. These fund managers are highly qualified persons with lots of experience in the share market. The fund managers evaluate the performance of various participants in the market, assess the risks associated with the investment and take a prudent decision whether to invest the money in that company or not and if so to what extent. While the market risk will be still with the investor, due to the expertise of the Fund Manager and also deployment of funds in various participating companies, the risk will be distributed evenly and brought down to the barest minimum. Naturally, the benefits arising out of increase or the loss suffered due to fall in the value of share will be borne by the investors. The Fund Manager will be entitled for various charges for managing the fund/administering the scheme on behalf of the Unit Holders, which will constitute his main source of income. In the case of a ULIP, the proposer officers to pay a certain sum towards premium. Insurers insist that this amount should be in
multiples of say Rs.500 or Rs.1000 with a minimum of say, Rs.5000 or Rs.10000. The term of the policy is also specified it should not be less than 5 years or age 70 for Whole Life plans. The premium may be paid as a Single premium at the start or periodically over the term or less, as in the case of limited payment policies in yearly, halfyearly, quarterly or monthly installments. The SA or death cover, payable in the event of death during the term, is related to this premium, usually as a multiple like 5 times the annual premium or 1.5 times the single premium. The minimum SA, according to IRDA guidelines, has to be 1.25 times single premium or 5 times annual premium. Out of the premium, annual or otherwise as the case may be, a certain amount is adjusted towards the cost of the insurance(death) cover. Some portion may be adjusted towards charges. The balance, called the allocated premium, is invested in a fund that the proposer chooses, from among the set of options. The allocated premium is more in the second year and still more in the third and later years because some charges are not levied in every year. The allocated premium is used to buy a certain number of units in the chosen fund at the price at which the units are being offered on that day. This price called the NAV, which varies every day, is explained later. The death benefit is fixed but the maturity benefit is not guaranteed. The maturity benefit depends on market conditions and the fund in which the premium has been invested, on the date of maturity. In linked policies, the SA may be expressed as an integrated benefit, which means that on the happening of the event, the SA or the value of units in the fund, whichever is higher, is payable. In this case, the life cover will reduce as the value of the units increases. As the risk cover decreases, the premium adjusted towards the cover will decrease and the amount allocated to investment will increase. The alternative to the integrated benefit, is to pay a fixed SA as an additional benefit on death, in addition to the value of the units in the fund. In this case, the charge for the risk cover will increase and the allocation to the fund will decrease every year. This is sometimes called the ‘Double Death Benefit’.
Some of the other features offered by insurer along with ULIPs are the following. These are not offered by all insurers. They are also not available with ULIPs offered by the same insurer. • The policy holder can pay additional premium for investment at any time. • Partial or total withdrawal is allowed. Sometimes there are conditions attached. Some insurers, not all, charge a redemption fee in such cases. • These policies will not be entitled to any bonus. • There is no annual bonus, but there may be a loyalty bonus paid at the end.
ULIP from LIC
Life Insurance Corporation of India has launched a new unit-linked pension product called ‘Market Plus’. It utilizes the premium received to purchase units from a fund type chosen by the individual, after deduction of applicable charges. The total fund accumulated over a period of time after investment generates regular income that will be paid to the individual through his or her lifetime. The choice of retirement age is between 40 to 75 years, with a minimum deferment period of 5 years only. The individual will have a choice of four fund options, with varying degree of equity exposure. The policy comes with additional options of a life and accident cover. The customer has the option to pay premia in yearly, half-yearly, quarterly and ECS modes.
Unique characteristics of ULIP products :
1. Unlike mutual funds, ULIP products most offer insurance coverage. Industrial Regulation and Development Act (IRDA) guidelines clearly stipulate that all ULIP products other than pension and annuity products must necessarily have provision for death benefit. 2. Among the investors, some may be coming forward to take very high risk and others may not be prepared to take such high risk though they will be interested in reaping the benefits of share market. So naturally, insurance companies have different types of customers. 3. In conventional insurance business, investment business of Life Fund is governed by the provisions of Insurance Act 1938. As the policy holders money in high risk securities. As the investments are mostly made in government securities, bonds and money market instruments, the returns will be generally low. In ULIP business, investments are made in accordance with the option exercised by the ULIP holder. 4. Investment in ULIP funds are subject to market risks due to high volatility of the share market. The degree of risk vary from fund and hence the risks associated with each fund are borne by the investors in that particular fund. 5. Unlike conventional products, the ULIP products clearly define the charges that are to be borne by the ULIP policy holder. If the insurance company is able to restrict their spending well below the amount recovered, they can retain the surplus. Similarly, if they incur more than the amount recovered, the company may have to bear the same and it cannot be recovered from the ULIP policy holder.
6. Any accretion to the investments made out of the policy holders funds are fully passed on to the policy holders. Similarly, any diminution in the value of investments is also fully borne by the ULIP policy holders. As a corollary, any surplus or loss arising out of non UNIT fund is fully borne by the insurance company.
RESEARCH OBJECTIVES AND APPROACH
The intended outcome of the research program is the provision of practical advice on financial sector policies and reforms relevant to the needs of policymakers. The research will provide policy advice on such issues as: strengthening the efficiency and regulation of the domestic financial sector; boosting domestic savings. The main objective is to increase understanding of the crucial relationship between the parallel strategies of financial development and thereby improve the effectiveness of policy design and implementation.
The Approach
My approach to the research topic is premised on two propositions. The first is that a marked acceleration in higher levels of savings and investment, in particular, private investment. A key function of the financial system is to facilitate increased savings mobilization and to allocate the increased savings to those private investors capable of generating the highest returns to capital. The institutional features of the financial system are crucial for the efficient functioning of financial markets and their distributional impact. My second premise is that the effectiveness of the financial system in stimulating overall savings and investment and the efficiency with which financial institutions allocate these resources across sectors, depend upon the regulatory regime for financial markets and institutions. Regulatory design, both internal incentive and governance structures and external monitoring and supervision, is a key instrument for financial development. The research program will cover a wide range of topics within the overall remit of financial sector development; various research methodologies will be employed. They will include: Difference between ULIPS & Traditional Plan, ULIP V/S ELSS, Something about ULIPS, Points to be kept in mind, ULIPs Systematic Insurance cum
Investment plan. The focus and content of the research program have been designed to complement and extend the current body of knowledge in the area of development finance.
RESEARCH OBJECTIVE
To find out the expectations of an individual Customer about the Mutual fund and Unit Linked Insurance plans. And what should be done to fulfill the expectations of customers.
RESEARCH SCOPE
The study was conducted within the city limit of Bhavnagar. The aim was to cover as many geographical areas of Bhavnagar as possible and also to get varied demographics.
Sampling method and size
Research methodology states how the research study is under taken. It includes specification of research design source of data, method of primary data collection, sampling design and analysis procedure adopted. Research methodology states what procedures were employed to carry out the research study.
Research Design
Here in the market research of expectation of an individual customer about Unit Linked Plans descriptive research design is used. It will help to understand the investor’s behavior. Research done on media habits and viewing habits of target market is done under descriptive research. Survey is one of the research approach is best suited for descriptive research. Survey research is the most widely used method for primary data collection. It is used to obtain many different kinds of information in different situations.
During the survey it was asked to respondents that whether they know about Marked Linked plans which provide Insurance cover and Returns. Most of them knew little about the plans.
ULIP
32%
Knows ULIPs Don't Know ULIP
68%
Finally they were explained the benefits of ULIPs and LIC plans they were ready to add this Insurance plans in their Portfolio.
Difference between ULIPs and Traditional Plans
ULIPS The premiums, in excess of risk cover, is invested as desired by the policy holder. The investment return may vary depending on the market movements and the investment risk is borne entirely by the policy holder. Traditional Plans All the premiums go into a common fund and are invested at the insurer’s description. There are two categories of benefits – guaranteed and non – guaranteed. For guaranteed benefits, the insurer bears the investment risk. However, nonguaranteed benefits, such as bonuses, depend on the performance of the insurer. Surrenders are allowed but at a loss. Loans may be provided. For participating policies, bonuses are payable. The premium amount used for insurance coverage, other charges and investment are bundled up and not known. Benefits are pre-determined. Loss is unlikely. Gains unlikely except through bonuses.
Withdrawals are allowed. Loss, if any, depends on NAV Loans are not allowed. There are no bonuses, except loyalty bonus in some cases. The amount of the premium used for insurance coverage, other charges and the purchase of units are unbundled and transparent. Benefits are variable. Loss is likely Gains likely depending on market movements.
ULIPs can be compared to
• Endowment plan, if not withdrawn till maturity. • Money – back plan by withdrawing as and when funds are required.
• Children’s plan by withdrawing funds for higher studies, marriage expenses, etc • Whole – life plan by not withdrawing at all, till 70 or 80 years of age. • Pension plan by withdrawing every month after retirement. ULIPs differ from other traditional insurance plans in matters of documents, lapse and revival conditions, and in claim settlement procedures. Underwriting practices are similar. The proposal form will have questions about family history and personal history. The agent’s report is also called for. The underwriter may, if necessary, call for more reports, medical or otherwise, to check insurability. The premium is not a fixed figure. The amount at maturity and on death will be differently stated. In the event of a non – payment of premium during the days of grace, 30, 15 or zero days as the case may be, the policy lapses. In some plans, the risk cover ceases after six months. In some other plans, the risk cover continues and the policy can be revived within two years. During the period of lapse, the fund continues to be in tact and the premium for death cover and other annual charges will be deducted from the fund, by cancellation of required units. This will continue for two years or till the fund amount reduces to one annualized premium, if earlier. The claim procedures will remain the same, except that the claim amount will be determined differently. In the event of death during this period, the SA and the value of the units in the account will be paid to the nominee. Surrenders are usually allowed after the 3 rd policy anniversary. Loans are not allowed.
ULIP V/S ELSS
In today’s scenario , when we talk of life insurance policies what immediately springs to our mind are ULIP’s. ULIP’s from life insurers have been the preferred flavour for a lot of people who wish to ‘invest through insurance’. The main attraction is the tax break under Section 80C of the Income tax Act, 1961. ULIPs basically work like a mutual fund with a life cover thrown in. They invest the premium in marketlinked instruments like stocks, corporate bonds and government securities. But if talk about pure tax saving schemes, then we have the option of investing in tax-saving funds/equity linked saving schemes (ELSS).Which offer similar tax benefits. An ELSS is a diversified equity mutual fund scheme where you have an option of making a one-time investment. It works like an open-ended diversified equity fund that invests predominantly in the stock market to generate growth by way of capital appreciation for investors. The only difference between an equity fund and a tax-saving fund is that the latter has a 3-year lock-in and tax benefits under Section 80C.
A brief comparison of ULIP (Unit Linked Insurance Product) vs MF (Mutual Funds) specifictotheIndianmarket:
The similarities: For both ULIP’s and ELSS, you have to invest once and the investment is locked in for minimum three years. Under the present tax laws, what you get on maturity is tax-free. While in ELSS your entire investment will be in equity. ULIP’s give you the choice of investing in equity or debt instruments, or both, and the choice to move from one to the other.
The differences: The biggest difference is that ULIP’s give you a life cover, while ELSS does not. So in ULIP’s , the ‘mortality cost’ of insuring your life
is deducted from the value of the fund every month. When the plan matures, the value of the units, or fund value, is yours. If a policy holder dies during the plan term, the higher of sum assured or fund value is paid to the beneficiary. The tax benefits: Investments in ULIPs and ELSS attract tax benefits under Section 80C. The costs: In an ELSS, the amount invested is subjected to only two charges. One is the entry cost or the load, which is normally 2.25 per cent of the amount invested. After the units are allotted, there are recurring charges also called the expense ratio. For ELSS, the average is around 2.25 per cent of the fund value, while the maximum permitted is 2.5 per cent. For ULIP’s, first there is the premium allocation charge ,it ranges from 2 to 4.5 per cent for amounts below Rs 1 lakh, and goes down for higher amounts. Then there is fund management cost, which is similar to the MF recurring expense ratio. Further, there is the mortality cost, which is based on the difference between the sum assured and the value of the fund. Some ULIP’s also carrying a ‘surrender charge’ for exiting the plan in the fourth and fifth years as well. Then there is the ‘policy administration charge’. It is deducted from the fund value either as a percentage, a fixed sum every month, often based on the sum assured. Irrespective of how the charges come in, the post-charges returns from most ULIP’s is below that from the ELSS funds for lower amounts. Lower front-end costs often come with higher mortality rates and policy administration charges, and so on. After looking at the above comparison, although an ELSS looks more favorable, an individual should keep in mind that these tax-saving funds invest 100 per cent of their corpus in equities. Balanced or debt schemes are not available for availing the tax benefits under Section 80C.
