ULIPs are a category of goal-based financial solutions that combine the safety of insurance

protection with wealth creation opportunities. In ULIPs, a part of the investment goes towards
providing you life cover. The residual portion is invested in a fund which in turn invests in stocks
or bonds. The value of investments alters with the performance of the underlying fund opted by
you.
Simply put, ULIPs are structured such that the protection element and the savings element can be
distinguished and hence managed according to your specific needs, offering unprecedented
flexibility and transparency.

ULIPs give you

wealth plus life cover

Stay invested and enjoy

their power

It is critical that you understand how your money gets invested once you purchase ULIP.
Once you decide the amount of premium to be paid and the amount of life cover you want, the
insurer deducts some portion of the premium upfront. This portion is known as the Premium
Allocation charge and this 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 administration charges are
thereafter deducted on a periodic (mostly monthly) basis whereas the fund management charges
are deducted 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 in a graphical
format.
In addition to the investment fund ULIPs give you the benefit of insurance cover as well. The
mortality charge mentioned above goes towards provision of this cover.
Over a period of time, the component of charges as a percentage of the premium paid tends to
decrease. Which is why, you should continue paying your premiums regularly. That is the best
way of making your ULIP deliver on its dual benefit of protection and wealth creation.

One of the big advantages that a ULIP offers is that whatever be your specific financial
objective, chances are that there is a ULIP which is just right for you.The figure below gives a
general guide to the the different goals that people have at various age-groups and thus, various
life-stages.

Depending on your specific life-stage and the corresponding goal, there is a ULIP which can
help you plan for it.
Retirement is the end of active employment
and brings with it the cessation of regular
income. Today an increasing number of
people have stated planning for their
retirement for below mentioned reasons

Almost 96% of the working population has no formal

provisions for retirement
With the growing nuclearisation of family structure, traditional
support system of the younger earning members – is no longer
available
Developments in the healthcare space has lead to an increase in
life expectancy
Cost of living is increasing at an alarming rate

Pension plans from insurance companies ensure that regular,

disciplined savings in such plans can accumulate over a period of
time to provide a steady income post-retirement. Usually all
retirement plans have two distinctive phases
The accumulation phase when you are saving and investing during
your earning years to build up a retirement corpus
And
The withdrawal phase when you actually reap the benefits of your
investment as your annuity payouts begin.

In a typical pension plan you have the flexibility to make a lump sum payment or a regular
contribution every year during your earning years. Your money is then invested in funds of
your choice. You can opt to receive the annuity at any time after vesting age (age at which you
become eligible for pension chosen by you at the inception of the plan).
Most of the Unit linked pension plans also come with a wide range of annuity options which
gives you choice in structuring the post-retirement benefit pay-outs. Also at the time of vesting
you can make a lump sum tax-exempted withdrawal of up to 33 per cent of the accumulated
corpus.
In a retirement plan, the earlier you begin the greater you gain post retirement due to the power
of compounding.
Let us take an example of Gaurav & Hari. Both of them want to retire at the age of 60. Gaurav
starts investing Rs. 10,000 every year from the age of 25 till the time that he retires. In all, he
would have invested Rs. 350,000. If his investments were to earn 7% return every year, at the
time of his retirement, Gaurav will have a retirement corpus of Rs. 13, 82,368.
Now, Hari starts investing 10 years later (i.e. at the age of 35) and in order to make up for the
lost time, invests Rs.15,000 every year (which is 50% more than Gaurav’s annual investment).
So, by the time of his retirement, he would have invested Rs. 3,75,000. And assuming the same
annual return of 7%, he will end up with a retirement corpus of Rs 9, 48,735.

So, you see how

despite setting aside more than 50% of Gaurav’s annual contribution, Hari ends up with a
retirement corpus which is almost a third lesser than Gaurav’s. That is the power of
compounding.
Which is why, it is never too early to invest in a ULIP for retirement planning.

ULIPs are the right insurance solutions for you if you are
looking for a strong wealth creation proposition allied to a
core insurance benefit. Such plans are ideal for people
who are in their late 20s and early 30s and by investing in
such a plan get the flexibility of using it to fund any of
their long-term financial goals such as purchase of a
house or funding their children’s education. The added
element of life cover serves to make these plans a
wholesome financial investment option.

