The need for life insurance comes from the need to safeguard our family. If you care for your family’s needs you will definitely consider insurance.

Today insurance has become even more important due to the disintegration of the prevalent joint family system, a system in which a number of generations co-existed in harmony, a system in which a sense of financial security was always there as there were more earning members. 

Times have changed and the nuclear family has emerged. Apart from other pitfalls of a nuclear family, a high sense of insecurity is observed in it today besides, the family has shrunk. Needs are increasing with time and fulfillment of these needs is a big question mark. 

How will you be able to satisfy all those needs? Better lifestyle, good education, your long desired house. But again - you just cannot fritter away all your earnings. You need to save a part of it for the future too - a wise decision. 

This is where insurance helps you. 

Factors such as fewer number of earning members, stress, pollution, increased competition, higher ambitions etc are some of the reasons why insurance has gained importance and where insurance plays a successful role. 

Insurance provides a sense of security to the income earner as also to the family. Buying insurance frees the individual from unnecessary financial burden that can otherwise make him spend sleepless nights. The individual has a sense of consolation that he has something to fall back on. 

From the very beginning of your life, to your retirement age insurance can take care of all your needs. Your child needs good education to mould him into a good citizen. After his schooling he need to go for higher studies, to gain a professional edge over the others - a necessity in this age where cut-throat competition is the rule. His career needs have to be fulfilled. 

Insurance is a must also because of the uncertain future adversities of life. Accidents, illnesses, disability etc are facts of life which can be extremely devastating. Other than the hospitalisation, medication bills these may run up it’s the aftermath of the incident, the physical well being of the individual that has to be taken into consideration. Will the individual be in a position to earn as before? A pertinent question. But what if he is not? Disability can be taken care of by insurance. Your family will not have to go through the grind due to your present inability. 

Moreover, retirement, an age when every individual has almost fulfilled his responsibilities and looks forward to relaxing can be painful if not planned properly. Have you considered the increasing inflation and taxes? Will your investment offer you attractive returns under such circumstances? Will it take care of your family after you? An insurance policy will definitely take care of these and a lot more. 

Insurance today has opened up new vistas for every section of society. Even for the village farmer insurance holds a lot of potential. Considering how dependent our agricultural system is on the monsoon, the farmer sees a dim future. The uncertainty of the monsoon too can be taken care of by insurance. Looking at the advantages of an insurance policy a number of farmers have gone in for insurance. Insurance has become a necessity today. It provides timely financial as also rewards with bonuses. 

Life insurance is many different things to many different people. For some, it is a premium to be paid on time. For others it offers liquidity since cash can be borrowed when needed. For the investment-minded, it denotes a constantly growing capital account and numerous other benefits.

Life insurance is nothing but the creation of capital funds on an installment basis. Only here, the results are guaranteed. Life insurance is basically a property that is bought under a contract, accompanied by contractual guarantees that ensure large sums of money at the death of the insured.

The contractual guarantee is the promise to pay, backed by one of the oldest and most stably regulated financial industry operating in the Indian sub-continent today. 


Insurance Buys Time and Money

People like to refer to life insurance as time insurance, the reason being that life insurance proceeds are paid to the insured's beneficiaries in case of death. The money proffered by life insurance helps buy time to adjust to the change of circumstances. Insurance provides large amounts of cash that will keep the lifestyle for the survivors the way it was before the insured's death.

Insurance Offers Peace of Mind

For the person who buys an insurance policy, it offers absolute and complete peace of mind. He or she knows that the decision made by him will provide sound benefits in the future, whether or not the individual may live to see it. The life insurance policy will subsequently prove this in the future if and when funds are needed. This is the guarantee of the insurance contract.

Multiple Applications

The future is uncertain for each and every one. No one knows how long he or she will live. The investment benefit is paid to the insured's beneficiaries after his death or it can be used during the life as well. Life insurance policy owners can turn to the cash value of the policy in case of a financial emergency when all avenues are either blocked or denied. They know that they can avail of loans based on their insurance policies.

