ULIP Vs ‘Life Insurance + Mutual Fund’ -- Intro

OBJECTIVE:

Unit Linked Insurance Plan is life insurance solution that provides for the benefits of protection and flexibility in investment. It actually combines both Life Insurance and Investments. So,

ULIP = Mutual Fund + Term assurance

In this paper I will compare the charges for ULIP with a similar ‘Mutual Fund + Term assurance’ combination. After this comparison, appropriate inferences from the same will be made.

INSURANCE:

Insurance can be defined as a contract between 2 parties, where one (the insurer) promises the other (the insured) to indemnify or make good any loss suffered by the latter, in consideration for an amount received by way of premium. The contract of insurance is referred to as an insurance policy. Insurance becomes a very important part for any entity, be it an individual or a group of people or a business. In this paper we are concerned about the Life Insurance part of insurance, which forms a major part of Insurance industry.

LIFE INSURANCE:

Life insurance or life assurance is a contract between the policy owner and the insurer, where the insurer agrees to pay a sum of money upon the occurrence of the insured individual's or individuals' death or other event, such as terminal illness or critical illness. In return, the policy owner agrees to pay a stipulated amount called a premium at regular intervals or in lump sums. There are many types of Life Insurance, however in this paper we will concentrate on Term Assurance which is what ULIP’s are offering.

TERM ASSURANCE:

Term Assurance is nothing but death benefit. That is the sum assured will be paid on the death of the life assured. The insured should pay a predetermined premium for the policy period, if the insured dies within the policy period, the sum insured will be paid. If the insured is alive after policy period nothing will be paid.

MUTUAL FUND:

Mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities. The mutual fund will have a fund manager that trades the pooled money on a regular basis. The net proceeds or losses are then typically distributed to the investors annually. Mutual funds are a good way of diversification, even with small amounts of money. It also gives professional management for one’s money.

UNIT LINKED INSURANCE PLAN:

Unit Linked Insurance Plan (ULIP) 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 world. The reason that is attributed to the wide spread popularity of ULIP is because of the transparency and the flexibility which it offers.

Unit Linked Insurance Plan - is a financial product that offers you life insurance as well as an investment like a mutual fund. Part of the premium you pay goes towards the sum assured (amount you get in a life insurance policy) and the balance will be invested in whichever investments you desire - equity, fixed-return or a mixture of both. So as mentioned earlier

ULIP = TERM ASSURANCE + MUTUAL FUND

VARIOUS CHARGES FOR ULIP:

Premium Allocation Charge:

This means a percentage of the premium appropriated towards charges from the premium received. The balance known as allocation rate constitutes that part of the premium which is utilized to purchase units for the policy. This charge is levied at the time of receipt of premium.

Policy Administration Charge:

This charge is levied in the beginning of every year for the various administration charges that the company incurs for running the policy. This is usually a constant amount charged in a monthly basis.

Fund Management Charge:

This means a charge levied as a percentage of the value of assets and shall be appropriated by adjusting the NAV. This is a charge levied at the time of computation of NAV. This charge will be levied by selling the units available at the current market price. The maximum allowable limit for this charge is 2.5%. But various companies charge different percentages according to the funds they are invested in.

Switching Charges:

This means a flat charge levied on switching of monies from one fund to another available within the product. The charge will be levied at the time of effecting switching. This charge is free for certain number of switching per year, in many of the companies. This is usually a fixed charge and not a variable charge.

Mortality Charge:

This refers to the cost of life insurance cover and is levied at the beginning of each policy month from the fund by cancelling units for an equivalent amount. This charge increases as the number of payment increases. And this charge refers to the premium for paid for the Term Insurance covered for the customer.

Surrender Charge:

This means a charge levied on the fund value at the time of surrender of the policy. When the policy holder wants to get out of the policy before the policy period, he/she has to pay these charges before opting out. This charge varies form company to company and it decreases (in percentage terms) as the number of premium paid increases.

Rider Charge:

This refers to the cost of Rider benefit and is levied at the beginning of each policy month from the fund by cancelling units for equivalent amount. This charge is levied if the policy holder has taken more covers along with the term insurance. This varies with the rider that the policy holder chooses.

To be Contd...

I will be happy to discuss about any difference in opinions regarding the above view . Looking forward to many interesting discussions.