Wealth Creation ULIPs can be primarily classified as

Single premium - Regular premium plan :
 Depending upon you needs & premium paying capacity you
can either opt for a single premium plan where you need to pay
premium only once during the term of entire policy or regular
premium plans where you can premium at a frequency chosen
by you depending upon your convenience
Guarantee plans – Non guarantee plans:
Today there are wealth creation ULIPS which also offer
guaranteed benefit. These plans are ideal insurance-cum-
investment option for customers who want to enjoy the
potentially higher returns (over the long term) of a market
linked instrument, but without taking any market risk. On the
other hand non guarantee plans comes with an in - built range
of fund options to choose from –ranging from aggressive funds
(Primarily invested in equities with the general aim of capital
appreciation) to conservative funds (invested in cash, bank
deposits and money market instruments with aim of capital
preservation) so that you can decide to invest your money in
line with your market outlook, time horizon and your
investment preferences and needs.
Life Stage based – Non life Stage based:
Life Stage based Ulips factor in the fact that your priorities
differ at different life stages & hence distribute your money
across equity & debt. Here the initial allocation is decided as
per your age since age is a significant indicator of risk appetite.
Such a strategy ensures that the asset allocation at all times is in
sync with your age and changing financial needs

One of the most important

responsibilities you have as a
parent is to ensure that your child
gets the best possible education
that can be provided. Apart from
conventional schooling, it becomes
important to expose your child to
different activities such as dance,
painting and sports training for
holistic development. As a parent,
you want to ensure that their
development is not hampered
either due to rising costs or
unforeseen circumstances.
Today there are ULIPs that offer money at key milestones of your
child's education thus ensuring that your child’s education continues
unhampered even if something unfortunate happens to you. While,
the death of a parent is an irreparable emotional loss, child education
plans safeguard the child against the financial ramifications of the
death of a parent.
Apart from above mentioned benefit, child plans also offers below
mentioned features.

Flexibility of adding on various riders like Income benefit rider,

disability rider etc to get additional benefits .For e.g. In case of
income benefit rider, In the event of the death of the parent, the
child will receive a regular pre-determined amount every year to
meet the educational expenses.
In case of unfortunate incidence of the death of a parent, not only
will the child receive the sum assured immediately but will also
continue to receive money at the key educational milestones.

When you are young and working you save for various
goals like marriage, education, retirement etc. but saving
for health care is never considered or left for later. During
these years we have various sources of income or savings
on which we can rely for health emergencies.

But with increasing cost of healthcare, proportion of this spend is increasing at an alarming pace.
This is forcing families to borrow or sell assets to meet expenses during medical emergencies.
And during old age health care expenses increase due to health deterioration because of age and
higher incidence of chronic illness. Thus it is important for you to invest in health insurance
today so that tomorrow you are fully prepared to meet rising healthcare expenses, which would
be incurred during old age, with the right health insurance plan.
Health ULIP is a recent innovation from the health insurance industry. In a health ULIP part of
your premiums are allocated for investment designed specifically to build a health fund to meet
future health related expenses. It aims to create a health savings kitty by investing in a long term
flexible savings plan with multiple fund options. The health fund thus created allows you to
claim for health related expenses of any kind and also fund your future health insurance charges.
You can also avail of tax benefit on premium paid u/s 80D.
Get the most out of your ULIP

Whether you are in the process of deciding which ULIP to invest in; or whether you already have
a unit linked insurance policy to secure your important financial goals there are some key
principles which should govern any decision related to ULIPs. Adhering to these key principles
will allow you to make optimum utilization of your ULIP.

The ULIP edge

ULIPs are dynamic plans and are flexible by nature and hence allow for changes and high degree
of customization in the plan as opposed to most of the financial plans which once purchased
cannot be modified. It is because of embedded characteristics of transparency, flexibility,
liquidity & goal based savings that ULIPs have emerged as preferred investment option today.

The following subsections will not only help you to understand various attributes of ULIPs but
also guide you to use these features to manage your policy.

