Unit-Linked Insurance Plans (ULIP)

[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.

[farooqid]

hello
i am the slient guy in the group
this my first mail

[suresh_ktnv]

Which is the best Unit linked Insurance Plan for get max. returns? plz suggest

[suresh_ktnv]

Hi,
I want to take a good child policy for my baby aged 2 months. Can any body suggest a good insurane policy.

[radkris]

You can try Bajaj Allianz Child gain policy. This policy is conventional, you have to pay primium on yearly/half yearly basis till the child is 18 years. I would suggest that you invest the money on your child's name in some of the new unit linked policy, you have to pay the primium for min 3 years, you may withdraw the entire amount when your child become major. The growth is excellent.

[wcnw]

Instead of going for a child policy do consider having
a. Term Policy ( on parents name) - nominee child represented by guardian
b. Investing in an equity diversified mutual fund(s) in SIP

Pl refer www.valueresearchonline.com for MF's - Do not forget to consider expense ration while shortlisting MF's..

[suresh_ktnv]

I am doing a Govt Job earning 13000/- per month and I have taken a 5lacs LIC moneyback policy for 20 yrs in 2003 with a monthly premium Rs2185/-. Can any body tell me how much amt I get after every 5 yrs and at 20th year. Finally Is it a good policy or not ? Is there is any good method for Tax saving and Insurance coverage better than LIC moneyback policy?

[sampann.bose]

This is my first post at Traderji.. and i describe myself as a novice who is still learning..well the post have been quite informative on ULIP... I recently had invested in bajaj Allianz ULIP...and frankly speaking i m regretting doin so...

well the reason primarily is...
1) its a complete hotch potch of insurance and investment...
2) My 15K investment is actually 11K .. rest all the money eaten up as insurance charges..
3) i cannot track down the performance of ULIP like the way i do it with MF...
4) NAV's are difficult to find out and payment modes are quite complex...
5) I m tied down paying 15K for next 3 yrs.. no other go..

Right now i do not hv enuf time to elaborate .. but for young investors like me... i can only advise... do not opt ULIP as tax saving instrument... insurance+investment funda is a toral non sense...

opt individually for insurance (term insurance) and keep investment avenues seperate...

the same thing was advised by my financial consultant also .. but i did'nt listened to him... and now i m stuck with this....

[Ram321]

Hi,
I am investing 2000/- PM in MetSmartPlus ULIP of MetLife.I dont know the performance of the Metlife in the past.Can any one suggest me is it ok to invest on....
And also i want to invest in SIP MFs around 2000/- which SIP is good to go for..i am expecting returns in an 1 or 2 years period..

Thanks for suggesting.

Thanks
Ram

[wcnw]

Hi Ram,
Please refer http://www.traderji.com/mutual-funds...lans-ulip.html

As suggested, consider keeping your insurance and investment avenues seperate.

Its better to have a term insurance + invest in MF's, stocks, PPF, gold

for MF's refer www.valueresearchonline.com. Even if you opt for 4 & 5 rated MF's you will get a decent return.


I also found http://ulip.blogspot.com/ worth looking into