Insurance policy owners can use the cash value of their policies to meet their long-term financial needs as well. They may have purposefully invested in insurance to use the cash in the policy for their children's future marriage expenses or higher education fees.

Enduring Elasticity

Since life insurance is flexible enough to serve several needs, the insured can keep several long-term goals in mind once he or she invests in the insurance plan. The cash value of the policy can be allocated towards augmenting the monthly income during the retirement years. Leisure years should be turned into pleasure years. Permanent life insurance is designed on the concepts of long-term flexibility.

Financial Security

The insurance policy offers contractual guarantees to people looking for peace of mind when they buy life insurance. Life insurance offers complete financial security. The purchase of life insurance demonstrates concern for a family's future financial well being.

Regard for Family

The purchase of life insurance clearly displays care and concern for the people the policy owner loves.

Insurance is Safer

No financial institution can do what life insurance does. No industry can back its products with reserves and surplus as sound as those of the insurance industry.

The proof of strength and safety that insurance companies have ensured even under the most adverse of conditions is a matter of pride for the entire insurance industry. For generation after generation, life insurance has been acclaimed as the very benchmark of security against which the other industries are measured.

A well-planned life insurance fund can clear the pending debts of the insured after his or her imminent demise. At times, this can mean the difference between retaining the family house & heirlooms and losing it by default to the creditors.

It can also avoid the possibility of a distress sale whereby an item might have to be sold at a much lower price owing to the urgency of funds.

Insurance can also pay for the cost of higher specialised education. Education in certain specialised fields can cost a staggering amount and owing to the intense competition in the job market today, not many people have the liberty of choice.

The need of education is clear. Parents who want to provide for their ward's education must carefully save money to provide for their future. Scholarships are not easily available either. Life insurance can easily provide for expected educational costs even if the insured dies before his children's education is complete.

At times, after the death of the sole-earning member of a household, the surviving spouse may need a secondary qualification current to the prevailing employment market situation. This additional education is critical since only one parent has to bear the responsibility of the entire family. A life insurance policy can provide the funds required to stabilise the family situation until the pending tension has eased off.

Do you need life insurance?

Every person has an economic value in life, which is connected to the income potential of the individual. So every income provider or producer has to be properly insured against any shortfall that might result from his or her death when some one else will be dependent on that person's income for financial security.

Without proper planning, a sudden financial emergency can force a family to act in a manner that would be inconceivable or unthinkable for most parents. They might have to halt children's education and/or have to sell the house and/ or the car and/ or fall deep into debt.

Life insurance does not replace the intrinsic value of a person's metaphysical self. Nothing and no one can. What it does attempt to provide is solid and tangible security to weather the storm that might befall the individual's family and dependents after his demise.

There are no hard and fast rules, nor any easy formulae to help you decide how much life insurance cover you need. However, there is a fairly straight forward approach which each of us can follow.

Since life insurance is, first and foremost, financial security for your family, you can judge how much money your family will need increase of your premature death and build your insurance portfolio accordingly.

For instance, if you are contributing Rs.3,000 a month for meeting your family’s needs, you must have a life insurance cover of around Rs.3 lakhs. In case of the policy holder’s death the family can invest this amount in some absolutely safe investment avenue such as government bonds, which pay 12% interest. The annual interest of Rs.36,000. Additionally, the insurance portfolio could also include polices specifically earmarked for the education and marriage of your children.

Income replacement is another approach to determine how much insurance one needs. There are ways to figure it; two are discussed below:

1. Seventy-five percent solution: Some observers believe that a family, particularly a young one, needs about 75 percent of the take-home pay the insured would have received until age sixty-five.
   
   
2. Five times solution: A second income replacement formula is to buy insurance equal to five times your annual income less any insurance equal to five times your annual income less any insurance already held. Suppose your annual income is Rs.25,000. Multiply this by 6 and it equals Rs.1,50,000. Now if you have Rs.25,000 in-group life insurance, you need an additional Rs.1,25,000 (Rs.1,50,000 minus Rs.25,000) of life insurance.