Flexibility to change your life cover: ULIPs give you the flexibility to choose your sum
assured (insurance cover) at the time of policy inception. Moreover, some ULIPs allow you
to increase your sum assured over the term of the plan. This is crucial as your protection
needs keep on changing with time .Typically, greater the financial liabilities you have such
as repayment of a home loan, greater will be your need for protection.

Flexibility to change premium amount: With ULIPs you can easily change premium
amount as most ULIPs provide you the option to increase or reduce premiums after a certain
period of time to match your premium paying capability. Another distinguishing feature of
ULIP is Top up which is an additional contribution over & above regular premium so that if
 you receive extra money today you can invest the amount in your policy & maximize your
investment gains.

Flexibility to opt for a rider: ULIPs also enable you to customize the policy with optional
riders to enjoy additional protection. Riders are additional or supplementary benefits that are
bought along with the main insurance policy. Some of the commonly offered riders by most
insurance companies are critical illness benefit rider, accident & disability benefit rider,
waiver of premium rider etc. For ex. a critical illness rider cover major critical illnesses like
heart attack etc. In case of contracting any of the above illness, the insurance company pays
the insured amount.

Flexibility to choose your fund option: Most of the ULIPs come with an in - built range of
fund options to choose from –ranging from aggressive funds to conservative funds so that
you can decide to invest your money in line with your investment preferences and needs.
What’s more, ULIPs even come with the option of switching between different fund options
so that you are able to reap maximum benefits from your investments.

ULIPs are dynamic, transparent

and flexible

To your changing needs they are

amenable

One of the key advantages that ULIPs offer is complete transparency which makes the working
of a ULIP abundantly clear to the investor. Thus, you are empowered to make informed
decisions on how to best use your ULIP.
Benefit Illustration
As a customer it is your right to ask for a sales benefit illustration. Sales benefit illustration
will help you understand how premium paid by you is utilized & what are the charges
deducted year by year, by the insurance company for the term of the plan . It will also
illustrate how your policy will grow in accordance with the choosen sum assured &
premium. In fact IRDA has mandated that all insurance companies use two scenarios with 6
% & 10 % return rate to depict future returns.
The table below is a sample benefit illustration which shows the premium amount, the various
charges deducted and the corresponding fund value.
Policy Year 1 2 3 4 5
Age 30 31 32 33 34
Premium 20,000 20,000 20,000 20,000 20,000
 Sum Assured 1,00,000 1,00,000 1,00,000 1,00,000 1,00,000
Premium allocation
3,400 1,800 200 200 200
charge
Mortality Charges 141 123 94 58 16
Policy Admin charge 480 480 480 480 480
Total Charges 4012 2403 774 738 696
Fund Value 17,662 38,659 63,299 90,169 1,19,478
Surrender Value at
- - 60,767 88,366 1,19,478
the end of the year
Death Benefits 1,00,000 1,00,000 1,00,000 1,00,000 1,19,478

Brochures and key feature documents

While benefit Illustrations play a significant role in explaining the quantitative aspects of
ULIPs, it is also important for you to know the other features and benefits which the ULIP
offers. All insurance companies come out with brochures for prospective customers to go
through & understand the plan thoroughly. You should ask your insurance advisor to
provide brochure of the ULIP you intend to purchase.

Once a policy gets issued, your insurer will send you a key feature document capturing all
the essential features of the plan. This is to ensure complete comprehension of the plan
purchased.

Free-look period
ULIPs also offer you a distinct feature that no other financial product offers as of now. It is
called Free-look period which is a 15 day window during which you can close the policy &
get paid back the entire premium less charge borne by company in issuing the policy in case
you are unhappy with the product.

Net Asset Value

It is critical that you monitor the performance of your policy on a regular basis. This will
help you ascertain whether you are on right financial track or not. To help you do so all life
insurance companies publish the NAV of different fund options on their website on a daily
basis so that you can track the performance of your policy on a regular basis. This will also
help you make informed decisions when it comes to comparing fund performances.
 ULIPs are products without any hidden
clauses

To invest in one, you have many causes

Everyone needs to save for their important life goals. One of the prudent ways to do so is by
investing in ULIPs which are long-term systematic investment options designed to address key
financial goals. ULIPs help you cultivate a disciplined savings pattern which ensures that the
money being set aside will go towards the fulfillment of the specific objective. In the absence of
such a focused approach, there is a high possibility of savings towards one objective getting
utilized for an immediate short-term requirement, thus jeopardizing the long-term goal. ULIPs
are a potent safeguard against such a tendency.

