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PRINCIPLES OF INSURANCEASSIGNMENT ONULIP: AN EFFECTIVE SECURITY ANDINVESTMENT PLAN IN INDIAMaharaja Surajmal Institute(Affiliated to GGSIPU)C-4,JanakPuri, New Delhi-SUBMITTED TO-DR. HERAMB NAYAKASST PROFDEPT. OF BUSINESS ADMINISTRATIONSUBMITTED BY- BBA(B&I) SEM II/SHIFT 1 2017- UJJWAL GOYAL (402...

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PRINCIPLES OF INSURANCE ASSIGNMENT ON ULIP: AN EFFECTIVE SECURITY AND INVESTMENT PLAN IN INDIA SUBMITTED BY-

SUBMITTED TOBBA(B&I)

DR. HERAMB NAYAK

SEM II/SHIFT 1

ASST PROF DEPT. OF BUSINESS ADMINISTRATION

2017-2020 UJJWAL GOYAL (40214901817) BHAVYA PATWAL (41214901817) YANKITA GARID (35614901817) SAKSHI CHAUHAN ( 41414901817) PRAGYA (41814901817) YAKSHITA WADHAWA (40814901817) FARDEEN TANTRAY (41614901817)

Maharaja Surajmal Institute (Affiliated to GGSIPU) C-4,JanakPuri, New Delhi-58

Acknowledgement The success and final outcome of this assignment required a lot of guidance and assistance from many people. We are extremely fortunate to have got such support necessary for the completion of our assignment. We respect and thank Dr. Heramb Nayak for giving us an opportunity to do the assignment on ‘ULIP: An effective and security investment plan in India’. We are really grateful as we gained knowledge about new insurance products. This assignment could not be completed without the effort and cooperation from our group members. Lastly, we would like to express our gratitude to our friends and respondents for support and willingness to spend some time with us.

TABLE OF CONTENTS

S.NO CHAPTER 1

TOPIC

PAGE

INTRODUCTION: OBJECTIVES

1

SCOPE

2

LIMITATIONS PROFILE OF STUDY:

3

WHAT ARE ULIPs?

5

IRDA V/S SEBI

7

ULIP GIUDELINES

9

TERMS RELATED TO ULIPS

11

ULIP FUNDS & CLASSIFICATION

14

ULIP FEATURES

19

TRADITIONAL V/S ULIP PLANS

22

MUTUAL FUNDS V/S ULIPS

28

VARIOUS ULIP PLANS IN THE MARKET

45

VARIABLE UNIVERSAL LIFE

52

CHAPTER 3

DATA ANALYSIS

60

CHAPTER 4

CONCLUSION:

CHAPTER 2

CONCLUSION&RECCOMENDATION

72

BIBLIOGRAPHY

75

ANNEXURES

76

CHAPTER 1INTRODUCTION

INTRODUCTION OBJECTIVES OF STUDY: 

To study the concept and working mechanism of ULIPs



To have an awareness of IRDA Guidelines with respect to ULIPs



To review the impact on the ULIPs business after relaxation of regulatory by IRDA.

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To make a comparison between Mutual Funds & ULIPs

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To study the comparison between Traditional Policies & ULIPs

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To study the myths about investing in ULIPs

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To evaluate the plan offered by LIC, HDFC Life Insurance Ltd and other life insurance industry.



To review the status of ULIPs in India and how it is different against other insurance plans abroad.



Reasons why ULIPs get thumps up

RESEARCH METHODOLOGYThe data for the assignment has been collected from the following sources Primary Data- Surveys carried out by the group members regarding awareness about ULIPs.  Secondary Data- Other valuable data has been collected from Newspapers, magazines and websites.

SCOPE OF STUDY: The project entitled “ULIP: an effective and security investment plan in India” is a detailed study about the inception of the concept of Unit linked insurance policies and its working mechanism. The study is confined only to the analysis about the ULIPS and its effectiveness in comparison with the traditional policies and the Mutual funds. 1

