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INSURANCE & ULIP

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ABOUT ULIP

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Page 1: Insurance Ulip

INSURANCE&

ULIP

Page 2: Insurance Ulip

INTRODUCTION TO INSURANCE

1818 saw the advent of life insurance business in India with the establishment of the Oriental Life Insurance Company in Calcutta. This Company however failed in 1834. In 1829, the Madras Equitable had begun transacting life insurance business in the Madras Presidency. 1870 saw the enactment of the British Insurance Act and in the last three decades of the nineteenth century, the Bombay Mutual (1871), Oriental (1874) and Empire of India (1897) were started in the Bombay Residency. This era, however, was dominated by foreign insurance offices which did good business in India, namely Albert Life Assurance, Royal Insurance, Liverpool and London Globe Insurance and the Indian offices were up for hard competition from the foreign companies.      In 1914, the Government of India started publishing returns of Insurance Companies in India. The Indian Life Assurance Companies Act, 1912 was the first statutory measure to regulate life business. In 1928, the Indian Insurance Companies Act was enacted to enable the Government to collect statistical information about both life and non-life business transacted in India by Indian and foreign insurers including provident insurance societies. In 1938, with a view to protecting the interest of the Insurance public, the earlier legislation was consolidated and amended by the Insurance Act, 1938 with comprehensive provisions for effective control over the activities of insurers.

    The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there were a large number of insurance companies and the level of competition was high. There were also allegations of unfair trade practices. The Government of India, therefore, decided to nationalize insurance business.

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       An Ordinance was issued on 19th January, 1956 nationalizing the Life Insurance sector and Life Insurance Corporation came into existence in the same year. The LIC absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies—245 Indian and foreign insurers in all. The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector.      The history of general insurance dates back to the Industrial Revolution in the west and the consequent growth of sea-faring trade and commerce in the 17th century. It came to India as a legacy of British occupation. General Insurance in India has its roots in the establishment of Triton Insurance Company Ltd., in the year 1850 in Calcutta by the British. In 1907, the Indian Mercantile Insurance Ltd was set up. This was the first company to transact all classes of general insurance business.1957 saw the formation of the General Insurance Council, a wing of the Insurance Association of India. The General Insurance Council framed a code of conduct for ensuring fair conduct and sound business practices.     In 1968, the Insurance Act was amended to regulate investments and set minimum solvency margins. The Tariff Advisory Committee was also set up then.     In 1972 with the passing of the General Insurance Business (Nationalization) Act, general insurance business was nationalized with effect from 1st January, 1973. 107 insurers were amalgamated and grouped into four companies, namely National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United India Insurance Company Ltd. The General Insurance Corporation of India was incorporated as a company in 1971 and it commence business on January 1sst 1973.

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      This millennium has seen insurance come a full circle in a journey extending to nearly 200 years. The process of re-opening of the sector had begun in the early 1990s and the last decade and more has seen it been opened up substantially. In 1993, the Government set up a committee under the chairmanship of RN Malhotra, former Governor of RBI, to propose recommendations for reforms in the insurance sector. The objective was to complement the reforms initiated in the financial sector. The committee submitted its report in 1994 wherein, among other things, it recommended that the private sector be permitted to enter the insurance industry. They stated that foreign companies are allowed to enter by floating Indian companies, preferably a joint venture with Indian partners.    FUNCTION OF INSURANCE

The functions of Insurance can be bifurcated into three parts: 1. Primary Functions2. Secondary Functions3. Other Functions

The primary functions of insurance include the following:

Provide Protection

The primary function of insurance is to provide protection against future risk, accidents and uncertainty. Insurance cannot check the happening of the risk, but can certainly provide for the losses of risk.

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Collective bearing of risk

Insurance is a mean by which few losses are shared among larger number of people. All the insured contribute the premiums towards a fund and out of which the persons Exposed to a particular risk is paid.

Assessment of risk

Insurance determines the probable volume of risk by evaluating various factors that give rise to risk. Risk is the basis for determining the premium rate also.

Provide Certainty

Insurance is a device, which helps to change from uncertainty to certainty. Insurance is device whereby the uncertain risks may be made more certain.