Goal based savings is the way to go

Don't worry about the market – too high

or too low

ULIPs are an efficient tax saving instrument too .The tax benefits that you can avail in case you
invest in ULIPs are described below:

Life insurance plans are eligible for deduction under Sec. 80C
Pension plans are eligible for a deduction under Sec. 80CCC
Health insurance plans and critical illness riders are eligible for deduction under Sec. 80D
The maturity proceeds or withdrawals of life insurance policies are exempt under Sec
 10(10D), subject to norms prescribed in that section

ULIPs give you the edge on tax

No more tension, now you can relax

Unlike conventional traditional products charges are segregated in ULIP & thus made known to
the customer.

You can know the charges applicable on your ULIP through:

Sales benefit illustration : A sales benefit illustration illustrates various charges, year by
year, for the term of the plan so that you know exactly how much money is deducted as
charges & what is invested.
Brochure : A brochures informs you about the various charges & their purpose applicable
on your policy.
Advisor : You should enquire your advisor about all the charge applicable on your policy.

Although ULIPs offered by different insurers have varying charge structures broadly, important
charges that you should know are:

Policy administration charges

These charges are deducted on a monthly basis to recover the expenses incurred by the
insurer on servicing and maintaining the life insurance policy like paperwork , work force
etc.
Premium allocation charges
These charges are deducted upfront from the premium paid by the client. These charges
account for the initial expenses incurred by the company in issuing the policy- eg. Cost of
underwriting, medicals & expenses related to distributor fees. After these charges are
deducted the money gets invested in the chosen fund.
 Mortality charges
Mortality expenses are charged by life insurance companies for providing a life cover to
the individual. The expenses vary with the age and either the sum assured or the sum-at-
risk which is the difference between sum assured and fund value of the insurance policy
of an individual. Mortality charges are deducted on a monthly basis
Fund management charges
A portion of the ULIP premium, depending on the fund chosen, is invested either in
equities, bonds, g-secs or money market instruments. Sometimes it is a combination of
these. Managing these investments incurs a fund management charge (FMC). The FMC
varies from fund to fund even within the same insurance company depending on the
underlying assets in the fund. Usually a fund with higher equity component will have a
higher FMC

The important thing to note about ULIPs is that the overall charge structure for the plan comes
down substantially over a long term. However it may be noted that insurers have the right to
revise fees and charges over a period of time.

What a ULIP is
A plan which gives complete clarity about the various charges deducted and
why it’s being deducted and so how your fund will grow over time.
What a ULIP is not
A plan in which you don’t know where your money is going or what is
happening to it.

ULIPs can easily be customized to suit one’s needs & requirements. This is primarily due to
range of features that ULIPS offer to the customer. Below mentioned are few charges applicable
in case you have opted for an additional feature.

ULIP Benefits Applicable charges

Riders
Riders are additional or supplementary benefits Insurance companies levy rider charges in
that are bought along with a main life insurance case you opt for riders.
plan. Some of the commonly offered riders are
critical illness benefit rider, accident &
disability benefit rider, waiver of premium rider
etc. For ex. In case you opt for a Critical illness
rider you get additional protection from 9
critical illnesses.
Switch
Your insurance company may charge you a
ULIPs not only allow you to invest your money
fee for switching your funds Generally only a
in fund options with various debt – equity
limited number of fund switches are
exposure but also give you the option to switch
recommended in a year as a ULIP is a long-
between different funds. For example, you can
term investment tool therefore most of the
switch money from a fund with 100% equity to
companies allow a certain number of switches
a balanced portfolio, which has 60 per
each year free of charge, with subsequent
cent equity and 40 per cent debt.
switches, subject to a minimal charge.
Top Up
Insurance companies deduct a certain
One of the unique feature offered by ULIP is percentage from the top-up amount as
Top Up where you can make additional charges. These charges are usually lower than
contribution over & above the regular premium. the regular charges that are deducted from the
annual premium.
Surrender
You may decide to surrender (premature partial Surrender charge may be deducted for
or full encashment of units ) your policy before premature partial or full encashment of units
the term of the plan. wherever applicable, as mentioned in the
policy conditions. These charges are levied as
a percentage of the fund value or as a
percentage of the premium.

