Unit-Linked Insurance Plans (ULIP)

[birdinfo]

Originally Posted by TATrader

Unit-Linked Insurance Plans (ULIP)

Unit-linked insurance plans, ULIPs, are distinct from the more familiar ‘with profits’ policies sold for decades by the Life Insurance Corporation.

‘With profits’ policies are called so because investment gains (profits) are distributed to policyholders in the form of a bonus announced every year.

ULIPs also serve the same function of providing insurance protection against death and provision of long-term savings, but they are structured differently.

In ‘with profits’ policies, the insurance company credits the premium to a common pool called the ‘life fund,’ after setting aside funds for the risk premium on life insurance and management expenses.

Every year, the insurer calculates how much has to be paid to settle death and maturity claims. The surplus in the life fund left after meeting these liabilities is credited to policyholders’ accounts in the form of a bonus.

In a ULIP too, the insurer deducts charges towards life insurance (mortality charges), administration charges and fund management charges.

The rest of the premium is used to invest in a fund that invests money in stocks or bonds.

The policyholder’s share in the fund is represented by the number of units.

The value of the unit is determined by the total value of all the investments made by the fund divided by the number of units.

If the insurance company offers a range of funds, the insured can direct the company to invest in the fund of his choice. Insurers usually offer three choices — an equity (growth) fund, balanced fund and a fund which invests in bonds.

In both ‘with profits’ policies as well as unit-linked policies, a large part of the first year premium goes towards paying the agents’ commissions.

Which is better, unit-linked or ‘with profits’?

The two strong arguments in favour of unit-linked plans are that — the investor knows exactly what is happening to his money and two, it allows the investor to choose the assets into which he wants his funds invested.

A traditional ‘with profits,’ on the other hand, is a black box and a policyholder has little knowledge of what is happening. An investor in a ULIP knows how much he is paying towards mortality, management and administration charges.

He also knows where the insurance company has invested the money. The investor gets exactly the same returns that the fund earns, but he also bears the investment risk.

The transparency makes the product more competitive. So if you are willing to bear the investment risks in order to generate a higher return on your retirement funds, ULIPs are for you.

Traditional ‘with profits’ policies too invest in the market and generate the same returns prevailing in the market. But here the insurance company evens out returns to ensure that policyholders do not lose money in a bad year. In that sense they are safer.

ULIPs also offer flexibility. For instance, a policyholder can ask the insurance company to liquidate units in his account to meet the mortality charges if he is unable to pay any premium instalment.

This eats into his savings, but ensures that the policy will continue to cover his life.

Are ULIPs similar to mutual funds?

In structure, yes; in objective, no. Because of the high first-year charges, mutual funds are a better option if you have a five-year horizon.

But if you have a horizon of 10 years or more, then ULIPs have an edge. To explain this further a ULIP has high first-year charges towards acquisition (including agents’ commissions).

As a result, they find it difficult to outperform mutual funds in the first five years. But in the long-term, ULIP managers have several advantages over mutual fund managers.

Since policyholder premiums come at regular intervals, investments can be planned out more evenly.

Mutual fund managers cannot take a similar long-term view because they have bulk investors who can move money in and out of schemes at short notice.

Why do insurers prefer ULIPs?

Insurers love ULIPs for several reasons. Most important of all, insurers can sell these policies with less capital of their own than what would be required if they sold traditional policies.

In traditional ‘with profits’ policies, the insurance company bears the investment risk to the extent of the assured amount. In ULIPs, the policyholder bears most of the investment risk.

Since ULIPs are devised to mobilise savings, they give insurance companies an opportunity to get a large chunk of the asset management business, which has been traditionally dominated by mutual funds.

I found that there are many queries on ULIPs.I have come across a blogsite namely www.panchtattvainsurance.blogspot.com and some good analysis alongwith switching advice in different funds is available.You may also like to go through the same.