Research and publicity

Insurers also spend money in research and publicity in creating risk consciousness amongst which has a far reaching effect on reduction in national waste.The secondary functions of insurance include the following:

Prevention of Losses

Prevention of losses causes lesser payment to the assured by the insurer and this will encourage for more savings by way of premium. Reduced rate of premiums stimulate for more business and better protection to the insured.

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Small capital to cover larger risks

Insurance relieves the businessmen from security investments, by paying small amount of premium against larger risks and uncertainty.

Contributes towards the development of larger industries

Insurance provides development opportunity to those larger industries having more risks in their setting up. Even the financial institutions may be prepared to give credit to sick industrial units which have insured their assets including plant and machinery.

If improves efficiency

The insurance eliminates worries and miseries of loans at death and destruction of property. The carefree person can devote his body and soul together for better achievement. It improves not only his efficiency, but the efficiencies of the masses are also advanced.

It helps economic progress

The insurance by protecting the society from huge losses of damage, destruction and death, provides an initiative to work hard for the betterment of the masses. The next factor of economic progress. The capital is also immensely provided by the masses. The property, the valuable assets, the man, the machine and the society cannot lose much at the disaster.The other functions of insurance include the following: Means of savings and investment

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Insurance serves as savings and investment, insurance is a compulsory way of savings and it restricts the unnecessary expenses by the insured's For the purpose of availing income-tax exemptions also, people invest in insurance.

Source of earning foreign exchange

Insurance is an international business. The country can earn foreign exchange by way of issue of marine insurance policies and various other ways.

Risk Free trade

Insurance promotes exports insurance, which makes the foreign trade risk free with the help of different types of policies under marine insurance cover.

PURPOSE OF INSURANCE 1.Insurance spreads the economic burden of losses by using funds contributed by members of the group to pay for them. Thus, it is a loss spreading device.2.The fundamental purpose of insurance however is neither the spreading nor the prevention of losses. Rather, it is reduction of the uncertainty which is caused by awareness of the possibility of loss.

3.An insurance scheme provides certainty for the individual members of the group by averaging loss costs. The contribution made by the individual to the group is assumed, on the basis of predictions, to be his share of losses suffered by the group.

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In exchange for this contribution, he is assured that the group will assume any losses that involve him. He transfers his risk to the group and averages his loss costs, thus substituting certainty for uncertainty. He pays a certain premium instead of facing the uncertainty of the possibility of large loss.

INTRODUCTION TO LIFE INSURANCE

What is a life insurance policy?

A life insurance policy provides financial protection to our family in the unfortunate event of your death. At a basic level, it involves paying small sums each month (called premiums) to cover the risk of our untimely demise during the tenure of the policy. In such an event, our family (or the beneficiaries we have named in the policy) will receive a lump sum amount. In case we live till the maturity of the policy, depending on the type of life insurance policy we have opted for, we will receive returns the policy may have earned over the years. Today,

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there are many variations to this basic theme, and insurance policies cater to a wide variety of needs.

What are the various types of life insurance policies?

Given below are the basic types of life insurance policies. All other life insurance policies are built around these basic insurance policies by combination of various other features.Term Insurance Policy

A term insurance policy is a pure risk cover policy that protects the person insured for a specific period of time. In such type of a life insurance policy, a fixed sum of money called the sum assured is paid to the beneficiaries (family) if the policyholder expires within the policy term. For instance, if a person buys a Rs 2 lakh policy for 15 years, his family is entitled to the sum of Rs 2 lakh if he dies within that 15-year period.

If the policy holder survives the 15-year period, the premiums paid are not returned back. The advantage, apart from the financial security for an individual’s family is that the premiums paid are exempt from tax.

These insurance policies are designed to provide 100 per cent risk cover and hence they do not have any additional charges other than the basic ones. This makes premiums paid under such life insurance policies the lowest in the life insurance category.

Whole Life Policy

A whole life policy covers a policyholder against death, throughout his life term. The advantage that an individual gets when he / she opts for a whole life policy is that the validity of this life insurance policy is not defined and hence the individual enjoys the life cover throughout his or her life.

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Under this life insurance policy, the policyholder pays regular premiums until his death, upon which the corpus is paid to the family. The policy does not expire till the time any unfortunate event occurs with the individual.