Life insurance and building a respectable corpus are two goals that most of us set out to achieve early in life so that our dependents have enough to manage their lives. Gauging this general wish, insurance companies have devised several plans. Unit Linked Insurance Plan (ULIP) is one of them which has gained popularity over the past few years in contrast to the traditional endowment plans. Technological advancement has also played a role as now one can see all the available plans online, compare and buy the best suited. There, however, exist some fears in peoples’ mind with regard to the possibility of decent returns in ULIPs because part of the premium money that insurance companies collect is put in a fund for insurance cover and the rest is invested in money markets, including share market which is unpredictable. The concept of ULIP has been introduced for those who wish to avail a mix of both insurance cover and higher returns on investment. Although a substantial part of the premium money is invested in the money market, the companies have now developed expertise to insure that these investments don’t become a victim of vagaries of the markets, and ULIP investors gain decent returns. Also, ULIPs are not as complex and expensive as they may sound. However, investors must understand that in order to expect decent returns, besides the life cover, they need to remain invested in ULIPs for a long time as insurance companies invest the premium money in different market instruments such as stocks and debt to ensure good returns.

LIMITATIONS OF ULIPs:  Expensive and Complex: Since ULIPs combine insurance with investment, the premiums charged for the life cover turn out to be far more expensive than term insurance. They are also complex in terms of charges and not very transparent as it is not clear how much of the money goes towards insurance, management expenses and investment. Thus, it is

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not viable to make redemptions at the end of the lock-in period as the fund value might be low at the time due to higher initial charges.  Higher costs in initial phase: ULIPs cost more in the initial years because of the charges levied on the investor, that go towards policy charges.  Market fluctuations: Due to market fluctuations, a lower amount of returns are generally anticipated in the initial years. So,ULIPs are not suitable for investment for a short-term basis.

WHAT IS INVESTMENT ? Investment is nothing but a process wherein an individual puts in money to earn profits after a certain period of time. Investments can be made in anything – be it property, gold, silver, fixed deposits, or any sort of precious metals, that are believed to have increased or enhanced value in future. Importance of investment Makes us financially independent  To make goals  Security for future  Increased value of the product purchased at present WHAT IS INSURANCE ? A device for transfer of risk of individual entities to an insurer, who agrees for a consideration (called the premium) to assume to a specified extent losses suffered by the insured.

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CHAPTER 2: PROFILE OF STUDY

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PROFILE OF STUDY What is ULIP? Unit Linked Insurance Policy (ULIP) is a category of goal-based financial solutions which combine the safety of insurance protection with wealth creation opportunities. Part of the investment made by a customer in ULIPs goes towards providing the insurance protection and residual portion is invested in a fund which in turn invests the money in stocks / bonds. The value of this part of the investment alters with the performance of the underlying fund opted by a customer. Thus, the protection element and savings element are distinguishable in ULIPs and they are managed as per the needs of the customer. ULIPs provide flexibility for the investors.

Growth Of Unit Linked Business In India: India has seen a tremendous growth of Unit Linked Plans over the recent years. The growth has been fuelled by the Booming Stock Markets & Lower Interest Rates. Before the Introduction of The Unit Linked Product, the Prospects/Policyholders who are interested in investing in Stock Markets either had to purchase Stocks On their own in the Primary/Secondary Or Invest In 5

Mutual Funds. With the introduction of the Unit Linked Product , the prospect has an option to invest in the Stock Market via Purchase Of A Unit Linked Life Insurance Policy. In addition to the Life Insurance Cover, a Unit Linked Policy Scores over Mutual Fund Via Tax Advantages And Life Cover(Now SIPS can Offer Life Cover As Per Recent SEBI Guidelines).

1ST ULIP PLAN LIC introduced the first ULIP plan named Bima Plusin 2000. Later the ULIP was launched by Unit Trust of India (UTI). With the Government of India opening up the insurance sector to foreign investors in 2001 and the subsequent issue of major guidelines for ULIPs by the Insurance Regulatory and Development Authority (IRDA), in 2005, several insurance companies forayed into the ULIP business leading to an over-abundance of ULIP schemes being launched to serve the investment needs of those looking to invest in an investment cum insurance product.