You think twice before taking the plunge into buying insurance. Is buying insurance a necessity now? Spending an 'extra' amount as premium at regular intervals where you do not see immediate benefits does not seem a necessity at the moment. May be later.

Well you could be wrong. Buying Insurance cannot be compared with any other form of investment. Insurance gives you a life long benefit and the returns will definitely come but only when you need it the most i.e at the right time. Besides buying insurance early in life is one of the wise decisions you could take. Because the premium you would be paying would be comparatively lower.

Insurance is not about how much more it can offer you when the stock market is at its peak. It may not be an attractive investment option. But weigh the pros and cons and consider how much more it offers at a small price.

Most important of all it provides you with that unique sense of security that no other form of investment provides. It gives you a sense of financial support especially during that time of crisis irrespective of the fluctuations in the stock market. Insurance provides for your career goals right from your childhood years.

If the earning member of the family is no more your child's educational needs will not suffer. In fact his higher education too will be provided for. You need not spend sleepless nights thinking about how to save for your child's marriage. Life Insurance will take care of that typical once-in-a-life-time spending on marriages.

An accident or a disability may be devastating but an insurance policy can be of utmost support for the family during such times too. Besides it provides for additional benefits such as bonuses. You need not worry about your retirement years. The rising prices, taxes, and your lifestyle will be taken care of easily. And you can relax and spend your old age in comfort and peace.

Life insurance today plays a major role in ones life at various stages. Considering the benefits it offers one cannot but give a thought to buying an insurance policy at the earliest.

1. 
   Ask your agent how much he will be earning from the products he is trying to sell you. The more you know about how he earns his livelihood thanks to your patronisation, the less are the chances that you’ll end up buying a useless product. However, do NOT ask for any rebate since it is illegal and will also disentitle you from any subsequent claim in the future.
   
   
2. Make a list of your possessions, which genuinely need insurance. It does not make sense to insure your old antiquated and decrepit television since the premium would probably outweigh the sum assured. Nor does it make sense to insure your credit card since you might pass away while still holding a debit balance. The only beneficiaries from the latter would be the bankers or the lenders. All over the world, credit card losses arising from deceased cardholders are written off. So never mind.

Most importantly, you must remember to cover all critical risks. Can you name the single most seemingly unnecessary but nevertheless the one that possesses invaluable importance type of insurance without thinking twice?

The answer is Disability Insurance.

Most of us insure our lives, effectively insuring that we will be able to provide income for our families in event of our untimely death since we believe that we are doing something reasonable to prevent any undue financial burden from affecting the lives of our loved ones. Yet, most of us never insure a part of us that is much more important.

Not only can a disabled person not work but he or she has to undergo extensive medical regimes while still incurring the daily costs of living. And health insurance is not enough to circumvent the perils associated with permanent disability. A recent study conducted abroad found that although 96 percent of seriously ill people had medical insurance over a third of them lost everything that they owned and maintained owing to their disability.

After all, a disabled person still needs to eat and drink like the rest of normal human society. Given the fact that he or she is disabled now requires extra care from the family or paid professional help that eventually uses up the funds much beyond what they might have earned. People may be put off by the price of disability insurance but the only reason why the policy premiums are higher is because there is a much greater chance of you actually needing the policy

Most of the Indian insurance policies have an in-built disability clause. So the next time any agent tries to sell you a life insurance policy, do inquire more about the disability clauses.

Also, check out the definition of ‘disabled’ in the policy that the agent offers since you must be insured for your chosen occupation. At times, a disability may stop you from working at your current job but still lets you perform other activities. Do verify if there is coverage offered for partial disability since it could be the moot point between over-taxing yourself and worsening your condition and being able to achieve the needful by performing whatever amount of work seems prudent.