Therefore, individuals who do not have the risk appetite for equities could opt for a balanced ULIP, as tax-saving funds would be too risky for them. Also, a ULIP offers an individual the choice to 'protect' his portfolio if need be by way of a restructure. He can shift his money from high-risk equities to debt or go for a balanced portfolio, unlike investments in tax saving funds where he either could holds on to your investments or sell them. Besides, many insurance companies have introduced ULIPs with a capital guarantee. This product protects individuals from a potential market slide. In case of a market slide, the insurance company purports to at least return the premia paid by the individual. This is unlike investments in a mutual fund scheme where you are partner to both profits as well as losses incurred by the scheme. Hence we can conclude by saying, individuals who have the stomach for taking risk can separate their investment and insurance needs. They can consider the option of buying a term plan separately and investing in tax-saving funds. Whilst investors who do not have an appetite for risks, but who would still like to add a dash of equity to their portfolio, could look at investing in a balanced ULIP
Something about ULIPs and its charges
Unit Linked insurance plan provides the combination of insurance with investments. It has the double benefit of providing a RISK cover & investing in stock markets. Unlike traditional plans the ULIPS are subject to the risk factors where the risk is borne by the policy holder, the investment risk is related with the stock markets & accordingly the NAVs of the units go up & down depending upon the fund’s performance & the factors affecting the capital market. Before you invest in ULIPs check out what all charges ULIPS have. Unless you know about the charges in ULIPS by various insurance companies you would not be able to come to know about your returns in the short as well as in the long run because most of the charges are taken upfront. Thus the basic understanding about the cost structure of ULIPS would help you to know about your returns with complete transparency.
Basic Charges in ULIPs:
1. Premium Allocation Charge: This is a percentage of the premium appropriated towards charges before allocating the units. This percentage is generally higher in the first few years varying greatly from company to company. Say your premium allocation charges are 30%, and then out of your total premium paid of Rs. 1,00,000 Rs. 70,000 are invested in the funds effectively. 2. Mortality Charges: These are the charges to insure you against life cover which depends on no of factors such as age, amount of coverage, state of health etc. If you don’t take a life cover then your mortality charges become zero. As these charges depend upon your age primarily, these charges could be around 1.3 for a 30 year old guy & can extend to 6.4 for a 50 years old guy per Rs. 1000 of the sum assured. 3. Fund Management Charges: These charges are deducted for managing the funds before arriving at the Net Asset Value (NAV). The fee is charged as a percentage of funds under management by the fund mangers. These are ranging from 0.5-2% per annum.
4. Policy/Administration Charges: These are the charges for administration of the plan which could be flat throughout the policy term or vary at a pre-determined rate. These are a monthly fixed amount which varies every year with inflation or as a percentage of sum assured. 5. Surrender Charges: These charges are deducted for premature partial or full encashment of units. 6. Fund Switching Charges: The charges when you wish to switch ULIP options like from Equity to debt. Generally a limited number of switches are allowed without any charge.
Points to be kept in mind :
1. Stay invested for long run: Everyone will get good returns only after 5-8 years of investing therefore its charges should be seen from a long-term perspective as its charges are higher in the first few years which is why it takes more years to get a break even point in investments i.e. your cost will be recovered in a longer period. Insurance agents might convince you to withdraw the money after 3 years but stay invested for 5-8 years to get good returns. 2. Be clear with the charges: The transparency about charges was not there earlier but now the Insurance Regulatory Development Authority of India has issued guidelines according to which the investors should know all the charges & no hidden charges can be charged. 3. Invest as per your risk profile: Understand the risk appetite & accordingly allocate assets across different categories. Choose fund depending upon the age and risk profile. 4. Other features: Apart from the charges look at the flexibility in switching to funds, fund management charges & the funds past performance should also be looked upon before looking out for ULIPS. Thus ULIPS provide the twin benefit of covering the risks & investing in the stock market. Before investing in ULIPS there is a need to take care of the past performances of funds which invests the money & have transparency about what all charges are deducted from the premium. So be a smart investor & invest according to your risk profile for a long term to get the maximum returns from ULIPS
ULIPs- Systematic Insurance cum Investment Plan
Any individual who has purchased a life insurance policy in the last year or so surely would have a Unit Linked Insurance Plan (ULIP). ULIPs have been selling like Wonder Products in the recent past and they are likely to continue to outsell their plain vanilla counterparts going ahead. A ULIP is a market-linked insurance plan. The difference between a ULIP and other insurance plans is the way in which the premium money is invested. Premium from, say, an endowment plan, is invested primarily in risk-free instruments like government securities (gsecs) and a rated corporate paper, while ULIP premiums can be invested in stock markets in addition to corporate bonds and gsecs. So what else apart from this reason makes ULIPs so attractive to the individual? Here, we have explored some reasons, which have made ULIPs so irresistible. Transparency However, ULIPs offer a transparent option for customers to plan their various life stage needs through market-led investments as compared to traditional investment plans. Insurance cover plus savings 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 variety than traditional life insurance plans. So there are multiple options at the individual's disposal. ULIPs generally come in three broad variants: • Aggressive ULIPs (which invest 80%-100% in equities, balance in debt) • Balanced ULIPs (invest around 40%-60% in equities)
• Conservative ULIPs (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. A ULIP policy holder has the option to invest in a variety of funds, depending on his risk profile. If one does not have the appetite to invest in equity, they can choose a debt or balanced fund. Flexibility Individuals can switch between the ULIP variants outlined above to capitalise 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 a 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 costaveraging 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. When you're buying a ULIP, make sure you select one that works well for you. The important thing is to look for and understand the nuances, which can considerably alter the way the product works for you. Take
the following into consideration: Charges Understand all the charges levied on the product over its tenure, not just the initial charges. A complete charge structure would include the initial charges, the fixed administrative charges, the fund management charges, mortality charges and spreads, and that too, not only in the first year but also through the term of the policy. Fund Options and Management Understand the various fund options available to you and the fund management philosophy and objectives of each of them. Examine the track record of the funds and how they are performing in comparison to benchmarks. Who manages the funds and what experience do they have? Are there adequate controls? Importantly, look at how easily you can access information about your fund's performance when you need it -- are their daily NAVs? Is the portfolio disclosed regularly? Features Most ULIPs are rich in features such as allowing one to top-up or switch between funds, increase or decrease the protection level, or premium holidays. Carefully understand the conditions and charges associated with each of these. For instance, is there a minimum amount that must be switched? Is there a charge on the same? Must you go through medical underwriting if you want to increase the sum assured? Company Last but not least, insure with a brand you can trust to honour its commitment and service you according to your requirements First and foremost, investors need to understand that a ULIP is a bundled product of their investments and their insurance proceeds. Since privatization in 2000 and the introduction of ULIPs as a life insurance product category, the overall insurance penetration in the country has grown from around 2% to 4%. Today, more than 70 per cent of the new business premium for life insurers comes from Ulips.
Types of ULIP Funds:
Basically there are two types of Funds in ULIP business, namely: 1. Non Unit Fund and 2. Unit Fund. Non Unit Fund: This fund belongs to the Company/Promoter. All charges recovered from the ULIP policy holder such as allocation charges, mortality charges, policy administration charges, fund management charges, surrender charges, etc. are taken to this fund. All payments such as death claims(amount paid over and above units lying to the credit of the ULIP holder), commission to Agents, policy preparation charges, policy administration expenses, fund management charges publicity expenses, conference expenses, etc. are charged funds. As the insurer recovers from the policy holder various charges, he has to restrict his expenses within the amount collected from the policy holder and excess, if any, spent by him may have to be borne by him from the Non Unit Fund. The insurer cannot lay his hands on the Unit Fund, to cover the shortfall, under any circumstances. Similarly, he has also to bear any extra outgo he will be incurring due to adverse death claim experience, since he recovers mortality charges from the policy holders. Unit Fund: This fund comprises of the Fund belonging to the ULIP policy holders. The premium collected from the policy holders after recovery of allocation charges are taken to this fund and units are allocated at the prevailing Net Asset Value (NAV). Out of this fund, monthly charges such as mortality charges, extra accident benefit charges, critical rider charges, policy administration charges, etc. are recovered by way of cancellation of units(at the prevailing NAV). The remaining balance is invested in accordance with the option exercised by the policy holder. Any income received such as interest, dividend, etc. are taken to the credit to this fund. Similarly, any capital gains arising out of the transfer of the shares/securities also form part of this fund. Any accretion to the unit holders’ investments such as bonus shares, rights issue also belongs to this fund. When the fundamentals of the shares/securities invested by the fund go strong, the market value of
the shares traded in the stock exchange also go up. The growth in the value of an investment will depend upon several factors such as the bullish/bearish trend in the stock market, the economic growth of the country, the environmental factors affecting the growth of that particular industry, the Government policy towards that particular industry, tax incentives, the credibility of the promoter, trend in the earnings of the particular company as compared to the industry, the future growth potential of the company, etc. The value of a particular Unit Fund on a given date is calculated as follows: The value of a particular Unit Fund on a given date = Market value of all investments + amounts due to the fund(receivables) towards interest/dividend etc. + all current assets relating to the Unit fund – current liabilities relating to the Unit fund. Classification of Unit Fund: ULIP scheme is nothing but a Mutual Fund with a small difference. This fund will include variety of investors with variety of options. Some investors may be interested in taking high risk in order to get high returns, some investors may be interested in taking high risk in order to get high returns, some may be coming forward to take only moderate risk and some may be hesitating to take even very little risk. Nevertheless every one of them will be desirous of repaying the benefits of investments in financial/capital market. Naturally, it may not be possible for a company to place all the investors in a single group and hence the company has to necessarily have different types of funds suiting the needs of different types of policy holders. When there is the need for segregation of funds, it also becomes essential to have separate fund management for each type of fund since the risks associated with each fund and the volume of tasks to be performed for each type of fund are different. The classification of funds becomes essential for various reasons: 1. Some investors may require periodical income and some investors may be coming forward to reinvest their income and get an accumulated lump sum as and when they need. 2. Some investors will be prepared to take even very high risk and some investors may not be coming forward to take high risks. 3. Some investors would be very much concerned about the 100% safety of the money and getting periodical returns on
their investments whereas some of the investors may not mind taking a little more risk in order to get more returns. 4. Some of the investors may use this as a device for reducing their tax burden. They will be interested in getting tax benefits on maturity, capital gains, etc. whereas some investors may be prepared to pay tax at the full rate even on the returns/capital gains provided the returns will be substantial. 5. Some of the investors may be interested in repaying the benefits arising out of the growth of a particular sector such as steel, cement, IT,etc. Based on the above, we can classify the funds as follows: 1. Growth Fund: The objectives of this fund is to provide capital appreciation over the medium to long term. Such funds invest a major portion of their corpus(say 60 to 80%) in equities and equity oriented securities. Naturally, the risks are comparatively higher. Growth schemes are good for investors having a long term outlook seeking appreciation over a period of time. This fund is also called Risk Fund. 2. Sectors specific schemes: The objectives of this fund is to invest in the securities of only those sectors or industries specified in the securities of only those sectors or industries specified in the offer documents, eg. IT, Petroleum, Steel, pharma, cement, etc. The return in these funds depend on the performance of the respective sector/industry. These funds may offer better returns but they are more risky as compared to diversified funds. 3. Index Fund: Some of the investors may be interested in investing in the share market in general rather than investing in any specific security. Such investors are happy to receive the returns posted by the market. As it is not practical to invest in each and every stock in the market in proportion to its size, these investors are comfortable investing in a fund which they believe is a good representative of the
entire market fund. The Index Funds replicate the portfolio of a particular index such as Sensitive Index, Nifty etc. NAVs of such funds fall in accordance with the rise or fall in the market though not exactly by the same percentage. 4. Balanced Fund: The objective of this fund is to invest both in equities and fixed income securities in proportion indicated in the offer document. This fund carries moderate risk with moderate growth potential. They generally invest around 40 to 60% in debt equities and similar percentage in debt instruments. These funds are also affected by the volatility of the stock market but at the same time, less volatile compared of the stock market but at the same time, less volatile compared to growth schemes. 5. Income Fund: The objective of this fund is to provide regular and steady income to investors. Such funds generally invest in fixed income securities like Government Securities, Public Sector Bonds, Corporate Bonds, Corporate Debentures, Money Market Instruments, etc. The default risk is very low and these funds are not affected by fluctuations in equity market. The risk associated with the scheme is relatively low as compared to equity schemes. Naturally, opportunities for capital market appreciation are also limited. Normally, they depend upon the interest rates prevailing in the country. 6. GILT Fund: These funds invest exclusively in Government Securities which have no default risk. NAVs of the schemes also fluctuate due to change in interest rates and other economic factors. 7. Money Market Funds: These Funds invest in short term instruments such as Commercial Paper, Certificates of Deposit, Treasury Bills, Call Money, etc. These schemes are least volatile since
investments in money market are with short term maturities. 8. Hybrid Schemes: These funds invest in both equities as well as debt. Some schemes invest less in equities and more in debts and securities. Other schemes invest more in equities and less in debt securities. These Funds are mostly available in Mutual funds. ULIP products, more specially LIC offer the following Funds: Secured Fund, Balanced Fund, Risk Fund, Growth Fund
Different Charges
Miscellaneous Charges
• This levied for any alternations within the contact such as increase in Sum Assured, reduction in policy term, change in premium mode to higher frequency etc. • The alternations will be effective from the policy anniversary concident with or following the alteration. • This charge is levied only at the time of alteration. All the charges, other than Premium Allocation Charge and Mortality Charges may have as upper limit and can be modified within the upper limits with the prior approval of IRDA (IRDA ULIP Guidelines).