Increasingly, whole life policies are being combined with other insurance products to address a variety of needs such as retirement planning, etc.

Premiums paid under the whole life policies are tax exempt.

Endowment Policy

Combining risk cover with financial savings, endowment policies are among the popular life insurance policies.

Policy holders benefit in two ways from a pure endowment insurance policy. In case of death during the tenure, the beneficiary gets the sum assured. If the individual survives the policy tenure, he gets back the premiums paid with other investment returns and benefits like bonuses.

In addition to the basic policy, insurers offer various benefits such as double endowment and marriage/ education endowment plans.

The concept of providing the customers with better returns has been gaining importance in recent times. Hence, insurance companies have been coming out with new and better ULIP versions of endowment policies. Under such life insurance policies the customers are also provided with an option of investing their premiums into the markets, depending on their risk appetite, using various fund options provided by the insurer, these life insurance policies help the customer profit from rising markets.

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The premiums paid and the returns accumulated through pure endowment policies and their ULIP variants are tax exempt.

Money Back Policy

This life insurance policy is favoured by many people because it gives periodic payments during the term of policy. In other words, a portion of the sum assured is paid out at regular intervals. If the policy holder survives the term, he gets the balance sum assured.

In case of death during the policy term, the beneficiary gets the full sum assured.

New ULIP versions of money back policies are also being offered by various life insurers.

The premiums paid and the returns accumulated though a money back policy or its ULIP variants are tax exempt.

Annuities and Pension

In these types of life insurance policies, the insurer agrees to pay the insured a stipulated sum of money periodically. The purpose of an annuity is to protect against financial risks as well as provide money in the formof pension at regular intervals.

How does insurance work? 

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Insurance works by pooling risk.What does this mean? It simply means that a large group of people who want to insure against a particular loss pay their premiums into what we will call the

insurance bucket, or pool. Because the number of insured individuals is so large, insurance companies can use statistical analysis to project what their actual losses will be within the given class. They know that not all insured individuals will

suffer losses at the same time or at all. This allows the insurance companies to operate profitably and at the same

time pay for claims that may arise. For instance, most people have auto insurance but only a few actually get into an

accident. You pay for the probability of the loss and for the protection that you will be paid for losses in the event they

occur.

Risks

Life is full of risks - some are preventable or can at least be minimized, some are avoidable and some are completely unforeseeable. What's important to know about risk when

thinking about insurance is the type of risk, the effect of that risk, the cost of the risk and what you can do to mitigate the

risk. Let's take the example of driving a car.

Type of risk: Bodily injury, total loss of vehicle, having to fix your car

The effect: Spending time in the hospital, having to rent a car and having to make car payments for a car that no longer exists 

The costs: Can range from small to very large

Mitigating risk: Not driving at all (risk avoidance), becoming a safe driver (we still have to contend with other drivers), or transferring the risk to someone else (insurance) 

Let's explore this concept of risk management (or mitigation)

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principles a little deeper and look at how you may apply them. The basic risk management tools indicate that risks that could bring financial losses and whose severity cannot be reduced should be transferred. You should also consider the relationship between the cost of risk transfer and the value of transferring that risk.

Risk Control There are two ways that risks can be controlled. We can avoid the risk altogether, or we can choose to reduce your risk.

Risk FinancingIf we decide to retain our risk exposures, then we can either transfer that risk (ie. to an insurance company), or we retain that risk either voluntarily (ie. we identify and accept the risk) or involuntarily (we identify the risk, but no insurance is available).

Risk SharingFinally, we may also decide to share risk. For example, a business owner may decide that while he is willing to assume the risk of a new venture, he may want to share the risk with other owners by incorporating his business.

So, back to our driving example. If we could get rid of the risk altogether, there would be no need for insurance. The only way this might happen in this case would be to avoid driving altogether. Also, if the cost of the loss or the effect of the loss is reasonable to us, then we may not need insurance. 

For risks that involve a high severity of loss and a low frequency of loss, then risk transference (ie. insurance) is probably the most appropriate protection technique. Insurance is appropriate if the loss will cause us or our loved ones a significant financial loss or inconvenience. Do keep in mind that

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in some instances, we are required to purchase insurance (i.e. if operating a motor vehicle). For risks that are of low loss severity but high loss frequency, the most suitable method is either retention or reduction because the cost to transfer (or insure) the risk might be costly. In other words, some damages are so inexpensive that it's worth taking the risk of having to pay for them yourself, rather than forking extra money over to the insurance company each month.