1. Also, look for a policy that holds a guarantee and is non-cancelable. Guaranteed policies are policies where the payment stays fixed. Non-cancelable policies stay in effect regardless of whatever that might happen and as long as the premium is paid from time to time.
   
   
2. Finally, the last option to map is to calculate how much actual cover you may be having currently or might need in the times to come. An insurance cover of Rs.1 lakh may have been adequate when you started working and earned Rs.3000 per month. But it sure will be insufficient now that you have risen up in the world and your salary has risen to over Rs.20000/- month.

Keep your interests in mind while choosing the insurance policy and you will never regret it. After all, in the materialistically inclined times where we subsist, self-centredness is the only truly justifiable prerogative in life 

This article, written by Mr.Puneet Nanda – Chief Investment Officer, ICICI Prudential Life Insurance, is being carried as a part of a series of articles by experts.

The introduction of unit-linked insurance plans (ULIPs) has been, possibly, the single-largest innovation in the field of life insurance in the past several decades. In a swoop, it has addressed and overcome several concerns that customers had about life insurance – liquidity, flexibility and transparency and the lack thereof. These benefits are possible because ULIPs are differently structured products and leave many choices to the policyholder. Hence as a customer, you must carefully consider whether you can make such a product work well for you. Broadly speaking, I believe that ULIPs are best suited for those who have a conceptual understanding of financial markets and are genuinely looking for a flexible, long-term savings–cum-insurance solution.

Put simply, ULIPs are structured such that the protection (insurance) element and the savings element can be distinguished and hence managed according to one’s specific needs. Traditionally, the savings element of insurance has been opaque, giving policyholders no control over asset allocation, no transparency, no flexibility to match one’s lifestyle, inexplicable returns and an expensive, complicated exit. ULIPs, by separating the two parts within the same product, and managing them independently, offer insurance buyers what no traditional policy had – continuous information about how their policy is working for them. Often, people wonder whether it’s better to purchase separate financial products for their protection and savings needs. Certainly, this is a viable option for those who have the time and skill to manage several products separately. However, for those who want a convenient, economical, one-stop solution, ULIPs are the best bet.

To understand how a ULIP meets the multiple needs of protection of both health and life; and savings in the same policy, lets take the example of a 35-year-old man with 2 young children. With a premium of, say, Rs 30,000 p.a. he could begin with a sum assured of Rs 5 lakh, for which the life insurer would set aside a nominal amount of the premium to cover this risk. The balance could be invested in a fund of his choice, possibly a balanced or growth option. As the children grow, he might want to increase the level of protection, which could be done by liquidating some of the units to pay for a risk premium. On the other hand, if he gets a significant raise, he could increase the savings element in the policy by topping it up. The chart below shows how one product can meet multiple needs at different life stages.

Integrated Financial Planning

The key to good financial planning is to understand one’s current and future financial goals, risk appetite and portfolio mix. This done, the next step is to allocate assets across different categories and systematically adhere to an investment pattern, so that they work in tandem to meet one’s requirements over the next month, year or decade. Because of their flexibility to adjust to different life stage needs, ULIPs fit in very well with financial planning efforts. Moreover, as a systematic investment plan, ULIPs greatly diminish the hazards of investing in a volatile market, and using the concept of ‘Rupee Cost Averaging’, allow the policyholder to earn real returns over the long term.

When you’re buying a ULIP, make sure you select one that works well for you. The important thing is to look for and understand the nuances, which can considerably alter the way the product works for you. Take the following into consideration.

1. Charges: 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, mortality charges and spreads, and that too, not only in the first year but also through the term of the policy. It might seem confusing at first, but a company provided benefit illustration should help make this clearer. Some companies levy a spread between the buy and sell rates of the units, which can significantly reduce the value of the investment over the long-term. Close examination and questioning of such aspects will reveal the growing power of your investment.
   
