ULIP-Risk Transfer

SUBMITTED BYTazeen Fatima EPIRM(Batch V -2012)

ACKNOWLEDGEMENT
As a part of curriculum at the IIRM, the assignment ULIP -RISK TRANFER I take this opportunity to express my sincere gratitude and thankfulness to IIRM and ICICI Prudential as part of EPIRM . I got chance to study ULIP and its benefit against risk . I would like to thank Mr. R.Munirathnam , co-ordinator of EPIRM Batch 2012, at IIRM , for taking time out of his busy schedule and guide me in every possible way, to proceed with my work. He has been a constant source of inspiration throughout my assignment. Last but not the least I would like to express my gratitude to all those who have in one way or the other interacted with me and shared their knowledge to complete this assignment .

Inside
1. Introduction 2. Working of ULIP 3. Types of ULIP 4. Types of funds do ULIP offer? 5. Benefits of ULIP 6. Comparison with traditional plans 7. Revenue generated by ULIP in insurance industry 8. Conclusion

Introduction

A unit-linked insurance plan (ULIP) is a type of life insurance where the cash value of a policy varies according to the current net asset value of the underlying investment assets. It allows protection and flexibility in investment, which are not present in other types of life insurance such as whole life policies. The premium paid is used to purchase units in investment assets chosen by the policyholder. In India investments in ULIP are covered under Section 80C of IT Act. The overall limit of permissible deductions under Section 80C is Rs. 1 Lac. However, the concept of having an insurance is governed by the Insurance Regulatory and Development Authority (IRDA). The concept of having an investment and insurance by the same instrument was challenged by the market regulator SEBI which took up the matter to the Supreme Court of India The Indian government brought down curtains on the two-month long tussle between the regulators by ruling that Unit-linked Insurance Products (Ulips) will be governed by the (IRDA).

Recent guidelines issued by IRDA

Minimum policy term ( 3 -5 years) Guarantees on policy benefits (risk cover with an exception on health insurance products) Loans: No loan shall be granted under Unit Linked Insurance Products. ULIP Pension/Annuity Products to offer guarantee of 4.5%/Year. No partial withdrawals for ULIP Pension/Annuity products. ULIP pension products must be converted into an annuity

Working of ULIPs
It is critical that to understand how money gets invested once purchase a ULIP: When one decide the amount of premium to be paid and the amount of life cover person want from the ULIP, the insurer deducts some portion of the ULIP premium upfront. This portion is known as the Premium Allocation charge, and varies from product to product. The rest of the premium is invested in the fund or mixture of funds chosen by you. Mortality charges and ULIP administration charges are thereafter deducted on a periodic (mostly monthly) basis by cancellation of units, whereas the ULIP fund management charges are adjusted from NAV on a daily basis. Since the fund of your choice has an underlying investment either in equity or debt or a combination of the two your fund value will reflect the performance of the underlying asset classes. At the time of maturity of your plan, you are entitled to receive the fund value as at the time of maturity. The pie-chart below illustrates the split of your ULIP premium:

Types of ULIP
ULIPs are life insurance policies which helps a person in realizing his financial objective. Though the primary purpose of ULIP is to provide financial protection along with good returns on investment, ULIP is categorized according to the future objective: Retirement/Pension Policy: Retirement is the time to enjoy the free time and have peace of mind. It is the time to engage in leisure activities. The expenses after retirement are tough to tackle as there is no regular income, bank interest on savings is low and everyday costs are increasing. That is the reason for buying a pension plan. Pension plan accumulates a portion of your savings over a period of time and the corpus amount is made available to policyholder at maturity. Child Policy: A parent wishes only the best for his child. There are many worries pondering in parents mind- childs education, marriage which require good sum of money. A child policy is the best gift that a parent can give to his child as it helps the children in achieving their dreams and aspirations. By allocating a small portion of your savings, you make sure your childs future needs are never hindered. Wealth Creation: A person can keep collecting his savings in the bank and yet the rising costs would deplete the savings much faster. There are many ULIPs with the objective of accumulating wealth over time which will help the policyholder beat the rising costs by offering good return on investment. Health ULIP: There is no doubt that health expenses are increasing every day. Age is directly proportional to health expenses. As age increases so does the probability of medical expenses. Keeping that in mind, insurers recently launched health ULIP. The premium is invested in the market and the accumulated amount can be used for healthcare expenses.