The Risk Management ProcessAfter you have determined that you would like to insure against a loss, the next step is to seek out insurance coverage. Here we have many options available to you but it's always best to shop around. We can go directly to the insurer through an agent, who can bind the policy. The process of binding a policy is simply a written acknowledgement identifying the main components of our insurance contract. It is intended to provide temporary insurance protection to the consumer pending a formal policy being issued by the insurance company. It should be noted that agents work exclusively for the insurance company.

There are two types of agents: 

1. Captive Agents: Captive agents represent a single insurance company and are required to only do business with that one company.

2. Independent Agent: Independent agents represent multiple companies and work on behalf of the client (not the insurance company) to find the most appropriate policy.

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UnderwritingUnderwriting is the process of evaluating the risk to be insured. This is done by the insurer when determining how likely it is that the loss will occur, how much the loss could be and then using this information to determine how much you should pay to insure against the risk. The underwriting process will enable the insurer to determine what applicants meet their approval standards. For example, an insurance company might only accept applicants that they estimate will have actual loss experiences that are comparable to the expected loss experience factored into the company's premium fees. Depending on the type of insurance product you are buying, the underwriting process may examine your health records, driving history, insurable interest etc. 

The concept of "insurable interest" stems from the idea that insurance is meant to protect and compensate for losses for an individual or individuals who may be adversely affected by a specific loss. Insurance is not meant to be a profit center for the policy's beneficiary. People are considered to have an insurable interest on their lives, the life of their spouses (possibly domestic partners) and dependents. Business partnersmay also have an insurable interest on each other and businesses can have an insurable interest in the lives of their employees, especially any key employees.

Insurance ContractThe insurance contract is a legal document that spells out the coverage, features, conditions and limitations of an insurance policy. It is critical that we read the contract and ask questions if we don't understand the coverage. We don't want to pay for the insurance and then find out that what we thought was covered isn't included

Insurance terminology:

Bound: Once the insurance has been accepted and is in place,

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it is called "bound". The process of being bound is called the binding process.

Insurer: A person or company that accepts the risk of loss and compensates the insured in the event of loss in exchange for a premium or payment. This is usually an insurance company. 

Insured: The person or company transferring the risk of loss to a third party through a contractual agreement (insurance policy). This is the person or entity who will be compensated for loss by an insurer under the terms of the insurance contract.

Insurance Rider/Endorsement: An attachment to an insurance policy that alters the policy's coverage or terms.

Insurance Umbrella Policy: When insurance coverage is insufficient, an umbrella policy may be purchased to cover losses above the limit of an underlying policy or policies, such as homeowners and auto insurance. While it applies to losses over the dollar amount in the underlying policies, terms of coverage are sometimes broader than those of underlying policies.

Insurable Interest: In order to insure something or someone, the insured must provide proof that the loss will have a genuine economic impact in the event the loss occurs. Without an insurable interest, insurers will not cover the loss. It is worth noting that for property insurance policies, an insurable interest must exist during the underwriting process and at the time of loss. However, unlike with property insurance, with life insurance, an insurable interest must exist at the time of purchase only. 

FUNDAMENTAL PRINCIPLES OF INSURANCE

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Some useful terms in Insurance:

A) INDEMNITY

A contract of insurance contained in a fire, marine, burglary or any other policy excepting life assurance and personal accident and sickness insurance) is a contract of indemnity. This means that the insured, in case of loss against which the policy has been issued, shall be paid the actual amount of loss not exceeding the amount of the policy, i.e. he shall be fully indemnified. The object of every contract of insurance is to place the insured in the same financial position, as nearly as possible, after the loss, as if his loss had not taken place at all. It would be against public policy to allow an insured to make a profit out of his loss or damage.

B) UTMOST GOOD FAITH

Since insurance shifts risk from one party to another, it is essential that there must be utmost good faith and mutual confidence between the insured and the insurer. In a contract of insurance the insured knows more about the subject matter of the contract than the insurer. Consequently, he is duty bound to disclose accurately all material facts and nothing should be withheld or concealed. Any fact is material, which goes to the root of the contract of insurance and has a bearing

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on the risk involved. It is only when the insurer knows the whole truth that he is in a position to judge

(a) Whether he should accept the risk and

(b) What premium he should charge.