   
2. Fund Options and Management: Understand the various fund options available to you and the fund management philosophy and objectives of each of them. Examine the track record of the funds thus far and how they are performing in comparison to benchmarks. Who manages the funds and what experience do they have? Are there adequate controls? Importantly, look at how easily you can access information about your fund’s performance when you need it – are their daily NAVs? Is the portfolio disclosed regularly?
   
   
3. Features: Most ULIPs are rich in features such as allowing one to top-up or switch between funds, increase or decrease the protection level, or premium holidays. Carefully understand the conditions and charges associated with each of these. For instance, is there a minimum amount that must be switched? Is there a charge on the same? Must you go through medical underwriting if you want to increase the sum assured?
   
   
4. Company: Last but not least, insure with a brand you can trust to honour its commitment and service you according to your requirements.

Having bought a ULIP, its important that you monitor it on a regular basis, though not as frequently as you would a stock or mutual fund. Your ULIP is a long-term investment and daily fluctuations in the NAV should not impact you. Check once a quarter to see how your fund is performing, and consider a switch if there is a change in the level of risk you are willing to take or in your personal market view. Monitor your fund; value it in the few weeks or months before a planned withdrawal or top-up, or a change in your life stage or lifestyle. For those who are still finding their feet with their ULIP and its multitude of options, the best thing to do is to consult your advisor.

Life insurance as a form of protection is the single-most important financial product any earning member of a family must have. Having said this, a well-diversified portfolio is one of the first rules of financial planning, and as such one should consider different instruments as the ability to save increases. Certainly ULIPs successfully combine the first and most important need of protection, with savings, and hence are an excellent addition to your portfolio. These can be combined with various other products, after taking into account your risk appetite, financial goals and need for portfolio diversification. Possible investment options range from bank deposits and government small saving schemes to mutual funds, stocks and property.

Buying a ULIP is quite different from buying a traditional insurance product; and sometimes there are cases of people who believe they have been mis-sold a ULIP, the complaint most often being that they were not aware of the risks or the charges. All financial products have a certain amount of risk and charges, be it a mutual fund, property, or even a bank deposit. It would be unrealistic to assume that the features and benefits of a ULIP come at no cost, though the charges are considerably lower than that of a traditional product. In fact, the very reason the product is transparent is because the customer knows the charges and risks. Further, unlike other financial products, all life insurance plans come with a 15-day free look, which allows you to return the policy if you believe it does not meet your needs or expectations. My advice to those who are looking to buy not just a ULIP, but any financial product: It is your right and responsibility to ask for a company printed benefit illustration and brochure, and take some time to read, understand and question it. After all, you are committing your hard-earned money for years to come!

They look attractive but they wilt easily.

Here is why insurance and stocks still don't mix even after the new regulations.

Mutual funds aim to generate returns alone, whereas Unit-linked Life Insurance Products (ULIP) offer an added benefit of insurance. Using this attractive but misleading sales pitch very aggressively, insurance companies have been selling loads of Ulips for the past few years. Some 200-odd Ulip schemes have bloomed in tune with the relentless rise in stock markets and insurance companies are almost entirely depending on Ulips for their growth. Alarmed by this rapid encroachment of their turf, the mutual fund industry started lobbying hard until the Insurance Regulatory and Development Authority (IRDA) woke up and amended the guidelines for Ulips last December. Ulips are now subject to stricter norms. According to the new regulations, Ulips must provide a minimum assurance of 50% of total premium paid over the tenure of the policy, or five times the annualised premium, whichever is higher. Even the existing Ulips must fall in line with this rule on or before June 30th.

What You Need to Know?

Does this change anything? Only some things, and you need to know what these are before insurance agents come knocking to sell Ulips with their newly-formulated sales talk. Here are five things to know if you are buying the new Ulips.

