It is said that Insurance isn’t bought, it is sold. ULIPs are a prime example of something that is sold to an individual by an insurance salesperson.

What is a ULIP?

Many individuals own ULIPs, but how many actually fully understand them? Here we present a guide to ULIPs, and what to expect out of them going forward.

A Unit Linked Insurance Plan, popularly known as ULIP, is a financial product that offers investment as well as insurance (risk) cover. The features of ULIP are similar to those of mutual funds; except that ULIPs are investment products with insurance benefits. ULIPs are basically investment products with a thin wrapper of insurance around them.

ULIP Controversy

The insurance regulator - Insurance Regulatory and Development Authority (IRDA), and the capital market regulator - Securities and Exchange Board of India (SEBI) were for some time locked in a turf war over the regulation of ULIPs. The two-month long tussle between the two regulators - SEBI and IRDA, finally came to an end after the intervention of the Government by issuing an ordinance, which ruled that ULIPs will be regulated by IRDA.

The IRDA introduced sweeping changes to the structure of ULIPs which will come to effect from September 1, 2010 which will have far-reaching implications for investors who are considering ULIPs.

Recent changes in the ULIP structure and their implications for investors

Features	ULIP	Avatar ULIP	Implications
	(Before Sept. 01, 2010)	(After Sept. 01, 2010)
1. Minimum Sum Assured	5 times of the annual premium amount	10 times of the annual premium amount	It will enhance the risk cover for the policyholder but it will lead to increase in mortality charges as well
2. Agent’s Commission	No disclosure of agent’s commissions	Compulsorily disclosure of agent’s commission in benefit illustration of a policy	Commission disclosure will help policyholders to get information about how much of his premium amount will be contributed towards payment of agent’s commission
3. Guaranteed Returns	Nil	Guaranteed returns on unit-linked pension plans @ 4.5%	The minimum guarantee rate certainly holds economic sense. However, this may actually make it costlier (in terms of the premium paid) for the buyers of such products. Moreover, actuaries at life insurance companies may find it difficult to manage long-term guarantees because there are not many long-term investment options available. Presently, the longest maturity government bond has tenure of 30 years.
			Moreover, the guaranteed rate is very low as compared to other fixed income instruments like PPF, Bank FDs which will fetch higher returns
4. Upfront Charges	High in initial 3 years of the policy and 4th year onwards gradually reduces	Evenly distributed over the initial 5 years (lock-in period)	IRDA has eliminated high front-ending of the expenses, which were as high as 60%. The regulator has also mandated that expenses should be evenly distributed during the lock-in period (5-years) which will reduce the overall charges for the whole policy term
5. Surrender Charges *	No limit. Companies can charge as per their discretion	IRDA has set a range of surrender charges from 2.5% to 12.5% for policies of less than 10 year term and 2.5% to 15% for policies of more than 10 year term	This will help those investors who wish to exit ULIP after the 5-year lock-in as they would not suffer any additional surrender charges over and above the expenses mandated by the IRDA
6. Overall Charges	No limit	Companies can charge maximum upto 3% and 2.5% for policy of 10 year term and 15 year term respectively	IRDA has taken this move in favour of investors, which will thus result in overall higher returns due to lower charges
7. Top-up	No compulsory life cover	Top-ups will be treated as single premium policies and will attract mandatory additional life cover. This amount (of top-up) will be locked in for 3 years	This step will have mix impact on the policyholders. On the one side, they can get increased insurance cover without entering into a new policy agreement. But, on the other hand, it will increase overall cost due to higher mortality expenses charged by the insurance companies
8. Partial Withdrawals	Allowed after 3 years	Allowed only after 5 years for all non-pensioned products	This step will harm those policyholders who would be in need of liquidity in emergency period, but nonetheless will also promote long-term saving habits amongst individuals
9. Lock-in-Period	3 years	5 years	All investments in ULIPs will carry a 5-year lock-in period. This will clearly weed out the mis-selling of ULIPs as short-term products to investors and will also promote long-term saving habits amongst individuals
10. Minimum Premium Paying Term	3 years	5 years	With minimum premium paying term increased to 5 years from the present 3 years, will lead to ULIPs being considered only by investors serious about building a long-term investment portfolio
11. Insurance Cover on Pension Plans	Not available	Mandatory insurance/health cover on all pension plans	Insurance/health cover with pension plans will attract higher charges (in terms of mortality charges) thereby reducing the overall returns
12. Tax Benefits	Enjoys Exempt-Exempt-Exempt (EEE) Status	Under consideration in DTC	Change in status of ULIP from Exempt–Exempt–Exempt (EEE) to Exempt–Exempt–Tax (EET) at the time of withdrawals will have an impact on the financial plans of people who own ULIPs

 

* Note: Surrender charges

Year	Policy Period
	Less than 10 years	More than 10 years
1st year	12.50%	15.00%
2nd year	10.00%	12.50%
3rd year	7.50%	10.00%
4th year	5.00%	7.50%
5th year	2.50%	5.00%
6th year	Nil	2.50%
7th year & onwards	Nil	Nil

While ULIPs under their new avatar look more appealing, one needs to asses from a financial planning perspective whether he/she really needs it. And this in a way is a function of numerous facets which a “true financial planner considers” while making a prudent financial plan.

PersonalFN is a Mumbai based Financial Planning and Mutual Fund Research Firm.