If that were so, the insured might be tempted to bring about the event insured against in order to get money.

C) Insurable Interest - A contract of insurance affected without insurable interest is void. It means that the insured must have an actual pecuniary interest and not a mere

anxiety or sentimental interest in the subject matter of the insurance. The insured must be so situated with regard to the thing insured that he would have benefit by its existence and loss from its destruction. The owner of a ship run a risk of losing his ship, the charterer of the ship runs a risk of losing his freight and the owner of the cargo incurs the risk of losing his goods and profit. So, all these persons have something at stake and all of them have insurable interest. It is the existence of insurable interest in a contract of insurance, which distinguishes it from a mere watering agreement.

D) Causa Proxima - The rule of causa proxima means that the cause of the loss must be proximate or immediate and not remote. If the proximate cause of the loss is a peril insured

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against, the insured can recover. When a loss has been brought about by two or

more causes, the question arises as to which is the causa proxima, although the result could not have happened without the remote cause. But if the loss is brought about by any cause attributable to the misconduct of the insured, the insurer is not liable.

F) Mitigation of Loss - In the event of some mishap to the insured property, the insured must take all necessary steps to mitigate or minimize the loss, just as any prudent person would do in those circumstances. If he does not do so, the insurer can avoid the payment of loss attributable to his negligence. But it must be remembered that though the insured is bound to do his best for his insurer, he is, not bound to do so at the risk of his life.

G) Subrogation - The doctrine of subrogation is a corollary to the principle of indemnity and applies only to fire and marine insurance. According to it, when an insured has received full indemnity in respect of his loss, all rights and remedies which he has against

Third person will pass on to the insurer and will be exercised for his benefit until he (the insurer) recoups the amount he has paid under the policy. It must be clarified here that the

Insurer’s right of subrogation arises only when he has paid for the loss for which he is liable under the policy and this right extends only to the rights and remedies available to the

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insured in respect of the thing to which the contract of insurance relates.

H) Contribution - Where there are two or more insurance on one risk, the principle of contribution comes into play. The aim of contribution is to distribute the actual amount of loss among the different insurers who are liable for the same risk under different policies in respect of the same subject matter. Any one insurer may pay to the insured the full amount of the loss covered by the policy and then become entitled to contribution from his co-insurers in proportion to the amount which each has undertaken to pay in case of loss of the same subject-matter.

In other words, the right of contribution arises when

1) There are different policies, which relate to the same subject matter

2) The policies cover the same peril which caused the loss, and

3) All the policies are in force at the time of the loss, and

4) One of the insurers has paid to the insured more than his share of the loss.

Policy is a form of security for the person who insures his life and his family. Life insurance policies have helped trade and other economic activities to flourish in a great manner. It has generated lots of job opportunities. It is looked upon as a lucrative career option. Life insurance companies have also entered the international business

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IRDAFollowing the recommendations of the Malhotra Committee report, in 1999, the Insurance Regulatory and Development Authority (IRDA) was constituted as an autonomous body to regulate and develop the insurance industry. The IRDA was incorporated as a statutory body in April, 2000. The key objectives of the IRDA include promotion of competition so as to enhance customer satisfaction through increased consumer choice and lower premiums, while ensuring the financial security of the insurance market.      The IRDA opened up the market in August 2000 with the invitation for application for registrations. Foreign companies were allowed ownership of up to 26%. The Authority has the power to frame regulations under Section 114A of the Insurance Act, 1938 and has from 2000 onwards framed various regulations ranging from registration of companies for carrying on insurance business to protection of policyholders’ interests.     In December, 2000, the subsidiaries of the General Insurance Corporation of India were restructured as independent companies and at the same time GIC was converted into a national re-insurer. Parliament passed a bill de-linking the four subsidiaries from GIC in July, 2002.      Today there are 28 general insurance companies including the ECGC and Agriculture Insurance Corporation of India and 24 life insurance companies operating in the country.