Premium Allocation charges
• This is a percentage of the premium appropriate towards charges from premium received. • This charge is levied at the time of receipt of premium and varies from plan to plan and even from mode to mode. • Generally, it will vary depending upon the commission rates. More the commission rate, more will be the allocation charges and less will be the allocation rate. • This charge is applicable to premium received through all modes including top up premium. • The percentage of allocation charges shall be explicitly stated by the insurer and could vary interalia by policy year in which the premium is paid, the premium size, premium payment frequency and the premium type.
• Generally, the allocation charges are high in the first few years and will be moderate/low in the subsequent years. • When an insurer receives premium from the policy holder, he first appropriates allocation charges and allots units only for the balance premium which is known as allocation rate. • Allocation rate means that part of premium which is utilized to purchase units for the policy. • Example, if a policy holder remits a premium of Rs.10,000 and the percentage of allocation charges is 24%, the insurer will first appropriate Rs.2400/- towards allocation charges and allot units only for the balance premium of Rs.7600/-. The balance premium is called allocation rate. • The percentage/rates of allocation charges are generally mentioned in the terms and conditions of the policy. • LIC Profit Plus: Single Premium 4.5t o 5% Regular Mode 3 or 4 years First Year 9 to 10.5%, subsequent years 2.5% 15 years – First year 22.5 to 24%, subsequent years 4%. • As these charges are substantial in volume, they can make material difference in product comparison. • Example, an insurance company in the private sector was allocating to the policy holders fund only 28.5% in the first year, 93% in the second year and 94% in the third year. • More the allocation charges, lesser will be the number of units allotted to the policy holder. • Naturally, it implies that the company benefits at the cost of the policy holder. • In yet another case, the company was charging 5% towards premium allocation charges but they were also charging initial
management charges at the rate of 5% per annum during the term of the policy subject to a maximum of 20 years. This means, though the company has been charging low allocation charges, it has been taking away the entire first year premium paid by the policy holder by way of initial management charges. • The allocation charges are fixed and cannot be increased by the insurer during the term of the policy.
Policy Administration Charges
• This charge is levied to cover the expenses of an insurer other than those covered by the premium allocation charges and the Fund Management Charges. • This may be expressed as a fixed amount or a percentage of the premium or as a percentage of the sum assured(IRDA ULIP Guidelines). • This charge is levied at the beginning of each policy month from the policy fund by canceling units of equivalent amount. • This charge could be flat throughout the policy term or vary at a predetermined rate(IRDA ULIP Guidelines). • As per the ULIP guidelines issued by IRDA, the predetermined rate shall preferably be a percentage per annum which shall not exceed 5%. • In most cases, LIC as been charging Policy Administration Charges at the rate of Rs.60/- per month during the first year and Rs.20 per month thereafter. • Example (1), one of the insurance companies in the private sector has been charging policy administration charges @ Rs.600 per annum increasing 5% annually.
• Example (2), Another product of a private company launched recently, collects policy administration charges @ 1.75% per annum of sum assured and will be collected at each monthly anniversary by cancellation of units. Suppose, if the annualized premium is Rs.2lakhs and the sum assured is Rs.10lakhs, the policy administration charges would be Rs.17,500(LIC charges only Rs.720 per annum in the first year and Rs.240 per annum in subsequent years).
Fund Management Charges
• This charge is levied as a percentage of value of the assets and shall be appropriated by adjusting the Net Asset Value. • This is a charge levied at the time of consumption of NAV which is usually done on daily basis. • Unlike other charges, this is not recovered directly from the policy holders either from the premium or by way of cancellation of units. • The percentage may vary for each Fund – example LIC Profit Plus 0.75% for Bond Fund, 1% for Secured Fund, 1.25% Balanced Fund and 1.5% Growth Fund. • One of the products launched recently by a private insurance company charges as follows: Growth Fund 1.75% Equity Index Fund 1.25% Bond & Liquid Fund 0.95%
Mortality Charges
• This is the cost of life insurance cover and it is exclusive of any expense loading levied by either by cancellation of units or by debiting premium but not both(IRDA ULIP Guidelines).
• This is generally levied at the beginning of each policy month from the Fund. • The method of computation will be clearly specified in the policy document. • Mortality rates are guaranteed during the contract period. • LIC usually collects mortality charges by way of cancellation of units.
Rider Premium Charges
• This premium is exclusive of expense loadings. • It is levied separately to cover the cost of rider cover levied either by cancellation of units or by debiting premium. • Like mortality charges, this charge is also levied at the beginning of each policy month. • Example, Critical Illness Rider, Additional Accident Benefit cover etc.
Partial Withdrawal Charges
• This is a charge levied on the Unit Fund at the time of part withdrawal of the fund during the contract period.
Surrender Charges
• Surrender means termination of the contract. On surrender, the surrender value is payable which is usually expressed as Fund Value less surrender charge. The surrender charge could be even zero.
• This charge is levied on the Unit Fund at the time of surrender of the contract. • This charge is usually expressed either as a percentage of the fund or as a percentage of the annualized premium. • A thorough and detailed understanding of this charge is absolutely essential for meaningful comparison of products. • Example, one of the products of a private insurance company has stipulated a surrender charge equivalent to 100% of the capital units(first year premium) if the policy had lapsed and 3 years premium had been paid. The same plan has given a formula for calculation of surrender charges if 3 years premium had been paid. As per that formula, the percentage of surrender charges is as high as 70% for some terms. • As may be seen, the surrender charges imposed by most of the insurance companies in the private sector are substantially high and some times even go upto 100%. • A thorough understanding of the surrender charges will save a substantial portion of the hard earned money of the investor.
Service Tax Charges
• Service Tax is usually payable on the charges for mortality, accident benefit and critical illness premium. • This charge is recovered by cancellation of units out of policy holders funds on a monthly basis. • The level of charge will be as per the rate of service tax applicable to risk premium which is presently 12.36%.
Switching Over Charges
Switching is a facility which allows the policy holder to change the investment pattern by moving from one fund to another fund amongst the funds offered under the underlying product of the insurer. Monthly charges recoverable on 1-11-07 No. of units = 160/19.80(NAV assumed as Rs.19.80) = 8.081 units No. of units available at the end of 1-10-07= 375.293 units Monthly charges recoverable on 1-12-07 No. of units = 160/20 (NAV assumed as Rs.20) = 8.000 units No. of units available at the end of 1-10-07= 367.293 units Premium paid on 2-12-07 Rs.10,000 Less: Allocation charges (24%) Rs. 2,400 Allocation rate __________ Rs. 7,600 __________
No.of units allotted on 02-12-07 = 7,600/20 (NAV)= 380.000 units Total number of units on 02-12-07 747.293 units The allocation of units and appropriation of charges go on like this. ? As the death benefit guaranteed under a policy is normally higher of the sum assured or NAV, while calculating the sum at risk, the insurer usually subtracts the fund value from the sum assured and applies the mortality rate. ? The mortality charges are therefore calculated on the difference between the sum assured of the basic plan and fund value of units as on the date of deduction of charges, after deduction of all other charges. Naturally, mortality charges will be deducted only when the basic sum assured is more than the fund value. When the fund value exceeds the sum assured, no mortality charge will be recovered. ? Mortality charges during a policy year will depend upon the age nearer birthday of the policy holder as at the policy anniversary
coinciding with or cancellation of units.
immediately
preceding
the
date
of
? As the age will increase every year, the mortality charge will also increase every year on each policy anniversary. However, in practice, this will not happen as the fund value would have also gone up substantially resulting in reduction of mortality charges.
How ULIPs can make you RICH!
Given that ULIPs are relatively new and remain an enigma for a large section of insurance-seekers in this note we compare them to the traditional endowment plans to give you a perspective.
Sum assured
Perhaps the most fundamental difference between ULIPs and traditional endowment plans is in the concept of premium and sum assured. When you want to take a traditional endowment plan, the question your agent will ask you is -- how much insurance cover do you need? Or in other words, what is the sum assured you are looking for? The premium is calculated based on the number you give your agent. With a ULIP it works in reverse. When you opt for a ULIP, you will have to answer the question -- how much premium can you pay? Depending on the premium amount you state, you are offered a sum assured as a multiple of the premium. For instance, if you are comfortable paying Rs 10,000 annual premium on your ULIP, the insurance company will offer you a sum assured of say 5 to 20 times the premium amount. In our illustration your sum assured could vary from Rs 50,000 to Rs 200,000. Within this range, you have to decide how much insurance cover you need. Of course the multiple to calculate the sum assured varies across life insurance companies.
doc_431188200.doc
Life insurance (or commonly Life assurance, especially in the Commonwealth) is a contract between an insured (insurance policy holder) and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money (the "benefits") upon the death of the insured person.