Investment Method:

As far as possible, investing can and should be quantitative. It brings in much-needed and much-lacking discipline (look at our stock screen and fund screen for example. We have substantially reduced the subjectivity involved in stock analysis.) You should always be clear what kind of method you are using to invest and what ought to be your expectations from such method, based on its historical results. Unfortunately, while it is usually possible to figure out the investment methods of a mutual fund, do you know the method insurance companies follow in their investment decisions? Does that method have an edge over the mutual funds ? Insurance companies simply lack the expertise of experienced fund managers. They can't procure the expertise from outside either under the IRDA regulations. No wonder Ulips struggled to match the returns of most diversified mutual funds last year.

Transparency:

In most mixed products like Ulips, investors have little idea information on which part of the money goes towards insurance and what goes towards insurance premia. So, you are neither able to figure out whether you are getting insured at a reasonable price nor are you able to figure out what the return on your investments would be. The guidelines have provided the applicability of net asset value (NAV) in respect of applications for surrender, maturity claim and switch-out. IRDA's new rules have improved transparency. Portfolios will be published and the charges for premium allocation, fund management and mortality have been specified under the new rules.

Dubious Practice & Costs:

Expenses of Ulips are higher than mutual funds. Insurance agents have been getting a very hefty percentage of your premia as commission, which is several times what a mutual fund distributor gets. This is sick. If the commission is 20%, your investment in down by 20% on day one! Investment products are not consumer products and simply cannot be sold at such high commissions. A fund manager would have to be extremely skilled or extremely lucky to come out a winner if he is down by 20% to start with.

Liquidity:

The new regulation forces Ulips to be locked in for three years. We have mixed feelings about this. This is good in theory for two reasons. One, it is desirable that insurance be a long-term contract. A three-year lock-in will remove the sword of redemption over the heads of treasury managers and they will be able to plan their investments better. Two, the riskiness of stocks does get reduced as you increase the tenure of your holding increases. But lock-in also eliminates liquidity. And liquidity is a key feature of good investment options. Smart investors simply cannot allow their investments to be locked in for a long period or for any period at all. Even if you are a long-term investor, why should you forego the option of being able to encash your investment when you want to? By the way, this argument also applies to Equity-linked savings scheme which have three year lock-in. Flexibility: Ulips have none of the flexibility of mutual funds. You can change the amount of your investment and switch from fund to fund. In case of public provident fund, you can borrow against your investment. You cannot borrow against Ulips.

The attraction of Ulips was always superficial, no matter what insurance companies said. Insurance and investments are two very different financial products and the new IRDA rule makes no difference. In trying to add an insurance-like feature, the new rules adds a new drawback - the three-year lock-in clause.

So What Should You Do?

Under the new rules, it is mandatory for all insurance agents and intermediaries to be retrained before they are authorised to sell ULIPs, to ensure appropriate market conduct. When they come, ask your agent all these above questions and finally ask him to do some simple math. What would your protection and return be if instead of buying Ulip, you were to take a pure risk insurance policy and invest the excess premium of Ulip in a diversified equity fund. He is unlikely to come back with a winning answer. Decide on an amount that you would like to insure yourself for and choose a term insurance policy of a long period. As for investments, choose from the mutual funds that pop up on our fund screens.

The New Rules

• IRDA has set a formula linking annual premium to the minimum sum assured in ULIPs. This used to be left to insurance players and policy holders. The sum assured for single premium products would be 125% of a single premium paid. For other products, it should be five times the annualised premium or half of a policy term multiplied by annualised premium, whichever is higher.
  
  
• IRDA says ULIPs must have a guaranteed sum assured, payable on death, and may have a guaranteed maturity value. It also says no loans should be granted under ULIPs.
  
  
• The regulator has specified that the minimum policy term will be five years. It has also banned withdrawals within three years of commencement of a policy. Partial withdrawal will be allowed only after the third anniversary of a policy for all regular premium contracts and single-premium contracts.
  
  
• The insurers will have to clearly mention and display on the policy prospectus/brochure all the expenses in their Ulips.
  
  
• The insurers will also have to publish the portfolio of investments under their various Ulips so that a buyer can make an informed decision.
  