The wide range of ULIPs available in the market might make it difficult for a consumer to
choose the correct ULIP. However if you were to follow a few simple steps choosing the right
ULIP can be a smooth process.

Understand the concept of ULIPs thoroughly

Do your homework well and read as much as you can about ULIPs as you can before investing.
Read the literature available on ULIPs on the web sites and brochures circulated by insurance
companies. This will help you know the benefits and structure of the ULIP.

Focus on your requirements and risk profile

Identify a plan that is best suited for you keeping in mind your risk appetite. In case you have a
high-risk appetite, opt for a more aggressive fund option (an option that invests higher
percentage in equities) and vice versa.
Understand the peculiarities of the plan
Understand all the charges levied on the product over its tenure, not just the initial charges. A
complete charge structure would include the initial charges, the fixed administrative charges,
fund management charges and mortality charges.

Examine the performance of the plan

Compare the performance of the plan with benchmark indices like BSE Sensex or Nifty in the
past two or three years to get a better idea about the performance. Ensure that you can easily get
information about your NAV when you need it. Thoroughly understand the flexibility and
redemption conditions of an ULIP.

Understand the charges levied on the product

Understand all the charges levied on the product over its tenure, not just the initial charges. A
complete charge structure would include the initial charges, the fixed administrative charges, the
fund management charges and mortality charges. You not only need to understand the charges in
the first year but also through the term of the policy.

Compare ULIP products of different insurance companies

Compare products of different insurance companies in terms of premium payments, cost
structure, performance of the scheme (equity as well as debt schemes), additional facilities such
as top-up premium and free switch between different fund options, flexibility in terms of
increasing or decreasing protection, reporting structure and flexibility in redemption.

Know about the Company

Last but not least, insure with a brand you can trust to honor its commitment and service in
accordance to your requirements

Q1. What is a Unit Linked Fund?

Unit Linked Fund is a pool of the premiums paid by the policyholders which is invested in a
portfolio of assets to achieve the fund(s) objective. The price of each unit in a fund depends on
how the investments in the fund would perform. The fund is managed by the insurance
companies.

Q2. What does a Unit stand for? A Unit stands for a portion or a part of the underlying
segregated unit linked Fund. Q3: What is Net asset value? Net Asset Value (NAV) is the
value per unit calculated in rupees. Q4: What is a Fund Value and how is it calculated?
Fund Value is the product of the total number of units under the policy and the NAV. The fund
value for the purpose of claims, surrenders or any other clause stated shall be calculated on the
basis of NAV.
 Q5: What do I get at the end of my policy term? The benefit received at the end of policy
term is termed as maturity benefit. The policyholder is entitled to receive fund value as maturity
benefit. Q6: What should I verify before signing the proposal? You should verify:
All the charges deductible under the policy
Features and benefits
Limitations and exclusions
Lapsation and its consequences
Other disclosures
Illustration projecting benefits payable in two scenarios of 6% and 10% returns as
prescribed by the life insurance council.
Q7: What will my family receive if something happens to me?
In the unfortunate event of death during the term of the policy, the person appointed as nominee
shall receive the higher of sum assured or the fund value. There are also certain ULIPs in market
which give sum of Fund value & sum assured as death benefit.
Q8: Is investment return guaranteed in ULIPs?
Investment returns from ULIP may not be guaranteed.” In unit linked products/policies, the
investment risk in investment portfolio is borne by the policy holder”. Depending upon the
performance of the unit linked fund(s) chosen; the policy holder may achieve gains or losses on
his/her investments. It should also be noted that the past returns of a fund are not necessarily
indicative of the future performance of the fund.
Q9: Can I change / switch my asset allocation?
Yes, you can change the investment pattern by moving from one fund to other fund (s) amongst
the funds offered under a particular product. Such a change between funds is termed as a Switch.
There will be a flat charge levied for any switch over and above the free switches.
Q10: What is Premium Re Direction?
Premium Re-Direction is the facility that allows a policyholder to modify the allocation of
amount of renewal premium into a different investment pattern from the option (investment
pattern) exercised at the inception of the policy.
Q11: Can I partially withdraw from my policy?
Yes, you can encash / withdraw a part of the fund anytime after completion of three years,
subject to surrender charges as applicable to each individual plan.
Q12: Can I foreclose my policy? Are there any charges applicable?
Yes, you can foreclose your policy by Surrendering the policy. Surrender means terminating the
contract once and for all. On surrender, the surrender value is payable to you which is Fund
Value less the surrender charge. Surrender Charge means a charge levied on the fund value at the
time of surrender of the policy.
Q13: What does redemption mean?
Redemption means encashing the units at the prevailing NAV offered by the company. This is
applicable in case of exercising partial withdrawal, switch, maturity, surrender, settlement option
or in the case of payment of death benefit.
Q14: What is the Settlement Option?
Settlement Option also known as periodical payment, means an option available to the
policyholder to receive the maturity benefit as a structured payout over a period of up to 5 years
after maturity.
Q15: What is the date of commencement?
Date of Commencement of Policy as shown in the policy certificate is the date on which the age
of the life assured and the term of the policy are calculated and the same are shown on the policy
certificate.
Q16: What is a Regular Premium Contract?
Regular premium contract means a ULIP where the premium payment is in level and paid in
regular intervals like yearly, half-yearly or monthly.
Q17: What is my monthly due date?
Monthly due date means the date in any subsequent calendar month corresponding numerically
with the date of the commencement of the policy. In the event that there is no date in any
subsequent calendar month corresponding numerically with the commencement date, then the
due date shall be the last date in that subsequent calendar month.
Q18: What does “Cover Cessation Date” mean? Cover Cessation Date (Date of
Maturity) as shown in the policy certificate is the date on which the policy contract comes to an
end and is the date on which the maturity benefit becomes payable.