History of LIC of India
The Life Insurance Corporation (LIC) of India founded in 1956 is the largest life insurance company in India owned solely by the Government of India. Headquartered in Mumbai, which is considered the financial capital of India, LIC presently has 8 Zonal Offices and 105 Divisional Offices situated all around the country. In addition to an even distribution of 2048 branches located in different towns and cities of India, LIC also has a network of around one million agents who solicit life insurance policies from the public. The first 150 years of the British Rule in India were characterized by turbulent economic conditions. The first war of independence in 1857, the World Wars 1 and 2 (1914-1918 and 1939-45) and India's national struggle for freedom in between had adverse effect on the economy. In addition to this the period of world wide economic crisis in between the two World Wars termed as the period of Great Depression led to the high rate of bankruptcies and liquidation of most Life Insurance Companies in India that existed during that time. These occurrences led to loss of faith in insurance of the people of India. The Life Insurance Companies Act and Provident Fund Act both passed in 1912 provided regulatory mechanisms to the Life Insurance Industry in India for the first time. After undergoing several other such reforms in the following decades and nearly a decade after India achieved independence, the Parliament of India passed the Life Insurance of India Act on 19 th June, 1956 following which the Life Insurance Corporation (LIC) of India on 1 st September of the same year. The Company began its operations with 5 Zonal Offices , 33 Divisional Offices and 212 Branch Offices .
Present Status of LIC of India
Existing as a towering insurance company for over 50 years, LIC has acquired almost monopoly power in the solicitation and sale of life insurance policies in India. In addition to the summary regarding the present stature provided at the beginning, LIC has extended its
activities in 12 countries other than India with the objective of catering to the insurance needs of Non Resident Indians. The enforcement of New Economic Reforms in 1991 coupled with the formation of Insurance Regulatory and Development Authority Act (IRDA) of 2000 (which started issuing licenses to private life insurers ) has diluted the monopolistic attitude commanded by LIC. The only insurance company belonging to the public sector now has to compete with several other corporate entities of its kind which often are heavyweight Indian as well as Multinational Life Insurance Brands in themselves. LIC had 5 zonal offices, 33 divisional offices and 212 branch offices, apart from its corporate office in the year 1956. Since life insurance contracts are long term contracts and during the currency of the policy it requires a variety of services need was felt in the later years to expand the operations and place a branch office at each district headquarter. re-organization of LIC took place and large numbers of new branch offices were opened. As a result of re-organisation servicing functions were transferred to the branches, and branches were made accounting units. It worked wonders with the performance of the corporation. It may be seen that from about 200.00 crores of New Business in 1957 the corporation crossed 1000.00 crores only in the year 1969-70, and it took another 10 years for LIC to cross 2000.00 crore mark of new business. But with re-organisation happening in the early eighties, by 1985-86 LIC had already crossed 7000.00 crore Sum Assured on new policies. Today LIC functions with 2048 fully computerized branch offices, 105 divisional offices, 8 zonal offices and the Corporate office. LIC’s Wide Area Network covers 105 divisional offices and connects all the branches through a Metro Area Network. LIC has tied up with some Banks and Service providers to offer on-line premium collection facility in selected cities. LIC’s ECS and ATM premium payment facility is an addition to customer convenience. Apart from on-line Kiosks and IVRS, Info Centres have been commissioned at Mumbai, Ahmedabad, Bangalore, Chennai, Hyderabad, Kolkata, New Delhi, Pune and many other cities. With a vision of providing easy access to its policy holders, LIC has launched its SATELLITE SAMPARK offices. The satellite offices are smaller, leaner and closer to the
customer. The digitalized records of the satellite offices will facilitate anywhere servicing and many other conveniences in the future. LIC continues to be the dominant life insurer even in the liberalized scenario of Indian insurance and is moving fast on a new growth trajectory surpassing its own past records. LIC has issued over one crore policies during the current year. It has crossed the milestone of issuing 1,01,32,955 new policies by 15th Oct, 2005, posting a healthy growth rate of 16.67% over the corresponding period of the previous year. From then to now, LIC has crossed many milestones and has set unprecedented performance records in various aspects of life insurance business. The same motives which inspired our forefathers to bring insurance into existence in this country inspire us at LIC to take this message of protection to light the lamps of security in as many homes as possible and to help the people in providing security to their families. Some of the important milestones in the life insurance business in India are: 1818: Oriental Life Insurance Company, the first life insurance company on Indian soil started functioning. 1870: Bombay Mutual Life Assurance Society, the first Indian life insurance company started its business. 1912: The Indian Life Assurance Companies Act enacted as the first statute to regulate the life insurance business. 1928: The Indian Insurance Companies Act enacted to enable the government to collect statistical information about both life and nonlife insurance businesses. 1938: Earlier legislation consolidated and amended to by the Insurance Act with the objective of protecting the interests of the insuring public.
1956: 245 Indian and foreign insurers and provident societies are taken over by the central government and nationalised. LIC formed by an Act of Parliament, viz. LIC Act, 1956, with a capital contribution of Rs. 5 crore from the Government of India. The General insurance business in India, on the other hand, can trace its roots to the Triton Insurance Company Ltd., the first general insurance company established in the year 1850 in Calcutta by the British.
Some of the important milestones in the general insurance business in India are:
1907: The Indian Mercantile Insurance Ltd. set up, the first company to transact all classes of general insurance business. 1957: General Insurance Council, a wing of the Insurance Association of India, frames a code of conduct for ensuring fair conduct and sound business practices. 1968: The Insurance Act amended to regulate investments and set minimum solvency margins and the Tariff Advisory Committee set up. 1972: The General Insurance Business (Nationalization) Act, 1972 nationalized the general insurance business in India with effect from 1st January 1973. 107 insurers amalgamated and grouped into four companies’ viz. the National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd. and the United India Insurance Company Ltd. GIC incorporated as a company.
Insurance.
Definition:
The business of insurance is related to the protection of the economic values of assets. Every asset has a value. The assets would have been created through the efforts of the owner. The asset is valuable to the owner, because it means some of his needs. The benefit may be an income or in some other form. In the case of a factory or a cow, the product generated by it is sold and income is generated. In the case of a motor car, it provides comfort and convenience in transportation. There is no direct income. Both are assets and provide benefits. Insurance companies are called insurers. The business is to bring together persons with common insurance interests (sharing risk), collect the share or contribution (called premium) from all of them, and pay out compensations (called claims) to those who suffer from the risks. In India, insurance business is classified primarily as life and non-life or general. Life insurance includes all risks related to the lives of human beings and general insurance covers the rest. General insurance has three classifications that are, Fire (dealing with all fire related risks), Marine (dealing with all other like liability, motor, crop, engineering, personal accident, etc). Personal accident and sickness insurance, which are related to human beings, is classified as ‘nonlife’ in India, but is classified as ‘life’, in many other countries. In India, the IRDA has, in 2005, issued Regulation enabling micro insurance to be done by both life and general insurers on the basis of mutual tie-ups. A policy may be issued by a life insurer covering both life and non-life risks, but premium on account of the non-life business will be passed on to a general insurer and the claim amount collected from the latter. The premium for insurance is based on exemptions of the losses. These expectations are based on studies of occurrences in the past
and the use of statistical principles. There is, in statistics, a “law of large numbers”. When you toss a coin, the chance, or probability, of a head or tail coming up is half. If the coin is tossed 10 times, one cannot be sure that the head will come up 5 times. If the coin is tossed 1 million times, the number of heads will be closer to half a million proportionately than in the case of 10. The variation will be less as a percentage. In order to be amenable to statistical predictions, insurer have to insure large numbers of risks. The large the spread of the business, the better the experience in relation to expectations. The probability of risk being the basis of premium calculation, large numbers are necessary to ensure that the premium charged is viable or adequate. The business of insurance is one of sharing. It spreads losses of an individual over the group of individuals who are exposed to similar risks. People who suffer loss get relief because at least part of their loss is made good. People who do not suffer loss are relieved because they were spared the loss.
Insurance Act, 1938
1. The insurance Act 1938, which came into effect from 1 st july 1939, and was amended in 1950 and later in 1999, is the principal enactment relating to the business of insurance in India. The Act contains provisions regarding licensing of agents and their remunerations, prohibition of rebates, and protection of policy holder’s interests. It also has provisions placing limit on the expenses of insurers, use of funds and patterns of investments, maintaining solvency levels, and constitution of Insurance Associations and Insurance Councils and the Tariff Advisory Committee for general insurance. 2. Till the constitution of the IRDA by the IRDA Act in 1999, the Controller of insurance was responsible for the administration of the Insurance Act. Since 1999, the IRDA has replaced the Controller of Insurance. The Insurance Act vests the IRDA with powers to • Register insurance companies and also cancel their registrations. • Monitor and certify the soundness of the terms of life insurance business. • Make regulations relating to the conduct of the business of insurance. • Inspect documents of insurers. • Appoint additional directors. • Issue directions. • Take over the management of an intermediaries or between intermediaries. insurers and
• Decide on disputes relating to settlement of claims of amounts not exceeding Rs.2000. 3. By the end of December 2006, the IRDA had issued more than 25 regulations and also issued several guidelines to insurer on a variety of matters.
Life Insurance Corporation Act, 1956
This Act was the basis for the establishment of the L.I.C. as a body corporate consisting of not more than 16 members appointed by the Central Government, one of them being Chairman. The Corporation’s duty was to carry on life insurance business to the best advantage of the community. Section 30 gave the L.I.C. exclusive privilege to transact life insurance business in India. This exclusive privilege ceased as a result of the amendments made in 1999. These amendments were made in pursuance of the Government’s policy of economic reforms. 16 insurance companies were registered and had commenced life insurance business till 31.08.2007.
Role of Insurance in Economic Development
For economic development, investments are necessary. Investments are made out of savings. A life insurance company is a major instrument for the mobilization of savings of people, particularly from the middle and lower income groups. These savings are channeled into investments for economic growth. The Insurance Act has strict provisions to ensure that insurance funds are invested in safe avenues, like Government bonds, companies with record of profits and so on. As on 31.03.2006, the total investments of the LIC exceeds Rs.520,000 crores, of which nearly Rs.300,000 crores were directly in Government related securities, nearly Rs.16,000 crores in housing loans, Rs.19,000 crores in the private sector and Rs.10,000 crores in water supply and sewerage systems. Other investments included road transport, setting up of industrial estates and directly financing industry. Investments in the corporate sector exceeds Rs.30,000 crores. These directly affect the lives of the people and their economic well-being. The L.I.C is not an exception. All good life insurance companies have huge funds, accumulated through the payments of small amounts of premium of individuals. These funds are invested in ways that contribute substantially for the economic development of the countries in which they do business. The private insurers in India are
new and have accumulated funds equal to about one-eighth of the L.I.C’s. But even their investments in the various sectors and contributing directly and indirectly to the country’s economic development, would be of similar proportion. A life insurance company’s funds are collected by way of premiums. Every premium represents a risk that is covered by that premium. In effect, therefore, these vast amounts represent pooling of risks. The funds are collected and held in trust for the benefit of the policy holders. The management of life insurance companies are required to keep this aspect in mind and make all its decisions in ways that benefit the community. This applies also to its investments. That is why successful insurance companies would not be found investing in speculative ventures. Their investments, as in the case of the L.I.C, benefit the society at large. Apart from investment, business and trade benefit through insurance. Without insurance, trade and commerce will find it difficult to face the impact of major perils like fire, earthquake, flood, etc. Financiers, like banks, would collapse if the factory, financed by it, is reduced to ashes by a terrible fire. Insurers cover also the loss to financiers, if their debtors default.
The Objectives of LIC
? Spread life insurance widely and in particular to the rural areas and to the socially and economically backward classes with a view to reaching all insurable persons in the country and providing them adequate financial cover against death at a reasonable cost. ? Maximize mobilization of people’s savings by making insurance linked savings adequately attractive. ? Bear in mind, in the investment of funds, the primary obligation to its policy holders, whose money it holds in trust, without losing sight of the interest of the community as a whole; the funds to be deployed to the best advantage of the investors as well as the community as a whole, keeping in view national priorities and obligations of attractive return. ? Conduct business with utmost economy and with the full realization that the moneys belong to the policy holders. ? Act as trustees of the insured public in their individual and collective capacities. ? Meet the various life insurance needs of the community that would arise in the changing social and economic environment. ? Involve all people working in the Corporation to the best of their capabilities in furthering the interests of the insured public by providing efficient service with courtesy. Promote amongst all agents and employees of the Corporation a sense of participation, pride and job satisfaction through discharge of their duties with dedication towards achievement of Corporate Objectives.