  
• IRDA has also made training mandatory for all insurance agents and intermediaries before they are authorised to sell ULIPs, to ensure appropriate market conduct by industry participants.
  
  
• The new norms take effect immediately. IRDA has said that existing ULIP products must be modified by June 30th.
  
  
• IRDA has suggested that life insurers go in for voluntary rating of ULIP funds in order to have an independent evaluation of their performance.

The role played by insurance advisors or agents (as they have been conventionally referred to) has been put under the scanner in recent times. The biggest contributor for this has been the mis-selling in the ULIPs segment. Conventionally an insurance advisor’s role was limited to helping his client select the right insurance policy, picking up the premium payments and arranging for receipt of the maturity proceeds. However ULIPs require a far greater degree of expertise and participation from the advisor. Sadly, experience suggests that advisors have been found wanting on both counts and more often than not, ULIPs have been sold for the wrong reasons

In this article we discuss some of the wrong premises for selling ULIPs.

1. Ignoring the insured’s risk appetite

Insurance advisors are known to be quite trigger-happy while suggesting ULIPs to insurance seekers and in the process have shown disregard for the latter’s risk profile and need. Often the advisor’s income becomes the key point in recommending a product rather than the client’s need. For example an individual with a low risk appetite whose insurance needs can be covered by a term plan might be sold an ULIP which invests its entire corpus in equities.

Similarly an individual whose investment portfolio comprises of equities and equity-oriented mutual funds could do with a conventional product like a term plan or endowment plan; the same would ensure that his investment and insurance portfolios are diversified across asset classes.

2. Not revealing the expenses

The expense structure for ULIPs tends to be a very complex one and varies across insurers, different offerings i.e. equity plans, debt plans and others. Usually the expenses tend to be higher in the initial years (can range from 20% to 60% of the premium) and taper down during the subsequent period. Higher expenses translate into a lower amount being invested which in turn means a smaller corpus is created during the first few years. Insurance advisors often fail to reveal these facts to ULIP investors resulting in the latter not being aware of his true financial standing.

3. Positioning ULIPs as a short-term avenue

Insurance advisors are known to entice investors by positioning ULIPs as investment avenues for the short-term. This practice is especially prevalent for selling equity plans when attractive returns are promised over short-term horizons. Advisors flaunt the surrender value clause to convince investors of their investment’s liquidity. However investors are almost never informed of facts like liquidating the ULIP investment during the initial years (generally the first 3 years) entails receiving the surrender value at a discount i.e. investors are penalised for prematurely liquidating ULIP.

4. Encouraging non-payment of premiums

The flexibility in premium payments is often used by advisors as a ploy to sell ULIPs. Unlike conventional insurance products wherein non-payments of premiums could result in the policy becoming lapsed; ULIPs continue to be in existence so long as size of the corpus doesn’t fall below the stipulated minimum amount. However the insurance company deducts mortality charges and other mandatory deductions from the investor’s existing corpus. Hence a default in paying premiums results in a loss for the investor albeit it seems like the former is an inconsequential event. Again insurance advisors rarely bother to inform their clients about the flip side of not paying premiums.

Listed above were some of the ‘techniques’ deployed by advisors for peddling ULIPs; however this list is far from exhaustive. So how should investors counter this problem? The solution perhaps lies in the law of ‘caveat emptor’ (let the buyer beware). Investors need to equip themselves with better information and be aware of the investment they are undertaking. Instead of relying only on the advisor, investors can scan through the insurance company’s sales literature, financial websites and newspapers to become well-versed with the investment avenue.

Rest assured, if your investment advisor only paints a rosy picture with all factors pointing in favour of an ULIP investment, he has probably failed to present the true picture!

As old age approaches, security and comfort become the most sought after. Advances in science and technology have thankfully lead to an increase in life span but at the same time there exists a requirement of funds for the individual during his retirement period to carry off a certain standard of living and fulfill the day-to-day essentials of life.

