Unit-linked insurance products (Ulips) provide the customer with the dual opportunity of financial security from unforeseen eventualities as well as reaping market-linked returns.
Unlike conventional policies where the customers are neither aware of what portion of the premium paid are expenses or benefits, nor how investment returns are allocated to the policy, Ulips clearly identify the investment element, expense, administration and benefit charges (such as mortality charge), as well as the benefits.
Ulips are transparent: The customer can see the progress of the policy. This is aided by an annual report on the status and performance of the policy, including charges taken and returns allocated. Transparency has enabled single premium life insurance policies to compete successfully with mutual funds and other openended collective investment schemes.
Ulips make use of unit-linked funds: A Ulip is one whose underlying investments are identifiable and determines its cash values. It is important to recognise that the assets of the funds may not be equities— they may be fixed-interest securities, money market or derivative instruments, property or shares.
Indeed, the assets of a particular fund may consist of a mixture of these asset types. The customer normally has a choice of funds having different characteristics to which premiums can be allocated.
Ulips are linked: Linking implies matching. The value of the policy is linked to the value of the net assets (assets less liabilities) of the fund. The investment risk and reward are therefore transferred from the insurer to the policy holder. The main advantage for the insuring company with few or no guarantees is that it is usually permitted to hold lower reserves, which makes more efficient use of capital.
Another advantage of unit-linking is that the customer has control over the investment strategy for the policy. One may be more comfortable with unit-linking as the concept is closer to other collective investment vehicles than a conventional policy. Customers can decide on the asset allocation most appropriate in relation to their risk tolerance. Those willing to take on more risk, for example by investing solely in an equity share fund, would expect to earn better returns in the long term.
These plans have been structured in different ways:
Many of these offer the choice of single or regular (monthly, annual or other) premiums, flexible premiums or a single or multiple life basis. The range of riders that can be added include life, guaranteed insurability options, critical illness, disability and health.
These products can be applied in a wide variety of situations such as family protection, mortgage or loan repayment, inheritance or estate tax planning, lump-sum investment, saving for retirement or school and college fees, and drawing retirement income.
Deepak Satwalekar, Managing Director and CEO, HDFC Standard Life Insurance