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IRDA V/S SEBI Why ULIPs became controversial? ULIPs have both Insurance and Investment parts. There are ULIP plans which have no sum assured as well. Investments are subject to market risks and Investment come under the purview of market watchdog SEBI (Securities and Exchange Board of India). Mutual Funds and other collective schemes are managed by SEBI. However, insurance is regulated by IRDA (Insurance Regulatory and Development Authority of India). ULIP: Insurance versus Investment The purpose of buying an insurance policy is that if the policy holder dies, the family is assured of certain amount. Since ULIPs are Market Linked, there is uncertainty in this benefit and the ULIPs may defeat this benefit. In case of untimely death of a customer, the family is entitled to get the higher the sum assured or the market value. Then there are many variants of these schemes which guarantee cover five times or two times of initial premium or so on. There are many ULIP pension plans which don’t give any cover or sum assured. Apart from this, the costs are deducted from the units and returns get reduced because of the reducing units. Even in the situation of good market conditions the and higher NAV( Net Asset Value), the benefit is reduced because of the unit associated costs Contentions of SEBI One of the main contentions for SEBI was that although a ULIP is an insurance product which comes under IRDA, part of it is also an investment product which should ideally be regulated by SEBI.The Insurance Companies which started selling ULIPs about 5-6 years ago, offered huge commissions to insurance agents and flooded the market with these products which nearly 7

mirrored mutual fund (MF) products. The commissions on ULIPs are as high as 30%. SEBI says that since ULIPs are investment products which mimic mutual funds so they should follow it’s guidelines. There is one aspect of SEBI’s action to curb the high commissions and ULIPs compared to Mutual funds. SEBI said:-“Such products, which work in a similar way as mutual funds, should not be launched nor should money be raised from investors by way of new or additional subscription, till companies obtain the certificate of registration from SEBI” SEBI act clearly says that any product with exposure to the securities market comes under its purview. In this context, SEBI had issued show cause notices to 14 companies on sale of Unit Linked Products without obtaining it’s approval. SEBI is said to have obtained the views of the Attorney General of India on the powers vesting with it to regulate ULIPs. IRDA’s Viewpoint IRDA responded by saying that SEBI does not have the jurisdiction to regulate ULIPs. Further IRDA also says that there is no case for dual regulation of ULIPs. A day after SEBI barred the companies IRDA mandated to ignore the SEBI’s order and directed them to continue selling the product. IRDA, as per reports in newspapers , sought a legal opinion from NKP Salve, eminent jurist and former Union minister, before clarifying its position. Final verdict The Indian Government on 19 June 2010 put an end to the SEBI and IRDA conflict regarding regulatory body of ULIPS. Maintaining that ULIPS would be regulated by IRDA. SEBI is the securities regulator and IRDA regulates insurance companies. The prevalent practise is that any financial scheme which has an insurance component tends to be regulated by the insurance regulator.

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ULIP happened to act as mutual funds, which are subject to the securities regulator The matter escalated to the Ministry of Finance but no conclusion could be reached at the meeting between the Finance Ministry and Chairman of IRDA and SEBI. The RBI Act, the Insurance Act, the SEBI Act and the Securities Contracts Regulation Act were amended on 18 June 2010 and clarity on regulation of ULIPs was brought. The Union Cabinet meeting on 17 June 2010 had cleared the Securities and Insurance Laws (Amendment and validation) Ordinance, 2010. The ordinance states that products that are approved by IRDA and pension watchdog PFRDA would not fall under the purview of SEBI.

The new ULIP GuidelinesULIPs are governed by the provisions of Insurance Act, 1938 The minimum policy term shall be five years  A lock in period of 3 years. First partial withdrawal only after third policy anniversary.  No loans shall be granted against ULIPs  Benefits payable on death under a single premium ULIP. Product should be at least 125% of the single premium paid  In non-single premium ULIP products, the death benefits should be a formula (0.5*term of the policy*annualised premium) or (5*Annualised premium), whichever is higher  The sum assured payable on deaths shall not be reduced at any point of time during the term of the policy, except to the extent of the partial withdrawals made during the two year period immediately preceding the death of the life assured.

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 However, on attainment of sixty years of age life assured all the partials withdrawals may be set of against the sum assured payable on death.  No cover should be extended after the expiry of the policy term and only and only settlement options (which are clearly outlined at the commencement of the contract) may be allowed.  A unit linked product must have a guaranteed sum assured payable on death and may have a guaranteed maturity value.  Voluntary ratings of ULIP fund are recommended. 

Training is must for advisors before they are authorised to sell ULIPs.