[birdinfo]

I found that there are many queries on ULIPs.I have come across a blogsite namely www.panchtattvainsurance.blogspot.com and some good analysis alongwith switching advice in different funds is available.You may also like to go through the same.

[lakkadshaw]

information provided by u was really interesting
I'am looking for result oriented ulip for three to five years term

[v_bhadrecha]

hi to all,

[mandala.pavan@gmail.com]

Hi all,
Dont go for any ULIP..Any ULIP carries 4 to 5 types of charges per month.
This is with my personal experience.
I have invested 10000 in Bajaj Allianz Capital Unit gain in Feb 2007, when the sensex was 13-14k.Seeing the sensex at 20,000, I have downloaded my account statement of my Bleady Bajaj Allianz unit Gain plan in flying colors. I was shocked on seeing my account statement in November 2007.

My account value was just 10,971.
Whereas, I got a bonus of 4000 for an LIC policy for which i have paid 10,000 in 1 year , that too i have paid in half yearly mode. The same is the case with all ULIP's.They will project 30%,40%,50% returns in colorful brochures.Actually the unit value may appreciate also. But the company will swalllow all our returns (appreciation of our unit value).
U can check my account statement if u want to know how will be the returns in any ULIP
For any further details, feel free to mail/call me. contact no:+91 9490747143

P.S: I have registered in this site just for communicating this to all investors as this is the time people look for tax saving investments.
If anyone have already invested in any ULIP, U are lucky enough to have an option to return the policy within 15 days. Please check your account statement b4 taking a decision.

[mandala.pavan@gmail.com]

Very very informative thread...keep it up. I have posted my account statement of BAJAJ ALLIANZ CAPITAL UNIT GAIN in support of this thread.I request all of u to go thru my a/c statement and then give their opinions.

Say a BIG NO to ULIPS, especially from BAJAJ ALLIANZ CAPITAL UNIT GAIN..IM REALLY REPENTING ON MY INVESTMENT IN THAT.
One of the above threads speaks that, ulips are good investments for long term investments. But, can anyone assure that the sensex will be good for years n years later when one cannot predict how the sensex will be tomorrow!!!!! or for that matter in the next minute or hour ???????????

[Vicky78]

I dont believe in ULIPs. They are too expensive. Also in case of emergency the garunteed sum is a in very less. The remaining amount (if applicable) is dependant on the stock market. Why mitigate risk by associating the money required during emergency with a high risk instrument like equity?

Insurance is a risk mitigation instrument and that should be the first criteria for selecting the right insurance product. The savings aspect of isurance is secondary or immaterial.

Term plan with an MF/elss is the way to go. I dont like endowment plans either. Term plan + FD is better option.

[sunilkumar.ks]

Hi Guys,
The ULIP is goo dif you are planning an inssurence purpose but if you are looking an more money return and also planning to tax benifits also go for any good mutual founds.

I have invested 18 K ammount in month of june(if i am not wrong) and there were 282 units are alloted and now that is after 6 months my net values reached to 18500 that mean 500 profit for six months.
If i invest same ammount in any mutal found it will give more that more ever in the bullish market as well as i apply with the ICICI Pro ( life timw super)......
Now you need to decide which one will better .......
I too agree there will be no tax on the returns and inssurenece must for the life.I am 25 years and i have dicided go for the insurence as well as pention plan after 30 years...

Now i request to guru's please sugguest my portfolio is wrong or i need to change in that....

Cheers...
Sunil Kumar KS

[Vicky78]

if you are 25 and the best pension plan would equities. Choose a divesified equity fund and put a SIP. When your are 2 -3 years before retirement put that money in debt fund.

Anything greater than 5 year term the best return is equity

[sunilkumar.ks]

Thanks for that......

I am planning to put another 60k into the 80C and/or 80d MF, Now will think to divesify this ammount into mutual found as well as in the MF.

Can any one sugguest me, which penssion plan will be good.......


Thanks

Sunil Kumar KS