What types of funds do ULIP offer?

Most insurers offer a wide range of funds to suit one's investment objectives, risk profile and time horizons. Different funds have different risk profiles. The potential for returns also varies from fund to fund. The following are some of the common types of funds available along with an indication of their risk characteristics. 1) Equity Funds (Medium to High risk) - Primarily invested in company stocks with the general aim of capital appreciation 2) Income, Fixed Interest and Bond Funds (Medium risk) - Invested in corporate bonds, government securities and other fixed income instruments 3) Cash Funds (Low risk) - Sometimes known as Money Market Funds invested in cash, bank deposits and money market instruments 4) Balanced Funds (Medium risk) - Combining equity investment with fixed interest instruments

Benefits of ULIPs
Unit Linked Plans offer unique opportunity to combine protection with investments. Some special features of Unit Linked Life Insurance Policies (ULIPs) are:

Provides flexibility in investments ULIPs offer a complete selection of high, medium and low risk investment options under the same policy. You can choose an appropriate policy according to your risk taking appetite, coupled with the opportunity to switch between fund options without any additional expense for specified number of switches. ULIPs provide the flexibility to choose the sum assured and investment ratio in the annual targeted premium. It also offers the flexibility of one time increase in investment portfolio, through top-ups to avail investment opportunity offered by external environment or own income flows. Transparency The charge structure, value of investment and expected IRR based on 6% and 10% rate of returns, for the complete tenure of the policy are shared with you before you buy a product. Similarly, the annual account statement, quarterly investment portfolio and daily NAV reporting, ensures that you are aware of the status of your investment portfolio at all times. Most companies publish latest NAVs on their respective websites on a daily basis. Liquidity To cope with unforeseen circumstances, ULIPs offer the benefit of partial withdrawal; wherein after 5 years you can withdraw funds from our Unit Linked account, retaining only the stipulated minimum amount. Disciplined and regular savings ULIPs help you inculcate a regular saving habit. Also, the average unit costs tend to be lower than one time investment. Multiple benefits bundled in one product ULIP is an outstanding solution for risk cover, long term investments with the benefit of various investment opportunities, coupled with tax benefits. Spread of risk ULIPS are ideal for those investors who wish to avail the benefit of market linked growth without actually participating in the stock market, with the added benefit of risk-cover. Tax benefits: Income tax benefits against your ULIP premium payments, by way of both deduction and exemption. One can deduct from your taxable income to a total of Rs. 1 lakh in certain instances, such as your insurance payments from gross income under Section 80C of the Income

Tax Act. Person can also seek exemption from gross income under Section 10 (10) D for any sum received from insurance policy as maturity proceeds, death benefits are exempt from tax. For insurance policies issued after 01 April 2003, where the premium payable for any of the years during the term of the policy exceeds 20% of the sum assured, the insured will not be eligible for Sec 10(10) D benefit.

Comparison with traditional plan

ULIPS

TRADITIONAL PLANS

The Premium, in excess of risk cover, is invested as desired by the policyholder.

All the premiums go into a common fund and are invested at the insurers discretion.(subject to Statutory restrictions) The investment return may vary There are two categories of depending on the market benefits guaranteed and nonmovements and the investment guaranteed. For guaranteed risk is borne entirely by the benefits, the insurer bears the policyholder. investment risk whereas nonguaranteed benefits depend on the performance of the insurer. Withdrawals are allowed. Loss, if Surrenders are allowed but at a any, depends on NAV. Loans are loss. Loans may be granted under not allowed. some plans. There are no bonuses, except For participating policies, bonuses loyalty additions in some cases are payable The amount of the premium used The premium amount used for for insurance coverage, other insurance coverage and charges and the purchase of units investment are bundled up and not are unbundled and transparent. known. Benefits are variable Benefits are pre-determined Loss or gain is likely depending on Loss is unlikely and gains are market movements. unlikely too except through bonuses.