Current Age:

13%
Inflation:

Monthly Household expense

( excluding EMI's )
Estimated expense for children education (upto
postgraduation) :

Estimated Health care expenses :

Loans taken (Home Loan , Car loan etc.):

Cash & Savings / Other liquid assets:

Current life Insurance Cover:

Current Age:
6%
Inflation:

Desired Retirement Age :

 Current Monthly expense :

Agents: Is the person authorized by Insurance Regulatory &

Development Authority (IRDA) to sell policies. Annuity: A life
insurance product that pays periodic income benefits for a specific
period of time or over the course of the annuitant’s lifetime. There
are two basic types of annuities: deferred and immediate. Deferred
annuities allow assets to grow tax deferred over time before being
converted to payments to the annuitant. Immediate annuities allow
the payments to begin within about a year of purchase.
Beneficiary : The person named by the owner of the policy to
receive the life insurance proceeds upon the death of the insured.
Claim: An insurance contract is a promise to pay certain sums under
certain conditions. Making a claim is invoking that promise and if it
is in accordance with what is set out in the contract then it is
admissible and can be payable if all other terms and conditions in the
contract are met. Cover continuance option: An option that
ensures that your policy continues in case you are unable to pay
premium, any time after payment of first three year’s premium
Endowment Policy: A life insurance policy that pays out a lump
sum after specific period of time or on the death of the policy holder.
Group Life Insurance : A number of lives insured on the one
policy. A multi-life policy. In-force Business: The total
premium amount of a book of business that is active and in effect at
any specific period in time. Insurance: A system to make large
financial losses more affordable by pooling the risks of many
individuals and business entities and transferring them to an
insurance company or other large group in return for a premium.
Insured or Insured Life: The person on whose life the policy is
issued