Advantages of Life Insurance
• In the event of death, the settlement is easy. The heirs can collect the moneys quicker, because of the facility of nomination and assignment. The facility of nomination is now available for some bank accounts, provident fund, etc. • There is a certain amount of compulsion to go through the plan of savings. In other forms, if one changes the original plan of savings, there is no loss. In insurance, there is a loss. • Creditors cannot claim the life insurance moneys. They can be protected against attachments by courts. • There are tax benefits, both in income tax and in capital gains. • Marketability and liquidity are better. A life insurance policy is property and can be transferred or mortgaged. Loans can be raised against the policy. • It is possible to protect a life insurance policy from being attached by debtors. The beneficiaries’ interests will remain secure. • Insurance is the only way to safeguard against unpredictable risks of the future. It is unavoidable. • The terms of life are hard. The terms of insurance are easy. • The value of human life is far greater than the value of property. Only insurance can preserve it. • Life insurance is not surpassed by any other savings or investment instrument, in terms of security, marketability, stability of value or liquidity. the
• Insurance, including life insurance, is essential for the conservation of many businesses, just as the preservation of homes. • Life insurance enhances the existing standards of living. • Life insurance helps people live financially solvent lives. • Life insurance perpetuates life, liberty and the pursuit of happiness. • Life insurance is a way of life.
Serve better to the policy holder
Care to be taken while completing Proposal Papers: A contract of life insurance is a contract of utmost good faith technically known as uberrima fides. The principle of disclosing all material facts is embodied in this important concept which applies to all forms of life insurance. It becomes the duty of the proposer to inform the insurer of everything likely to affect the judgment of the insurer, however unimportant it may seem to him/her (the proposer). Hence, the proposer should ensure that all questions in the proposal form are correctly answered. Any misrepresentation, non – disclosure of facts / information which is material to acceptance of risk, or fraudulent information in any document leading to the acceptance of the risk will render the insurance contract null and void. Hence it is quite important that the policy holder and his dependants provide the correct and full information to secure the precious benefits of the insurance policy for his near and dear ones. Importance of Age Admission: The rate of premium payable on a life insurance policy varies with age. Granting of some plans and consideration of proposals under Non – Medical schemes etc. depends on age. Hence prior age admission is a must. Hence, it is advisable to furnish standard proof of age. Modes of Payment of Premium and Days of Grace: Premiums, other than single premium, may be paid by the policy holder to LIC in yearly, half – yearly, quarterly or monthly installments. Policy holders are required to pay the premiums to the Corporation on the due dates. A grace period of one month but not less than thirty days is allowed for payment of yearly, half – yearly and quarterly premiums, and fifteen days for payment of monthly premiums. Revival of Lapsed Policy: When the premium is not paid within the days of grace, the policy lapses. It can, however, be revived within five years from the
date of lapse during the life – time of the assured but before the date of maturity, if applicable. The Corporation offers three convenient schemes of revival viz. the Ordinary Revival Scheme, the Special Revival Scheme and the Installment Revival Scheme for the convenience of the policy holders. Nomination/Assignment of Policy: When the policy money becomes due for payment on the death of the policy holder, it can be paid only to the person who is legally entitled to give a valid discharge to the Corporation. For quick settlement of claims, it is in the interests of the policy holders to effect a nomination in respect of their policy. Similarly, if the policy is assigned, the assignee receives the claim amount as per rules. It should be noted that an assignment of a policy automatically cancels the existing nomination. Hence, when such a policy is reassigned in favour of the policy holder, it is necessary to make a fresh nomination to avoid delay in payment of the claim. Change of Address and transfer of Policy Records: As and when a policy holder desires a change of his address in the Corporation’s record, intimation of such change should be given to the Branch Office serving his policy. Policy Records can be transferred from the Branch Office which services the policy to any other Branch Office convenient to the policy holder. The correct address and phone numbers facilitate better service and quicker settlement of claims. Care of Documents and Loss of Policy: The policy document (policy bond) is an evidence of the contract between the insurer and the insured. It has to be submitted to the Corporation at the time of loans / claims etc. Loss of the policy document should be immediately initiated to the Branch Office of the Corporation where it is serviced. Loan: At present loans are granted on unencumbered policies up to 90% of the Surrender Value under policies which are in force for the full sum assured and up to 85% of the Surrender Value on policies which are paid – up for a reduced sum assured. The minimum amount for which a loan can now be granted under a policy is
Rs.1,000/- The rate of interest charged at present varies from 9% to 12% per annum payable half – yearly depending upon the type of plan. The terms and conditions printed on the policy bond reveal whether a particular policy is eligible for a loan. Claim by Maturity/Installment Payment: The Corporation strives to settle maturity claims on or before the due date. Survival Benefit Payments up to Rs.60,000/- under Money Back type plans, barring few exceptions, are released without calling for original policy documents and Discharge Voucher. Death Claim: In the event of the death of the life assured, the claimant should immediately intimate the fact of such death to the Branch Office where the policy is serviced, along with the following particulars to help the Corporation to consider the claim promptly. (a) Policy numbers (b) name of the life assured (c) date of death preferably with proof of death and (d) claimant’s relationship with the assured. The claim is usually payable to the nominee / assignee or the legal successor, as the case may be. However, if the deceased policy holder has not nominated / assigned the policy or if he / she has not made the will regarding the policy moneys, the claim is payable to the holder of a Succession Certificate or some such evidence of title from a Court of Law. Claims Review Committee: The Corporation settles a large number of death claims every year. Only in case of fraudulent suppression of material information will the liability be repudiated. The number of death claims repudiated is, however, very small. Even in these cases, an opportunity is given to the claimant to make a representation for consideration by the Review Committees at the Zonal Office and the Central Office. As a result of such review, depending on the merits of each case, appropriate decisions are taken. The Claims Review Committees at the Central and Zonal Offices have among other members a retired High Court / District Court Judge. Grievance Redressal Machinery:
Policy holders’ Grievance Redressal Cells exist in all the Offices of the Corporation, headed by Senior Officers who can be approached by policy holders for redressal of their grievance, on any day but particularly on every Monday between 2.30 p.m. and 4.30 p.m. without prior appointment. All Branch Offices Chief Manager / Sr. / Branch Manager All Divisional Offices Marketing Manager All Zonal Offices Regional Manage (Marketing) / Regional Manager (CRM) Central Office Executive Director / Chief / Secretary (CRM) The Policy holder can avail of himself / herself the facility of toll – free telephone system in Delhi and Mumbai or contact us through the LIC website www.licindia.in. LIC’s website is rich in information on products / services. Scheme of Ombudsman: The grievance machinery has been further expanded with the appointment of the Insurance Ombudsman by the Government of India at different Centers. Complaints of the following types come within the purview of the Ombudsman’s consideration. ? Repudiation of liability under claims. ? Delay in settlement of claims. ? Any dispute regarding premiums paid or payable in respect of the policy. ? Any dispute regarding the legal construction of the policies in relation to a claim; and ? Non – issue of insurance document to customer after receipt of premium.
Tips to Policy holders:
Make use of various services available with the help of Information Technology initiate elaborated. Check the nomination status under the policy and intimate changes, if any, for speedy settlement of claims. Pay the premiums in time (where possible, using facility of Metro / Wide Area Network / Internet / Online Payment / ATMs of Corporation Bank & AXIS Bank & ECS). Revive the policy in case it has lapsed, so that the valuable insurance cover is kept intact. Review periodically the insurance needs of self and the family so that adequate insurance protection is ensured. Enquire with agent about new innovative plans devised by LIC. Intimate the Email address, Telephone, Mobile No. and Fax Number for faster communication on matters relating not only to the policy services like premium reminders, claim alerts but also to update on new plan / services being offered by LIC. Maturity proceeds can be reinvested in attractive products of LIC viz. investment oriented products like LIC’s Market Plus, Profit Plus, LIC’s Bima Nivesh, Bima Bachat or pension schemes like New Jeevan Suraksha – 1, LIC’s Jeevan Akshay – VI, etc. In case of any complaint, the full policy details with the same of the serving branch may be provided for quick disposal of the complaint. LIC has launched an Enterprise portal where policy holder can register and get information about his policy as well as LIC products on portal itself.
People’s Money for People’s Welfare
The Life Insurance Corporation of India has been a nation – builder since its formation in 1956. True to the objectives of nationalization, the LIC has mobilized the funds invested by the people in life insurance for the benefit of the community at large. The Corporation has deployed the funds to the best advantage of the policy holders as well as the community as a whole, true to the spirit of nationalization. National priorities and obligation of reasonable returns to the policy holders are the main criteria of our investments. The total funds, so invested for the benefit of the community at large accumulated to Rs.6,13,266.58 crore as on 31 st March, 2007. The investment of the Corporation’s funds is governed by section 27A of the Insurance Act, 1938, subsequent guidelines / instructions issued there under by the Government of India from time to time, and the IRDA by way of regulations. As per the prescribed investment pattern approved by IRDA, the controlled funds are invested as follows:Not less than 50% is invested in Government Securities or other approved investments. Not less than 15% is invested in infrastructural and social sector investments. Not exceeding 35% in others to be governed by exposure prudential norms.