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     The insurance sector is a colossal one and is growing at a speedy rate of 15-20%. Together with banking services, insurance services add about 7% to the country’s GDP. A well-developed and evolved insurance sector is a boon for economic development as it provides long- term funds for infrastructure development at the same time strengthening the risk taking ability of the countryMAJOR PLAYERS OF INDIA IN INSURANCE

Reliance Life InsuranceCanara HSBCDLF pramericaMetLifeICICI PrudentialMax New York.Bajaj AllianzBharti AXAHDFC Standard LifeAEGON ReligareKotak Mahindra.Future Generali LifeSBI LifeShriram Life TATA AIGAviva

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IDBI FortisSahara.ING VYSYA.

ULIP

ULIP stands for Unit Linked Insurance Plan. It provides for life insurance where the policy value at any time varies according to the value of the underlying assets at the time. ULIP is life insurance solution that provides for the benefits of protection and flexibility in investment. The investment is denoted as units and is represented by the value that it has attained called as Net Asset Value (NAV).

ULIP came into play in the 1960s and is popular in many countries in the word. The reason that is attributed to the wide spread popularity of ULIP is because of the transparency and the flexibility which it offers.

As times progressed the plans were also successfully mapped along with life insurance need to retirement planning. In today’s times, ULIP provides solutions for insurance planning, financial needs, financial planning

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for children’s future and retirement planning. These are provided by the insurance companies or even banks.

When the stock markets are volatile and unpredictability becomes a hindrance to encourage further investment, it leaves the customers perplexed. To top it all if the debt market doesn’t attract you because of its low interest rate, investment may seem customary. However, lately banks have been offering an 8% interest rate per annum for investors. A reason good enough to invest in Fixed Deposits (FD). What’s more? The investments in FDs qualify for tax benefits too under Section 80 C of the Income Tax Act, 1961, provided the minimum tenure selected is five years.

If the inclination to invest in stock market still persists but are still skeptical, try via Unit Linked Insurance Plan (ULIP) route. It provides cushion to those who are risk averse. ULIPs offer insurance protection along with the option to invest in the stock market. The best part of investing in stocks via ULIPs is that you can choose the funds suiting your risk profile.

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If you know that a particular fund is at its high and is performing well, with the switch over option you can move to that fund. You can do that when the fund in which you have invested is performing poorly or you feel the returns are high in some other fund. The funds offered by ULIPs give the investors an exposure to both high and low equity investments. Based on your risk profile, make your pick.

Simple Explanation Of ULIPs –

Suppose that you buy a ULIP when you are 30 years old. The sum assured is Rs 5 lakh and the term is 20 years. The premium that you will pay over a period of 20 years will work out to around Rs 25,000 to Rs 30,000 depending on the company you choose.

In a term policy, your premium will remain fixed throughout the term of the policy. So that means, if you

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opt to invest in a mutual fund and buy a term policy, the amount of investment and cost of insurance will not change over a period of time. For a similar example as above, if the 30 year old were to take a term insurance policy for Rs 5 lakh, he would end up paying anywhere between Rs 40,000 to Rs 50,000 as insurance premium.

This vast difference in cost of insurance is mainly because of cost of distribution and administration as also the margins of the insurer. In a ULIP, costs and margins are recovered commonly between the investment portion and the insurance portion. However, if you were to buy a term policy and a mutual fund, the insurance company will recover its costs of distribution and administration as well as margins. The mutual fund would again recover the same costs from your investment portion.

FlexibilityA ULIP will give you flexibility of increasing your life cover, while maintaining the same premium. This is done by simply reducing your investment allocation. So suppose you have a risk cover of Rs 5 lakh and would like to increase it to Rs 6 lakh, you can still continue to

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pay the same amount of premium. The only difference would be that the amount deducted towards the risk cover would be more and therefore, the amount invested would be less.

There’s more to the flexibility. With a ULIP you don’t have fear that your policy will lapse if you were unable to pay your premium. The cost of insurance will be taken out of your existing investment to keep the policy going. But if you fail to pay premium on your term policy, it will lapse.

ExpensesIf you were to look at the expenses of a ULIP as

compared with the expenses of a mutual fund, there is a difference. In a ULIP charges are front loaded, which means, most of the charges are recovered within the first few years. That is why it does not make sense to invest in a ULIP if you are looking at a short term. Look at a mutual fund if you are looking at a time horizon of 3-5 years. In the long term, charges of a ULIP even out and compare well with a mutual fund.

