Synopsis of ULIPs

8/3/2019 Synopsis of ULIPs

1/5

Synopsis of

FUTURE OF NAV- GUARANTEED ULIPs

Team Members:-

Ankitha Joseph

Priya Rao

Swati Patil

Jigna Gokani

Kameshwari K


2/5

Introduction

What are ULIPs?

ULIPs are Unit Linked Insurance Plans.

ULIP is a type of insurance vehicle in which the policyholder purchases units at their net

asset values and also makes contributions towards another investment vehicle. ULIPs

allow for the coverage of an insurance policy and provide the option to invest in any

number of qualified investments, such as stock, bonds or mutual funds.

A unit linked insurance plan acts just like a savings vehicle, but also has the benefits of

an insurance contract. When an investor purchases units in a ULIP, he or she

is purchasing units along with a larger number of investors, just like an investor wouldpurchase units in a mutual fund.

ULIPs are exposed to market ups and downs yet it cannot be considered as an

investment product. It is truly an insurance product hence mortality charges and

administration charge are required to be paid. The costs of insurance product have been

brought down yet the cost of ULIP remains higher than mutual funds.

The Guaranteed ULIP or unit linked insurance plans are those where you buy a life

insurance policy that comes clipped to an investment plan. Part of the premium you pay

goes towards buying you protection on your life, and part of the premium goes towards

buying units that invest in equity or debt instruments in the capital markets. These

instruments are exposed to the randomness of the markets and prices can move around.

In other words, the premium amount is divided into two:

The amount deducted for operational charges by the company likeadministration charges, fund management charges etc. And,

The allocated premium which was the let over amount which was available forinvestment.


3/5

What are the different types of Guarantees?

Highest NAV Guarantee: Such ULIPs consider the highest NAV recorded by thededicated fund over a certain number of policy years while calculating the fund

value payable to the insured on maturity.

For eg: A customer buys an 8-year guaranteed ULIP in 2011 and the investment

units are priced at Rs 10 NAV. The price of the underlying equity and debt

instruments is volatile, so the NAV fluctuates wildly from being as high as Rs 21

to as low as Rs 10 a unit. The client will get maturity proceeds at the price of Rs

21, even though the NAV has dropped to Rs 10 at maturity. This is the

guaranteed feature of this product whatever the price at maturity; the

policyholder is guaranteed the highest price during the term of the product. At

maturity, you will receive the higher of the fund value or the guaranteed value of

your units.

Pre-Specified NAV Guarantee: The insurer promises to link the fund value atmaturity to a pre-decided NAV.

For eg: The insurer promises to link the fund value at maturity to a pre-decided

NAV of say Rs 15 or Rs 20.


4/5

Reasons why ULIPs became popular...

Till recently the market trend was showing a boom and promised high NAV which led to

investors seeing an opportunity to earn higher and assured returns. The new set of unit

linked plans that guarantee highest NAV during the policy term gained popularity.

These schemes look attractive since the downside arising from volatility in the market

seems to be capped.

ULIPs were among the favourite investment avenues for retail investors. However, the

equity market crash in 2008 has shaken investors confidence in these products.

Reasons for Why the Future of NAV-Guaranteed ULIPs is

Uncertain...

After the market crash in 2008 the market trend is showing a downturn. The market is

not booming because of which not many opportunities are available to the customer to

earn higher returns. Insurance companies are not allowed to keep any money with them

in the form of liquid cash therefore they have to invest the premium amount available to

them. Therefore, to meet the guaranteed requirements, the insurance companies will

have to invest in fixed income instruments like bonds which offer lower risks and lowerreturns than common stock and similar investment vehicles.

Another reason for worry is the complain of charges on such products being very high.

Also, there are exit barriers i.e the guarantee comes into play only if the insured stays

with the policy until maturity. In the unfortunate scenario where a person dies before

the maturity of the policy, the guaranteed NAV would not be applicable. The beneficiary,

in such a case will get the sum assured by the policy, and some products might also give

the fund value at the time of death.


5/5

Conclusion

Therefore, one must understand that what is assured is the highest NAV attained by the

fund and not the highest index level. ULIPs might be good products for someone who

wants to buy insurance cum investment plan for the long-term. So If Someone is looking

for a ULIP and is worried about market fluctuations and losing the capital, then it might

be worth reviewing these guaranteed ULIP products. In this product one cannot dictate

where to invest the money. That would be the responsibility of the fund manager for he

needs to protect the customer`s money invested. In guaranteed ULIP one may not loose

money but would not also get best return as in case of general non guaranteed ULIP or

diversified Mutual fund.

Therefore, If someone is risk averse then they should buy guaranteed ULIP. Otherwise

they should go for non guaranteed ULIP or diversified Mutual fund with better return in

the long run.

Documents

Synopsis of ULIPs