Profile of LIC
Organisation Set – up
(All over India)
Central Office Mumbai
8 Zonal offices
105 Divisional offices
2048 Branches
Organisation Set – up
(Bhavnagar)
Western Zone
Bhavnagar Divisional Office
1- Bhavnagar City Branch 1st 2- Bhavnagar City Branch 2nd 3- Bhavnagar City Branch 3rd
4 – Savarkundla 5 - Mahua 6 – Botad 7 – Amreli 8 – Surendranagar 9 – Sihor 10 –Limbdi 11 - Dhrangadhra
The Life Insurance Corporation of India has been a nation-builder since its formation is 1956. The performance LIC has been exemplary and it has been growing from strength be it customer base, agency network, branch office network, new business premium and the like. It has played a significant role in spreading life insurance widely across the country. True to the objectives of nationalization, the LIC has invested the funds mobilization from policy holders for the benefit of the community at large. In the current scenario, LICs vision is to emerge as a world class customer centric organization. Some highlights of LICs performance are as follows:
New Business during the Year 01/04/07 to 31/03/08 (Individual Assurance)
Policies (in lakh) Composite Growth 375.90 -1.62% Sum Assured (in crore) 2,75,457.65 -9.12% First Premium Income(in crore) 43,812.86 10.80%
Pension and Group Business and Social Security Schemes Achievement from 01.04.07 to 31.03.08
Pension & Growth Group Rate Schemes New 153.71 lac 83% -9% Social Securities Schemes 113.67 lac 192.56 Growth Rate 98% 91%
No.of Lives Premium 10356.94 Income(Rs In Crore)
Business in Force as on 31.03.08
Policies (in crore) Individual Assurances Group Insurance(lives) 23.39 5.10 Sum Assured (Rs. In crore) 17,28,679 3,06,711
Other Parameters 01/04/07 to 31/03/08 Provisional (in crores)
1. 2. 3. 4. 5. Total Income Total Premium Income Total Policy Payments Total Life Fund (as at 31.03.08) Total Assets (as at 31.03.08) Rs. 2,06,363 Rs. 1,49,706 Rs. 57,623 Rs. 6,86,616 Rs. 8,03,820
Investment in Government & Social sector (Rs. In Crores)
Type of Investment As on 31.03.06 236959 58928 31.03.07 272498 64285 31.03.08 298157 89195
01. Central Government 02. State Government & Other Government Guaranteed Marketable Securities. Sub Total (A) 295887 336783 03. Infrastructure and Social Sector Investment (a) Housing 19807 22451 (b) Power 29740 37881 (c) Irrigation/Water supply 8288 7500 & sewerage (d) Road, Railways, Port & 725 1516 Bridges (e) Others 3954 4398 Sub Total(B) 62514 73746 Total(A+B) 358401 410529
387352 24325 41120 6649 1154 8774 82022 469374
Linked policy
Definition:
Insurers have developed plans that combine the benefits of life insurance as well as giving various options of participating in the growth of the capital market. Such plans are called Linked Life Insurance Plans. They are also called Unit Linked Insurance policy or ULIPs, in short. A ULIP is a life insurance policy which provides a combination of life insurance protection and investment. ULIPs contribute nearly 50% of the premium for some insurers and more than 85% of the premium for some others. We all know that investment in share market offer maximum returns. Many of us have the temptation to invest in share market to maximize our returns; but due to the high volatility of the share market and the high risks associated with the market, we hesitate to risk our funds in the share market. This has resulted in the emergence of ULIP market wherein several like minded people pool their resources and entrust the job of managing the funds to an expert called ‘Fund Manager’ and share the risks and returns associated with the investments. These fund managers are highly qualified persons with lots of experience in the share market. The fund managers evaluate the performance of various participants in the market, assess the risks associated with the investment and take a prudent decision whether to invest the money in that company or not and if so to what extent. While the market risk will be still with the investor, due to the expertise of the Fund Manager and also deployment of funds in various participating companies, the risk will be distributed evenly and brought down to the barest minimum. Naturally, the benefits arising out of increase or the loss suffered due to fall in the value of share will be borne by the investors. The Fund Manager will be entitled for various charges for managing the fund/administering the scheme on behalf of the Unit Holders, which will constitute his main source of income. In the case of a ULIP, the proposer officers to pay a certain sum towards premium. Insurers insist that this amount should be in
multiples of say Rs.500 or Rs.1000 with a minimum of say, Rs.5000 or Rs.10000. The term of the policy is also specified it should not be less than 5 years or age 70 for Whole Life plans. The premium may be paid as a Single premium at the start or periodically over the term or less, as in the case of limited payment policies in yearly, halfyearly, quarterly or monthly installments. The SA or death cover, payable in the event of death during the term, is related to this premium, usually as a multiple like 5 times the annual premium or 1.5 times the single premium. The minimum SA, according to IRDA guidelines, has to be 1.25 times single premium or 5 times annual premium. Out of the premium, annual or otherwise as the case may be, a certain amount is adjusted towards the cost of the insurance(death) cover. Some portion may be adjusted towards charges. The balance, called the allocated premium, is invested in a fund that the proposer chooses, from among the set of options. The allocated premium is more in the second year and still more in the third and later years because some charges are not levied in every year. The allocated premium is used to buy a certain number of units in the chosen fund at the price at which the units are being offered on that day. This price called the NAV, which varies every day, is explained later. The death benefit is fixed but the maturity benefit is not guaranteed. The maturity benefit depends on market conditions and the fund in which the premium has been invested, on the date of maturity. In linked policies, the SA may be expressed as an integrated benefit, which means that on the happening of the event, the SA or the value of units in the fund, whichever is higher, is payable. In this case, the life cover will reduce as the value of the units increases. As the risk cover decreases, the premium adjusted towards the cover will decrease and the amount allocated to investment will increase. The alternative to the integrated benefit, is to pay a fixed SA as an additional benefit on death, in addition to the value of the units in the fund. In this case, the charge for the risk cover will increase and the allocation to the fund will decrease every year. This is sometimes called the ‘Double Death Benefit’.
Some of the other features offered by insurer along with ULIPs are the following. These are not offered by all insurers. They are also not available with ULIPs offered by the same insurer. • The policy holder can pay additional premium for investment at any time. • Partial or total withdrawal is allowed. Sometimes there are conditions attached. Some insurers, not all, charge a redemption fee in such cases. • These policies will not be entitled to any bonus. • There is no annual bonus, but there may be a loyalty bonus paid at the end.
ULIP from LIC
Life Insurance Corporation of India has launched a new unit-linked pension product called ‘Market Plus’. It utilizes the premium received to purchase units from a fund type chosen by the individual, after deduction of applicable charges. The total fund accumulated over a period of time after investment generates regular income that will be paid to the individual through his or her lifetime. The choice of retirement age is between 40 to 75 years, with a minimum deferment period of 5 years only. The individual will have a choice of four fund options, with varying degree of equity exposure. The policy comes with additional options of a life and accident cover. The customer has the option to pay premia in yearly, half-yearly, quarterly and ECS modes.
Unique characteristics of ULIP products :
1. Unlike mutual funds, ULIP products most offer insurance coverage. Industrial Regulation and Development Act (IRDA) guidelines clearly stipulate that all ULIP products other than pension and annuity products must necessarily have provision for death benefit. 2. Among the investors, some may be coming forward to take very high risk and others may not be prepared to take such high risk though they will be interested in reaping the benefits of share market. So naturally, insurance companies have different types of customers. 3. In conventional insurance business, investment business of Life Fund is governed by the provisions of Insurance Act 1938. As the policy holders money in high risk securities. As the investments are mostly made in government securities, bonds and money market instruments, the returns will be generally low. In ULIP business, investments are made in accordance with the option exercised by the ULIP holder. 4. Investment in ULIP funds are subject to market risks due to high volatility of the share market. The degree of risk vary from fund and hence the risks associated with each fund are borne by the investors in that particular fund. 5. Unlike conventional products, the ULIP products clearly define the charges that are to be borne by the ULIP policy holder. If the insurance company is able to restrict their spending well below the amount recovered, they can retain the surplus. Similarly, if they incur more than the amount recovered, the company may have to bear the same and it cannot be recovered from the ULIP policy holder.
6. Any accretion to the investments made out of the policy holders funds are fully passed on to the policy holders. Similarly, any diminution in the value of investments is also fully borne by the ULIP policy holders. As a corollary, any surplus or loss arising out of non UNIT fund is fully borne by the insurance company.
RESEARCH OBJECTIVES AND APPROACH
The intended outcome of the research program is the provision of practical advice on financial sector policies and reforms relevant to the needs of policymakers. The research will provide policy advice on such issues as: strengthening the efficiency and regulation of the domestic financial sector; boosting domestic savings. The main objective is to increase understanding of the crucial relationship between the parallel strategies of financial development and thereby improve the effectiveness of policy design and implementation.
The Approach
My approach to the research topic is premised on two propositions. The first is that a marked acceleration in higher levels of savings and investment, in particular, private investment. A key function of the financial system is to facilitate increased savings mobilization and to allocate the increased savings to those private investors capable of generating the highest returns to capital. The institutional features of the financial system are crucial for the efficient functioning of financial markets and their distributional impact. My second premise is that the effectiveness of the financial system in stimulating overall savings and investment and the efficiency with which financial institutions allocate these resources across sectors, depend upon the regulatory regime for financial markets and institutions. Regulatory design, both internal incentive and governance structures and external monitoring and supervision, is a key instrument for financial development. The research program will cover a wide range of topics within the overall remit of financial sector development; various research methodologies will be employed. They will include: Difference between ULIPS & Traditional Plan, ULIP V/S ELSS, Something about ULIPS, Points to be kept in mind, ULIPs Systematic Insurance cum
Investment plan. The focus and content of the research program have been designed to complement and extend the current body of knowledge in the area of development finance.
RESEARCH OBJECTIVE
To find out the expectations of an individual Customer about the Mutual fund and Unit Linked Insurance plans. And what should be done to fulfill the expectations of customers.
RESEARCH SCOPE
The study was conducted within the city limit of Bhavnagar. The aim was to cover as many geographical areas of Bhavnagar as possible and also to get varied demographics.
Sampling method and size
Research methodology states how the research study is under taken. It includes specification of research design source of data, method of primary data collection, sampling design and analysis procedure adopted. Research methodology states what procedures were employed to carry out the research study.
Research Design
Here in the market research of expectation of an individual customer about Unit Linked Plans descriptive research design is used. It will help to understand the investor’s behavior. Research done on media habits and viewing habits of target market is done under descriptive research. Survey is one of the research approach is best suited for descriptive research. Survey research is the most widely used method for primary data collection. It is used to obtain many different kinds of information in different situations.
During the survey it was asked to respondents that whether they know about Marked Linked plans which provide Insurance cover and Returns. Most of them knew little about the plans.
ULIP
32%
Knows ULIPs Don't Know ULIP
68%
Finally they were explained the benefits of ULIPs and LIC plans they were ready to add this Insurance plans in their Portfolio.
Difference between ULIPs and Traditional Plans
ULIPS The premiums, in excess of risk cover, is invested as desired by the policy holder. The investment return may vary depending on the market movements and the investment risk is borne entirely by the policy holder. Traditional Plans All the premiums go into a common fund and are invested at the insurer’s description. There are two categories of benefits – guaranteed and non – guaranteed. For guaranteed benefits, the insurer bears the investment risk. However, nonguaranteed benefits, such as bonuses, depend on the performance of the insurer. Surrenders are allowed but at a loss. Loans may be provided. For participating policies, bonuses are payable. The premium amount used for insurance coverage, other charges and investment are bundled up and not known. Benefits are pre-determined. Loss is unlikely. Gains unlikely except through bonuses.
Withdrawals are allowed. Loss, if any, depends on NAV Loans are not allowed. There are no bonuses, except loyalty bonus in some cases. The amount of the premium used for insurance coverage, other charges and the purchase of units are unbundled and transparent. Benefits are variable. Loss is likely Gains likely depending on market movements.
ULIPs can be compared to
• Endowment plan, if not withdrawn till maturity. • Money – back plan by withdrawing as and when funds are required.
• Children’s plan by withdrawing funds for higher studies, marriage expenses, etc • Whole – life plan by not withdrawing at all, till 70 or 80 years of age. • Pension plan by withdrawing every month after retirement. ULIPs differ from other traditional insurance plans in matters of documents, lapse and revival conditions, and in claim settlement procedures. Underwriting practices are similar. The proposal form will have questions about family history and personal history. The agent’s report is also called for. The underwriter may, if necessary, call for more reports, medical or otherwise, to check insurability. The premium is not a fixed figure. The amount at maturity and on death will be differently stated. In the event of a non – payment of premium during the days of grace, 30, 15 or zero days as the case may be, the policy lapses. In some plans, the risk cover ceases after six months. In some other plans, the risk cover continues and the policy can be revived within two years. During the period of lapse, the fund continues to be in tact and the premium for death cover and other annual charges will be deducted from the fund, by cancellation of required units. This will continue for two years or till the fund amount reduces to one annualized premium, if earlier. The claim procedures will remain the same, except that the claim amount will be determined differently. In the event of death during this period, the SA and the value of the units in the account will be paid to the nominee. Surrenders are usually allowed after the 3 rd policy anniversary. Loans are not allowed.
ULIP V/S ELSS
In today’s scenario , when we talk of life insurance policies what immediately springs to our mind are ULIP’s. ULIP’s from life insurers have been the preferred flavour for a lot of people who wish to ‘invest through insurance’. The main attraction is the tax break under Section 80C of the Income tax Act, 1961. ULIPs basically work like a mutual fund with a life cover thrown in. They invest the premium in marketlinked instruments like stocks, corporate bonds and government securities. But if talk about pure tax saving schemes, then we have the option of investing in tax-saving funds/equity linked saving schemes (ELSS).Which offer similar tax benefits. An ELSS is a diversified equity mutual fund scheme where you have an option of making a one-time investment. It works like an open-ended diversified equity fund that invests predominantly in the stock market to generate growth by way of capital appreciation for investors. The only difference between an equity fund and a tax-saving fund is that the latter has a 3-year lock-in and tax benefits under Section 80C.
A brief comparison of ULIP (Unit Linked Insurance Product) vs MF (Mutual Funds) specifictotheIndianmarket:
The similarities: For both ULIP’s and ELSS, you have to invest once and the investment is locked in for minimum three years. Under the present tax laws, what you get on maturity is tax-free. While in ELSS your entire investment will be in equity. ULIP’s give you the choice of investing in equity or debt instruments, or both, and the choice to move from one to the other.