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So if you are looking for a long-term investment avenue with an insurance cover that goes with it, then ULIP is the product for you and if you are looking at a product that helps you focus purely on investment and returns over a medium term, then go for a mutual fund. Experts say the two products are different and ideally you should have both in your portfolio.

As financial planners, we get queries from our clients on how to go about managing their finances. We were recently faced with a rather interesting query related to ULIPs. In this article we discuss the query and our solution for the same.

The insurance component To begin with, we knew from our interaction with the client and based on the Human Life Value Calculations that he is underinsured. An immediate action point for him would be to buy a term plan. And considering his annual income, he would need to buy a term plan for more than the sum assured recommended on the ULIP (i.e. Rs. 5,000,000). Even if we were to consider his sum assured to be Rs 5,000,000 (as per the ULIP) for a term plan, the annual premium he would have to shell out would be approximately Rs 30,000 per annum for a 30-Yr period.

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The investment componentHaving taken care of the client’s insurance needs, now let’s shift our focus to his investments. We took into consideration the client’s current financial portfolio. He had a sizable portion of his portfolio invested in fixed income instruments like bonds and fixed deposits. Bearing this in mind, our view was he did not need to have another debt-heavy (ULIP with a 65% debt component) product in his portfolio. Instead what his portfolio needed was a higher equity component; this would not only ‘balance’ his portfolio but also ensure that the portfolio reflects his true risk profile.

It was also relevant that the client invest in equities since he was considering his investments from a long-term (over 30 years) horizon. This could be achieved by investing in equity-oriented mutual funds. Mutual funds can offer several benefits:

Several studies have shown that over the long term, equities give a higher return vis-à-vis fixed income instruments like bonds and government securities. And given that the client’s investment horizon is of over 30 years, this is an ideal time frame to reap the rewards of investing in equities. Also, over a 30-Yr period, a 100% equity mutual

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fund is better geared to outperform a ULIP portfolio with a 65% debt component.

ULIP tend to be expensive propositions (vis-a-vis mutual funds) during the initial years. However, over longer time horizons, the expenses balance out and ULIPs work out to be cheaper as compared to mutual funds. However, even if the lower expenses of a ULIP vis-à-vis that of a mutual fund scheme were to be considered, the latter would still surface as the better option.

Several mutual funds also have a track record to boast of. Personalfn’s recommended equity-oriented funds have a proven track record extending over several years and across market cycles. ULIPs do not have much of a track record to show for; in fact most ULIPs are yet to experience a bear phase.

Investing in a mutual fund portfolio will offer the benefit of diversification to the client. The investor will reap the reward of diversifying across several fund management styles. On the other hand, by investing all his money in just one ULIP, the client would be committing his entire corpus to just one

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style of investment. This can prove to be quite risky over the long term.

You can make adjustments to your mutual fund portfolio. If you believe you have made a wrong investment decision, you can redeem your investment in a particular mutual fund and invest in another one. Such adjustments are not entirely feasible in a ULIP.

BIBLOGRAPHY

WWW.BIRLASUNLIFE.COM

BIRLA SUN LIFE MAYAPORE BRANCH

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 1.2.3 Scope

Birla sun life is the fastest growing private insurance company in India. Itdetermines market share of the various private companies in India.

1.3 RESEARCH METHODOLOGY

Research means a search for knowledge or gain some new knowledge and methodologycan properly refer to the theoretical analysis of the methods appropriate to a field of studyor to the body of methods and principles particular to a branch of knowledge.1.3.1 Research Design

A research design is the arrangement of conditions for the collections and analysis of datain a manner tha t a ims to combine re levance to research purpose wi th economy in  procedure. 

methods of data collection

1.3.6.1 Data collection

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The word data means any raw information, which is either quantitative or qualitative innature, which is of practical or theoretical use. The task of data collection begins after ar e s ea r ch p rob l em ha s be en de f ine d and r e s ea r c h des i gn cha l ked ou t . Whi l e de c id i ng about the method of data collection, the researcher should keep in mind that there are twotypes of data primary and secondary.