ULIPs: BEFORE & AFTER REGULATIONS-

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TRIVIA: Terms related to ULIPs Net asset value (NAV)ULIP NAV equals the assets minus liabilities. The assets taken to calculate the ULIP NAV include the market value of investments held by the insurance company’s fund, the value of the fund’s current assets and any accrued income. The liabilities taken to calculate the ULIP NAV include fund management charges, current liabilities, provisions and service tax. ULIP NAV of the whole fund is divided by the number of units in the fund existing on the valuation date. The resulting figure is the ULIP NAV per unit. As per a directive of IRDA in 2013, the valuation of equity shares is now calculated on the closing price of the company’s shares on the National Stock Exchange (NSE), which is also the primary exchange. In case a security is not listed or traded on the NSE, the closing price of the Bombay Stock Exchange (BSE) or the secondary exchange has to be used for the purpose of computation of ULIP NAV. Like mutual funds, ULIP policyholders are also allotted units. Each unit has a net asset value (NAV) that is determined and declared every day. It is the value on which net rate of returns on ULIPs are determined. The ULIP NAV varies from one ULIP to another as it is based on prevailing market conditions and the performance of the funds. Premium Allocation Charges – The charges, namely premium allocation charges are imposed - beforehand on the premium paid by the investor. These are the initial expenses incurred by a company in issuing the policy, like medical expenses and underwriting cost.

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Policy Administrative Charges - These charges are deducted regularly for the recovery of expenses borne by the insurance company for maintaining a life insurance policy. Surrender Charges– These charges refer to the deduction for full or partial encashment of premature units subject to the policy documents. These charges are levied as a percentage of the fund value or as a percentage of the premium. Mortality Charges – The expenses, namely mortality charges are borne by the insurer to provide a life cover to insured, which vary with the age and sum assured of the policy. These charges are deducted on a monthly basis. Fund Management Charges – The aggregated sum through ULIP funds is invested in equity instruments and debt. The insurer bears these charges for fund management, which vary with both fund and plan. The amount is subject to deduction calculating the net asset value or NAV. Fund Switching Charge – ULIP plans enable you to invest your hard-earned money in different fund options that further have multiple debts equity exposure as well as provide you with the option to switch between different funds for which your insurance company will charge the switching fee. Most of the policies provide few free switches every year. Discontinuance Charges – On premature discontinuation of a plan within lockin period, the insurer deducts a small fee. Since these charges are preset by IRDA, these are the same for almost all policies. In ULIP, premiums payed are invested in debt and equity instruments, chosen by the customer, after deducting allocation and other charges. The value of each fund is computed by dividing total value of the fund’s investment by the total number of units. 12

Classification of ULIPs ULIP for Retirement - In this plan, the payment has to be made during the tenure with the customers’s employer, which is automatically collected in a corpus amount, which is paid in the form of annuities to a policyholder after retirement.

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ULIPs for Wealth Collection – This plan primarily accumulates the wealth over a period of time. Such plans are recommended for people who are in the late twenties and early thirties and by investing in this plan they get the flexibility to fund their any future financial goal. ULIP for Children Education – Parents want to ensure that no unforeseen event affects their child’s overall education in any condition. There are several ULIP plans that provide money in small chunks in the key events of children’s life. This ensures that no unforeseen even hinders their life in any manner. ULIPs for Health Benefits – In addition to some common benefits, ULIPS efficiently provide financial assistance to meet medical contingencies. ULIPs for Death Benefit Type 1 ULIP PlansIn case of death of the policyholder, the nominee receives death benefit which is equal to higher of the sum assured or fund value by the insurance company. The mortality charge in Type 1 ULIP keeps on reducing every year as the sum at risk reduces. The sum at risk is the difference between the accumulated fund value and sum assured under the policy. In other words, it is the amount an insurance company pays from its own pocket in the event of the death of the policyholder. For example, an insured took a ULIP plan with a sum assured of Rs. 50 lakh. He has paid the premium for 7 years and the fund value has now grown to Rs. 28 lakh. In the event of the death of the policyholder, the beneficiary will receive Rs. 50 lakh, the higher of sum assured (Rs. 50 lakh) or fund value (Rs. 28 lakh).

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 Type 2 ULIP PlansWhen a policyholder dies, the death benefit received by the nominee in case of type 2 ULIP is equal to sum assured plus fund value.One thing to note is that premiums for type 2 plans are higher than those for type 1 ULIP plans. A Type 2 ULIP plan also considers mortality rates with every policy year because the risk of death increases with age. As above, let us look at an example to understand the concept better. Taking the above scenario where the ...