The differences: The biggest difference is that ULIP’s give you a life cover, while ELSS does not. So in ULIP’s , the ‘mortality cost’ of insuring your life
is deducted from the value of the fund every month. When the plan matures, the value of the units, or fund value, is yours. If a policy holder dies during the plan term, the higher of sum assured or fund value is paid to the beneficiary. The tax benefits: Investments in ULIPs and ELSS attract tax benefits under Section 80C. The costs: In an ELSS, the amount invested is subjected to only two charges. One is the entry cost or the load, which is normally 2.25 per cent of the amount invested. After the units are allotted, there are recurring charges also called the expense ratio. For ELSS, the average is around 2.25 per cent of the fund value, while the maximum permitted is 2.5 per cent. For ULIP’s, first there is the premium allocation charge ,it ranges from 2 to 4.5 per cent for amounts below Rs 1 lakh, and goes down for higher amounts. Then there is fund management cost, which is similar to the MF recurring expense ratio. Further, there is the mortality cost, which is based on the difference between the sum assured and the value of the fund. Some ULIP’s also carrying a ‘surrender charge’ for exiting the plan in the fourth and fifth years as well. Then there is the ‘policy administration charge’. It is deducted from the fund value either as a percentage, a fixed sum every month, often based on the sum assured. Irrespective of how the charges come in, the post-charges returns from most ULIP’s is below that from the ELSS funds for lower amounts. Lower front-end costs often come with higher mortality rates and policy administration charges, and so on. After looking at the above comparison, although an ELSS looks more favorable, an individual should keep in mind that these tax-saving funds invest 100 per cent of their corpus in equities. Balanced or debt schemes are not available for availing the tax benefits under Section 80C.
Therefore, individuals who do not have the risk appetite for equities could opt for a balanced ULIP, as tax-saving funds would be too risky for them. Also, a ULIP offers an individual the choice to 'protect' his portfolio if need be by way of a restructure. He can shift his money from high-risk equities to debt or go for a balanced portfolio, unlike investments in tax saving funds where he either could holds on to your investments or sell them. Besides, many insurance companies have introduced ULIPs with a capital guarantee. This product protects individuals from a potential market slide. In case of a market slide, the insurance company purports to at least return the premia paid by the individual. This is unlike investments in a mutual fund scheme where you are partner to both profits as well as losses incurred by the scheme. Hence we can conclude by saying, individuals who have the stomach for taking risk can separate their investment and insurance needs. They can consider the option of buying a term plan separately and investing in tax-saving funds. Whilst investors who do not have an appetite for risks, but who would still like to add a dash of equity to their portfolio, could look at investing in a balanced ULIP
Something about ULIPs and its charges
Unit Linked insurance plan provides the combination of insurance with investments. It has the double benefit of providing a RISK cover & investing in stock markets. Unlike traditional plans the ULIPS are subject to the risk factors where the risk is borne by the policy holder, the investment risk is related with the stock markets & accordingly the NAVs of the units go up & down depending upon the fund’s performance & the factors affecting the capital market. Before you invest in ULIPs check out what all charges ULIPS have. Unless you know about the charges in ULIPS by various insurance companies you would not be able to come to know about your returns in the short as well as in the long run because most of the charges are taken upfront. Thus the basic understanding about the cost structure of ULIPS would help you to know about your returns with complete transparency.
Basic Charges in ULIPs:
1. Premium Allocation Charge: This is a percentage of the premium appropriated towards charges before allocating the units. This percentage is generally higher in the first few years varying greatly from company to company. Say your premium allocation charges are 30%, and then out of your total premium paid of Rs. 1,00,000 Rs. 70,000 are invested in the funds effectively. 2. Mortality Charges: These are the charges to insure you against life cover which depends on no of factors such as age, amount of coverage, state of health etc. If you don’t take a life cover then your mortality charges become zero. As these charges depend upon your age primarily, these charges could be around 1.3 for a 30 year old guy & can extend to 6.4 for a 50 years old guy per Rs. 1000 of the sum assured. 3. Fund Management Charges: These charges are deducted for managing the funds before arriving at the Net Asset Value (NAV). The fee is charged as a percentage of funds under management by the fund mangers. These are ranging from 0.5-2% per annum.
4. Policy/Administration Charges: These are the charges for administration of the plan which could be flat throughout the policy term or vary at a pre-determined rate. These are a monthly fixed amount which varies every year with inflation or as a percentage of sum assured. 5. Surrender Charges: These charges are deducted for premature partial or full encashment of units. 6. Fund Switching Charges: The charges when you wish to switch ULIP options like from Equity to debt. Generally a limited number of switches are allowed without any charge.
Points to be kept in mind :
1. Stay invested for long run: Everyone will get good returns only after 5-8 years of investing therefore its charges should be seen from a long-term perspective as its charges are higher in the first few years which is why it takes more years to get a break even point in investments i.e. your cost will be recovered in a longer period. Insurance agents might convince you to withdraw the money after 3 years but stay invested for 5-8 years to get good returns. 2. Be clear with the charges: The transparency about charges was not there earlier but now the Insurance Regulatory Development Authority of India has issued guidelines according to which the investors should know all the charges & no hidden charges can be charged. 3. Invest as per your risk profile: Understand the risk appetite & accordingly allocate assets across different categories. Choose fund depending upon the age and risk profile. 4. Other features: Apart from the charges look at the flexibility in switching to funds, fund management charges & the funds past performance should also be looked upon before looking out for ULIPS. Thus ULIPS provide the twin benefit of covering the risks & investing in the stock market. Before investing in ULIPS there is a need to take care of the past performances of funds which invests the money & have transparency about what all charges are deducted from the premium. So be a smart investor & invest according to your risk profile for a long term to get the maximum returns from ULIPS
ULIPs- Systematic Insurance cum Investment Plan
Any individual who has purchased a life insurance policy in the last year or so surely would have a Unit Linked Insurance Plan (ULIP). ULIPs have been selling like Wonder Products in the recent past and they are likely to continue to outsell their plain vanilla counterparts going ahead. A ULIP is a market-linked insurance plan. The difference between a ULIP and other insurance plans is the way in which the premium money is invested. Premium from, say, an endowment plan, is invested primarily in risk-free instruments like government securities (gsecs) and a rated corporate paper, while ULIP premiums can be invested in stock markets in addition to corporate bonds and gsecs. So what else apart from this reason makes ULIPs so attractive to the individual? Here, we have explored some reasons, which have made ULIPs so irresistible. Transparency However, ULIPs offer a transparent option for customers to plan their various life stage needs through market-led investments as compared to traditional investment plans. Insurance cover plus savings 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 variety than traditional life insurance plans. So there are multiple options at the individual's disposal. ULIPs generally come in three broad variants: • Aggressive ULIPs (which invest 80%-100% in equities, balance in debt) • Balanced ULIPs (invest around 40%-60% in equities)
• Conservative ULIPs (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. A ULIP policy holder has the option to invest in a variety of funds, depending on his risk profile. If one does not have the appetite to invest in equity, they can choose a debt or balanced fund. Flexibility Individuals can switch between the ULIP variants outlined above to capitalise 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 a 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 costaveraging 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. When you're buying a ULIP, make sure you select one that works well for you. The important thing is to look for and understand the nuances, which can considerably alter the way the product works for you. Take
the following into consideration: Charges Understand all the charges levied on the product over its tenure, not just the initial charges. A complete charge structure would include the initial charges, the fixed administrative charges, the fund management charges, mortality charges and spreads, and that too, not only in the first year but also through the term of the policy. Fund Options and Management Understand the various fund options available to you and the fund management philosophy and objectives of each of them. Examine the track record of the funds and how they are performing in comparison to benchmarks. Who manages the funds and what experience do they have? Are there adequate controls? Importantly, look at how easily you can access information about your fund's performance when you need it -- are their daily NAVs? Is the portfolio disclosed regularly? Features Most ULIPs are rich in features such as allowing one to top-up or switch between funds, increase or decrease the protection level, or premium holidays. Carefully understand the conditions and charges associated with each of these. For instance, is there a minimum amount that must be switched? Is there a charge on the same? Must you go through medical underwriting if you want to increase the sum assured? Company Last but not least, insure with a brand you can trust to honour its commitment and service you according to your requirements First and foremost, investors need to understand that a ULIP is a bundled product of their investments and their insurance proceeds. Since privatization in 2000 and the introduction of ULIPs as a life insurance product category, the overall insurance penetration in the country has grown from around 2% to 4%. Today, more than 70 per cent of the new business premium for life insurers comes from Ulips.
Types of ULIP Funds:
Basically there are two types of Funds in ULIP business, namely: 1. Non Unit Fund and 2. Unit Fund. Non Unit Fund: This fund belongs to the Company/Promoter. All charges recovered from the ULIP policy holder such as allocation charges, mortality charges, policy administration charges, fund management charges, surrender charges, etc. are taken to this fund. All payments such as death claims(amount paid over and above units lying to the credit of the ULIP holder), commission to Agents, policy preparation charges, policy administration expenses, fund management charges publicity expenses, conference expenses, etc. are charged funds. As the insurer recovers from the policy holder various charges, he has to restrict his expenses within the amount collected from the policy holder and excess, if any, spent by him may have to be borne by him from the Non Unit Fund. The insurer cannot lay his hands on the Unit Fund, to cover the shortfall, under any circumstances. Similarly, he has also to bear any extra outgo he will be incurring due to adverse death claim experience, since he recovers mortality charges from the policy holders. Unit Fund: This fund comprises of the Fund belonging to the ULIP policy holders. The premium collected from the policy holders after recovery of allocation charges are taken to this fund and units are allocated at the prevailing Net Asset Value (NAV). Out of this fund, monthly charges such as mortality charges, extra accident benefit charges, critical rider charges, policy administration charges, etc. are recovered by way of cancellation of units(at the prevailing NAV). The remaining balance is invested in accordance with the option exercised by the policy holder. Any income received such as interest, dividend, etc. are taken to the credit to this fund. Similarly, any capital gains arising out of the transfer of the shares/securities also form part of this fund. Any accretion to the unit holders’ investments such as bonus shares, rights issue also belongs to this fund. When the fundamentals of the shares/securities invested by the fund go strong, the market value of
the shares traded in the stock exchange also go up. The growth in the value of an investment will depend upon several factors such as the bullish/bearish trend in the stock market, the economic growth of the country, the environmental factors affecting the growth of that particular industry, the Government policy towards that particular industry, tax incentives, the credibility of the promoter, trend in the earnings of the particular company as compared to the industry, the future growth potential of the company, etc. The value of a particular Unit Fund on a given date is calculated as follows: The value of a particular Unit Fund on a given date = Market value of all investments + amounts due to the fund(receivables) towards interest/dividend etc. + all current assets relating to the Unit fund – current liabilities relating to the Unit fund. Classification of Unit Fund: ULIP scheme is nothing but a Mutual Fund with a small difference. This fund will include variety of investors with variety of options. Some investors may be interested in taking high risk in order to get high returns, some investors may be interested in taking high risk in order to get high returns, some may be coming forward to take only moderate risk and some may be hesitating to take even very little risk. Nevertheless every one of them will be desirous of repaying the benefits of investments in financial/capital market. Naturally, it may not be possible for a company to place all the investors in a single group and hence the company has to necessarily have different types of funds suiting the needs of different types of policy holders. When there is the need for segregation of funds, it also becomes essential to have separate fund management for each type of fund since the risks associated with each fund and the volume of tasks to be performed for each type of fund are different. The classification of funds becomes essential for various reasons: 1. Some investors may require periodical income and some investors may be coming forward to reinvest their income and get an accumulated lump sum as and when they need. 2. Some investors will be prepared to take even very high risk and some investors may not be coming forward to take high risks. 3. Some investors would be very much concerned about the 100% safety of the money and getting periodical returns on
their investments whereas some of the investors may not mind taking a little more risk in order to get more returns. 4. Some of the investors may use this as a device for reducing their tax burden. They will be interested in getting tax benefits on maturity, capital gains, etc. whereas some investors may be prepared to pay tax at the full rate even on the returns/capital gains provided the returns will be substantial. 5. Some of the investors may be interested in repaying the benefits arising out of the growth of a particular sector such as steel, cement, IT,etc. Based on the above, we can classify the funds as follows: 1. Growth Fund: The objectives of this fund is to provide capital appreciation over the medium to long term. Such funds invest a major portion of their corpus(say 60 to 80%) in equities and equity oriented securities. Naturally, the risks are comparatively higher. Growth schemes are good for investors having a long term outlook seeking appreciation over a period of time. This fund is also called Risk Fund. 2. Sectors specific schemes: The objectives of this fund is to invest in the securities of only those sectors or industries specified in the securities of only those sectors or industries specified in the offer documents, eg. IT, Petroleum, Steel, pharma, cement, etc. The return in these funds depend on the performance of the respective sector/industry. These funds may offer better returns but they are more risky as compared to diversified funds. 3. Index Fund: Some of the investors may be interested in investing in the share market in general rather than investing in any specific security. Such investors are happy to receive the returns posted by the market. As it is not practical to invest in each and every stock in the market in proportion to its size, these investors are comfortable investing in a fund which they believe is a good representative of the
entire market fund. The Index Funds replicate the portfolio of a particular index such as Sensitive Index, Nifty etc. NAVs of such funds fall in accordance with the rise or fall in the market though not exactly by the same percentage. 4. Balanced Fund: The objective of this fund is to invest both in equities and fixed income securities in proportion indicated in the offer document. This fund carries moderate risk with moderate growth potential. They generally invest around 40 to 60% in debt equities and similar percentage in debt instruments. These funds are also affected by the volatility of the stock market but at the same time, less volatile compared of the stock market but at the same time, less volatile compared to growth schemes. 5. Income Fund: The objective of this fund is to provide regular and steady income to investors. Such funds generally invest in fixed income securities like Government Securities, Public Sector Bonds, Corporate Bonds, Corporate Debentures, Money Market Instruments, etc. The default risk is very low and these funds are not affected by fluctuations in equity market. The risk associated with the scheme is relatively low as compared to equity schemes. Naturally, opportunities for capital market appreciation are also limited. Normally, they depend upon the interest rates prevailing in the country. 6. GILT Fund: These funds invest exclusively in Government Securities which have no default risk. NAVs of the schemes also fluctuate due to change in interest rates and other economic factors. 7. Money Market Funds: These Funds invest in short term instruments such as Commercial Paper, Certificates of Deposit, Treasury Bills, Call Money, etc. These schemes are least volatile since
investments in money market are with short term maturities. 8. Hybrid Schemes: These funds invest in both equities as well as debt. Some schemes invest less in equities and more in debts and securities. Other schemes invest more in equities and less in debt securities. These Funds are mostly available in Mutual funds. ULIP products, more specially LIC offer the following Funds: Secured Fund, Balanced Fund, Risk Fund, Growth Fund
Different Charges
Miscellaneous Charges
• This levied for any alternations within the contact such as increase in Sum Assured, reduction in policy term, change in premium mode to higher frequency etc. • The alternations will be effective from the policy anniversary concident with or following the alteration. • This charge is levied only at the time of alteration. All the charges, other than Premium Allocation Charge and Mortality Charges may have as upper limit and can be modified within the upper limits with the prior approval of IRDA (IRDA ULIP Guidelines).