In-force Business: The total premium amount of a book of business

that is active and in effect at any specific period in time.
Keyman Insurance: A policy to cover death of a business’s key
employee. It pays out a lump sum that is designed to cover the costs
of finding and training a replacement as well as covering any loss of
profitability. Morbidity: The probability of disability of a life or
group of lives. Mortality: The probability of death of a typical
person at various ages in a given group of people Nominee:
Person authorized by policy holder to receive policy money
Non-participating policy: Non participating policy is also known as
a without profit or non-par policy. The policy owner does not share
in any divisible surplus made by the life insurance company. Thus,
there are policies, which do not share in, any policyholder dividends
declared by the company.
Participating policies: A participating policy is also known as a
with-profits or par policy. A participating policy charges a higher
premium than a non-participating policy. In return, the policy owner
shares in the life insurance company’s divisible surplus, in the form
of bonus allotted to the policy. The bonus is allotted in addition to
the guaranteed sum assured. Thus these are policies where the
policyholder ‘participates’ in the surplus generated by the insurer.
Regular premium policy : A regular premium contract is a
contract where the policyholder accepts to pay a premium at regular
intervals over a number of years. Also known as recurring or annual
premium contract Renewal Premiums : Premiums that are
payable after the initial premium and that are a condition for the
continuation of the policy.
Rider : Additional or supplementary benefits that are bought
together with a main life policy on the same file and are combined
for the purposes of collecting one premium. They ride on and are
considered as part of the main policy. They could be added,
amended or deleted from the main policy, ant time, subject to risk
assessment. Details and the terms and conditions of the benefits are
clearly indicated in the main policy document.
Single premium policy : A single permium contract involves the
payment of one premium at inception with no obligation for the
policyholder to make subsquent, additional payments. Sum
Assured : is the amount payable on occurrence of the specified
event for which the policy is taken, such as death or completion of
term.
Surrender value : The amount of money that will be paid to a
policy holder if they discontinue a policy before it matures.
Switch: An option which enables you to transfer your money
from one fund to another Term Insurance : Policy under which
the benefit is payable only if the life insured dies before a specified
age or date.
Top Up: Any additional premium payment over & above regular
premium

Unit linked policy : An unbunbled policy where investment benefits

are expressed in units, each representing a share in an investment
porfolio. The unit price fluctuates with market-values and allows for
 investment income.

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ULIPs vs Mutual Funds: Who's better?

October 15, 2005 15:30 IST

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Unit Linked Insurance Policies (ULIPs) as an investment avenue are closest to mutual funds in
terms of their structure and functioning. As is the case with mutual funds, investors in ULIPs are
allotted units by the insurance company and a net asset value (NAV) is declared for the same on
a daily basis.
Similarly ULIP investors have the option of investing across various schemes similar to the ones
found in the mutual funds domain, i.e. diversified equity funds, balanced funds and debt funds to
name a few. Generally speaking, ULIPs can be termed as mutual fund schemes with an insurance
component.
However it should not be construed that barring the insurance element there is nothing
differentiating mutual funds from ULIPs.
How ULIPs can make you RICH!
Despite the seemingly comparable structures there are various factors wherein the two differ.
In this article we evaluate the two avenues on certain common parameters and find out how they
measure up.
1. Mode of investment/ investment amounts
Mutual fund investors have the option of either making lump sum investments or investing using
the systematic investment plan (SIP) route which entails commitments over longer time
horizons. The minimum investment amounts are laid out by the fund house.
ULIP investors also have the choice of investing in a lump sum (single premium) or using the
conventional route, i.e. making premium payments on an annual, half-yearly, quarterly or
monthly basis. In ULIPs, determining the premium paid is often the starting point for the
investment activity.
This is in stark contrast to conventional insurance plans where the sum assured is the starting
point and premiums to be paid are determined thereafter.
ULIP investors also have the flexibility to alter the premium amounts during the policy's tenure.
For example an individual with access to surplus funds can enhance the contribution thereby
ensuring that his surplus funds are gainfully invested; conversely an individual faced with a
liquidity crunch has the option of paying a lower amount (the difference being adjusted in the
accumulated value of his ULIP). The freedom to modify premium payments at one's
convenience clearly gives ULIP investors an edge over their mutual fund counterparts.
2. Expenses
In mutual fund investments, expenses charged for various activities like fund management, sales
and marketing, administration among others are subject to pre-determined upper limits as
prescribed by the Securities and Exchange Board of India [ Images ].
For example equity-oriented funds can charge their investors a maximum of 2.5% per annum on
a recurring basis for all their expenses; any expense above the prescribed limit is borne by the
fund house and not the investors.
Similarly funds also charge their investors entry and exit loads (in most cases, either is
applicable). Entry loads are charged at the timing of making an investment while the exit load is
charged at the time of sale.
Insurance companies have a free hand in levying expenses on their ULIP products with no upper
limits being prescribed by the regulator, i.e. the Insurance Regulatory and Development
Authority. This explains the complex and at times 'unwieldy' expense structures on ULIP
offerings. The only restraint placed is that insurers are required to notify the regulator of all the
expenses that will be charged on their ULIP offerings.
Expenses can have far-reaching consequences on investors since higher expenses translate into
lower amounts being invested and a smaller corpus being accumulated. ULIP-related expenses
have been dealt with in detail in the article "Understanding ULIP expenses".
3. Portfolio disclosure
Mutual fund houses are required to statutorily declare their portfolios on a quarterly basis, albeit
most fund houses do so on a monthly basis. Investors get the opportunity to see where their
monies are being invested and how they have been managed by studying the portfolio.
There is lack of consensus on whether ULIPs are required to disclose their portfolios. During our
interactions with leading insurers we came across divergent views on this issue.
While one school of thought believes that disclosing portfolios on a quarterly basis is mandatory,
the other believes that there is no legal obligation to do so and that insurers are required to
disclose their portfolios only on demand.
Some insurance companies do declare their portfolios on a monthly/quarterly basis. However the
lack of transparency in ULIP investments could be a cause for concern considering that the
amount invested in insurance policies is essentially meant to provide for contingencies and for
long-term needs like retirement; regular portfolio disclosures on the other hand can enable
investors to make timely investment decisions.
ULIPs vs Mutual Funds