Revenue generated by ULIP in insurance industry

ULIPs are the most talked about investment option today! In fact, they have contributed over 50% of new business for companies like Birla Sun Life and ICICI Prudential. Came September 1, and much awaited new ULIPs were out with a bang in their new avatar. ULIPs, which were till then considered most unfriendly product available for the investor in the market, managed to grow at the rate of 45% in the financial year 2009-10, whereas the life insurance industry as a whole grew at 21%. This speaks volumes about the selling ( rather mis selling ) strategies of the insurers who collected a total of Rs. 598 billion in total new business premium. More so, the private insurance companies generated almost 90% of the revenue by selling ULIPs. After remaining in the IRDAs radar for quite sometime, the ULIPs with new propositions in their more investor friendly avatar were released on September 1, 2010. But IRDA has moved swiftly to make ULIPs less attractive for agents and insurance companies. While this is laudable, there is an unintended impact. Policyholders will be persuaded to buy the more opaque traditional plans now Unit-linked Insurance Plans (ULIPs) were the main source of revenues for insurance companies all these years. The new framework of ULIPs substantially reduces the profitability of companies and agents. As a result, agents will be less motivated to sell ULIPs and they may shift to selling traditional plans like endowment plans and money-back plans. For the insurance companies too, selling traditional plans means more profits now. A lot of them were making money from high surrender charges so far on ULIPs. The Insurance Regulatory and Development Authority (IRDA) has capped surrender charges drastically. It may be recalled that the regulator has ordered that commission charges in ULIPs be distributed evenly over the entire lock-in period, which has been extended to five years from three years. IRDA has capped the charges at 4% annually for 5 years, and 3% for 5-10 years and 2.25% for products above 10year terms.

 Life Insurance Corporation of India (LIC) has seen a decline in growth in sales of unit linked insurance plans (ULIP) in the current financial year. "There is a degrowth on Ulip which is a trend among the whole insurance industry," Minister of State for Finance Namo Narain Meena said in a written reply to the Rajya Sabha. To a question on sales of various products of LIC, Meena said, "On the conventional plans there is growth rate of 11% in policies and 22% in premium till end of February 2012."

private LIC Industry

ULIP business 20052006-07 06 82.3 88.75 29.76 46.31 41.77 56.91

2007-08 90.33 62.31 70.3

Traditional business 2005-06 200607 17.7 11.25 70.24 53.69 58.23 43.09

200708 9.67 37.60 29.7

As per data above till 2007-08 , ULIP have generated but in present scenario picture is not so , all who invested in ULIP losing trust on insurance and specially ULIP product so, all insurance player moving towards traditional plans and via online so that no chance of misselling.

Conclusion
The ordinance has given a free-hand to IRDA which, till the tussle with SEBI, had done very little to protect the interests of the policyholders. However, the new guidelines issued by IRDA on ULIPs are welcome but more actions need to be taken. IRDA needs stop approving pure investment plans with just a touch of life insurance; initiate steps to develop a good, stable and trained agency force and stamp out all dubious channels of distribution; try to understand that thousands of crores of rupees are being pumped into the insurance industry; and strictly implement the ceilings on expenses as prescribed under the Act, without procrastinating indefinitely. An ideal situation will be if a joint-regulation mechanism is set up between SEBI and IRDA, the insurance regulator dealing with the insurance component of the plan and the capital market regulator dealing with the investment component. This would lead to a process of harmonization of the market place in which investors win. Because of mis-selling ULIP lost its charm and also because on crash down of market in 2008-09 and present situation of market also effecting negatively. And in present scenario picture of ULIP not so gloomy and traditional plans are again repositioned with aid of technology i.e online term plans .