Premium Allocation charges
• This is a percentage of the premium appropriate towards charges from premium received. • This charge is levied at the time of receipt of premium and varies from plan to plan and even from mode to mode. • Generally, it will vary depending upon the commission rates. More the commission rate, more will be the allocation charges and less will be the allocation rate. • This charge is applicable to premium received through all modes including top up premium. • The percentage of allocation charges shall be explicitly stated by the insurer and could vary interalia by policy year in which the premium is paid, the premium size, premium payment frequency and the premium type.
• Generally, the allocation charges are high in the first few years and will be moderate/low in the subsequent years. • When an insurer receives premium from the policy holder, he first appropriates allocation charges and allots units only for the balance premium which is known as allocation rate. • Allocation rate means that part of premium which is utilized to purchase units for the policy. • Example, if a policy holder remits a premium of Rs.10,000 and the percentage of allocation charges is 24%, the insurer will first appropriate Rs.2400/- towards allocation charges and allot units only for the balance premium of Rs.7600/-. The balance premium is called allocation rate. • The percentage/rates of allocation charges are generally mentioned in the terms and conditions of the policy. • LIC Profit Plus: Single Premium 4.5t o 5% Regular Mode 3 or 4 years First Year 9 to 10.5%, subsequent years 2.5% 15 years – First year 22.5 to 24%, subsequent years 4%. • As these charges are substantial in volume, they can make material difference in product comparison. • Example, an insurance company in the private sector was allocating to the policy holders fund only 28.5% in the first year, 93% in the second year and 94% in the third year. • More the allocation charges, lesser will be the number of units allotted to the policy holder. • Naturally, it implies that the company benefits at the cost of the policy holder. • In yet another case, the company was charging 5% towards premium allocation charges but they were also charging initial
management charges at the rate of 5% per annum during the term of the policy subject to a maximum of 20 years. This means, though the company has been charging low allocation charges, it has been taking away the entire first year premium paid by the policy holder by way of initial management charges. • The allocation charges are fixed and cannot be increased by the insurer during the term of the policy.
Policy Administration Charges
• This charge is levied to cover the expenses of an insurer other than those covered by the premium allocation charges and the Fund Management Charges. • This may be expressed as a fixed amount or a percentage of the premium or as a percentage of the sum assured(IRDA ULIP Guidelines). • This charge is levied at the beginning of each policy month from the policy fund by canceling units of equivalent amount. • This charge could be flat throughout the policy term or vary at a predetermined rate(IRDA ULIP Guidelines). • As per the ULIP guidelines issued by IRDA, the predetermined rate shall preferably be a percentage per annum which shall not exceed 5%. • In most cases, LIC as been charging Policy Administration Charges at the rate of Rs.60/- per month during the first year and Rs.20 per month thereafter. • Example (1), one of the insurance companies in the private sector has been charging policy administration charges @ Rs.600 per annum increasing 5% annually.
• Example (2), Another product of a private company launched recently, collects policy administration charges @ 1.75% per annum of sum assured and will be collected at each monthly anniversary by cancellation of units. Suppose, if the annualized premium is Rs.2lakhs and the sum assured is Rs.10lakhs, the policy administration charges would be Rs.17,500(LIC charges only Rs.720 per annum in the first year and Rs.240 per annum in subsequent years).
Fund Management Charges
• This charge is levied as a percentage of value of the assets and shall be appropriated by adjusting the Net Asset Value. • This is a charge levied at the time of consumption of NAV which is usually done on daily basis. • Unlike other charges, this is not recovered directly from the policy holders either from the premium or by way of cancellation of units. • The percentage may vary for each Fund – example LIC Profit Plus 0.75% for Bond Fund, 1% for Secured Fund, 1.25% Balanced Fund and 1.5% Growth Fund. • One of the products launched recently by a private insurance company charges as follows: Growth Fund 1.75% Equity Index Fund 1.25% Bond & Liquid Fund 0.95%
Mortality Charges
• This is the cost of life insurance cover and it is exclusive of any expense loading levied by either by cancellation of units or by debiting premium but not both(IRDA ULIP Guidelines).
• This is generally levied at the beginning of each policy month from the Fund. • The method of computation will be clearly specified in the policy document. • Mortality rates are guaranteed during the contract period. • LIC usually collects mortality charges by way of cancellation of units.
Rider Premium Charges
• This premium is exclusive of expense loadings. • It is levied separately to cover the cost of rider cover levied either by cancellation of units or by debiting premium. • Like mortality charges, this charge is also levied at the beginning of each policy month. • Example, Critical Illness Rider, Additional Accident Benefit cover etc.
Partial Withdrawal Charges
• This is a charge levied on the Unit Fund at the time of part withdrawal of the fund during the contract period.
Surrender Charges
• Surrender means termination of the contract. On surrender, the surrender value is payable which is usually expressed as Fund Value less surrender charge. The surrender charge could be even zero.
• This charge is levied on the Unit Fund at the time of surrender of the contract. • This charge is usually expressed either as a percentage of the fund or as a percentage of the annualized premium. • A thorough and detailed understanding of this charge is absolutely essential for meaningful comparison of products. • Example, one of the products of a private insurance company has stipulated a surrender charge equivalent to 100% of the capital units(first year premium) if the policy had lapsed and 3 years premium had been paid. The same plan has given a formula for calculation of surrender charges if 3 years premium had been paid. As per that formula, the percentage of surrender charges is as high as 70% for some terms. • As may be seen, the surrender charges imposed by most of the insurance companies in the private sector are substantially high and some times even go upto 100%. • A thorough understanding of the surrender charges will save a substantial portion of the hard earned money of the investor.
Service Tax Charges
• Service Tax is usually payable on the charges for mortality, accident benefit and critical illness premium. • This charge is recovered by cancellation of units out of policy holders funds on a monthly basis. • The level of charge will be as per the rate of service tax applicable to risk premium which is presently 12.36%.
Switching Over Charges
Switching is a facility which allows the policy holder to change the investment pattern by moving from one fund to another fund amongst the funds offered under the underlying product of the insurer. Monthly charges recoverable on 1-11-07 No. of units = 160/19.80(NAV assumed as Rs.19.80) = 8.081 units No. of units available at the end of 1-10-07= 375.293 units Monthly charges recoverable on 1-12-07 No. of units = 160/20 (NAV assumed as Rs.20) = 8.000 units No. of units available at the end of 1-10-07= 367.293 units Premium paid on 2-12-07 Rs.10,000 Less: Allocation charges (24%) Rs. 2,400 Allocation rate __________ Rs. 7,600 __________
No.of units allotted on 02-12-07 = 7,600/20 (NAV)= 380.000 units Total number of units on 02-12-07 747.293 units The allocation of units and appropriation of charges go on like this. ? As the death benefit guaranteed under a policy is normally higher of the sum assured or NAV, while calculating the sum at risk, the insurer usually subtracts the fund value from the sum assured and applies the mortality rate. ? The mortality charges are therefore calculated on the difference between the sum assured of the basic plan and fund value of units as on the date of deduction of charges, after deduction of all other charges. Naturally, mortality charges will be deducted only when the basic sum assured is more than the fund value. When the fund value exceeds the sum assured, no mortality charge will be recovered. ? Mortality charges during a policy year will depend upon the age nearer birthday of the policy holder as at the policy anniversary
coinciding with or cancellation of units.
immediately
preceding
the
date
of
? As the age will increase every year, the mortality charge will also increase every year on each policy anniversary. However, in practice, this will not happen as the fund value would have also gone up substantially resulting in reduction of mortality charges.
How ULIPs can make you RICH!
Given that ULIPs are relatively new and remain an enigma for a large section of insurance-seekers in this note we compare them to the traditional endowment plans to give you a perspective.
Sum assured
Perhaps the most fundamental difference between ULIPs and traditional endowment plans is in the concept of premium and sum assured. When you want to take a traditional endowment plan, the question your agent will ask you is -- how much insurance cover do you need? Or in other words, what is the sum assured you are looking for? The premium is calculated based on the number you give your agent. With a ULIP it works in reverse. When you opt for a ULIP, you will have to answer the question -- how much premium can you pay? Depending on the premium amount you state, you are offered a sum assured as a multiple of the premium. For instance, if you are comfortable paying Rs 10,000 annual premium on your ULIP, the insurance company will offer you a sum assured of say 5 to 20 times the premium amount. In our illustration your sum assured could vary from Rs 50,000 to Rs 200,000. Within this range, you have to decide how much insurance cover you need. Of course the multiple to calculate the sum assured varies across life insurance companies.
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