ULIPs Mutual Funds

Minimum investment
Determined by the amounts are
Investment investor and can determined by the
amounts be modified as well fund house

No upper limits, Upper limits for

expenses expenses
determined by the chargeable to
insurance investors have been
Expenses company set by the regulator

Quarterly disclosures
Portfolio disclosure Not mandatory* are mandatory

Generally
permitted for free Entry/exit loads have
Modifying asset or at a nominal to be borne by the
allocation cost investor
 Section 80C Section 80C benefits
benefits are are available only on
available on all investments in tax-
Tax benefits ULIP investments saving funds
* There is lack of consensus on whether ULIPs are required to disclose their portfolios. While some insurers claim that disclosing portfolios on a quarterly
basis is mandatory, others state that there is no legal obligation to do so.

4. Flexibility in altering the asset allocation

As was stated earlier, offerings in both the mutual funds segment and ULIPs segment are largely
comparable. For example plans that invest their entire corpus in equities (diversified equity
funds), a 60:40 allotment in equity and debt instruments (balanced funds) and those investing
only in debt instruments (debt funds) can be found in both ULIPs and mutual funds.
If a mutual fund investor in a diversified equity fund wishes to shift his corpus into a debt from
the same fund house, he could have to bear an exit load and/or entry load.
On the other hand most insurance companies permit their ULIP inventors to shift investments
across various plans/asset classes either at a nominal or no cost (usually, a couple of switches are
allowed free of charge every year and a cost has to be borne for additional switches).
Effectively the ULIP investor is given the option to invest across asset classes as per his
convenience in a cost-effective manner.
This can prove to be very useful for investors, for example in a bull market when the ULIP
investor's equity component has appreciated, he can book profits by simply transferring the
requisite amount to a debt-oriented plan.
5. Tax benefits
ULIP investments qualify for deductions under Section 80C of the Income Tax Act. This holds
good, irrespective of the nature of the plan chosen by the investor. On the other hand in the
mutual funds domain, only investments in tax-saving funds (also referred to as equity-linked
savings schemes) are eligible for Section 80C benefits.
Maturity proceeds from ULIPs are tax free. In case of equity-oriented funds (for example
diversified equity funds, balanced funds), if the investments are held for a period over 12
months, the gains are tax free; conversely investments sold within a 12-month period attract
short-term capital gains tax @ 10%.
Similarly, debt-oriented funds attract a long-term capital gains tax @ 10%, while a short-term
capital gain is taxed at the investor's marginal tax rate.
Despite the seemingly similar structures evidently both mutual funds and ULIPs have their
unique set of advantages to offer. As always, it is vital for investors to be aware of the nuances in
both offerings and make informed decisions.

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