Proper financial planning during an individuals’ productive years can put to rest these issues but sadly, such savings habits in every individual is hard to come by. By foreseeing the growing needs of the future and saving an appropriate amount well in advance can help the individual tide over the financial problems that may arise in his old age.

Retirement planning has not been taken seriously in our country. One of the reasons for the pension market not being very attractive may be the not -so -attractive financial options that were available earlier.

Professionalism:

Today, things have changed for the better. More professionalism is expected to come in with the entry of foreign companies in insurance.

Multiple options:

These insurance companies will also bring in a variety of financial products to choose from. Besides the insurance plans will be designed in a manner to suit every individual, be it the urban or the rural customer.

Flexibility in Plans:

The individual need not compromise anymore by merely accepting whatever was handed over to him whether it suited his needs or no. The customer is king today and can purchase just the right product according to his financial needs. In this changed environment, he can have tailor made products too. Insurance companies may come out with policies combining healthcare and pension as also taking into consideration the rising inflation. Such combinations will find a number of beneficiaries.

Improved Service:

An important area that will go through a total revamp is service. The insurance agents will have to brush up their skills in order to gear up for the competitive market. And you as a customer can expect prompt service unlike yesteryears.

Multiple information channels:

Informed decision-making is another of those upcoming areas. The customer can take an informed decision today. Insurance agents will not be the only source of information. With dime a dozen channels of information mushrooming each day the customer is bombarded with information explosion. The internet contains a wealth of information and each and every customer can now look forward to receiving every minute detail of the product he plans to purchase at his finger tips.

Buying an insurance policy is a long-term investment and it would only do well if you consider all those benefits you will receive in comparison with your financial outflow. With an increased number of financial options available and an equal number of sources for information a proper analysis could help you gain much more than you actually expected.

Unit Linked Insurance Plans (ULIPs) were seen as a “wonder product” that simultaneously fulfilled an individual’s needs for investment and insurance. However the recent downswings in the markets have forced investors to do a rethink. Very often it was poor selection that was responsible for the investors’ woes. We present a 5-step strategy for investing in ULIPs.

1. Understand the concept of ULIPs

Try to do as much homework as possible before investing in an ULIP. This way you will know what you are getting into and won’t be faced with unpleasant surprises at a later stage. Our experience suggests that many a time people do not realise what they are getting into (in fact we have been approached by several people who wanted to cancel the ULIPs they had been coerced into taking by unscrupulous agents). Gather information on ULIPs, the various options available and understand their working. Read the literature available on ULIPs on the websites and brochures circulated by insurance companies.

2. Focus on your requirement and risk profile

Identify a plan that is best suited for you (in terms of allocation of money between equity and debt instruments). Your risk appetite should play an important role in the plan you choose. So if you have a high risk appetite, go in for a more aggressive investment option and vice-a-versa. Opting for a plan that is lop-sided in favour of equities when you are a risk-averse individual might spell disaster for you (this is true in most cases currently).

3. Compare ULIPs of different insurance companies

Compare products of the leading insurance companies. Enquire about the premium payments as ULIPs work on minimum premium basis as opposed to sum assured in the case of conventional insurance policies. Check the fund’s performance over the past six months. Find out how the debt and equity schemes are performing and how steady the performance has been. Enquire about the charges you will have to pay. In ULIPs the costs involved are a big deciding factor.

Ask about the top-up facility offered by ULIPs i.e. additional lump sum investments you can make to increase the savings portion of your policy. The companies give you the option to increase the premium amounts, thereby providing you with the opportunity to gainfully utilise surplus funds at your disposal.

Enquire about the number of times you can make free switches (i.e. change the asset allocation of the money in your ULIP account) from one investment plan to another. Some insurance companies offer you free switches for a 2-Yr period while others do so only for 1 year.

4. Go for an experienced insurance advisor

Select an advisor who is not only professional and informed, but also independent and unbiased. Also enquire whether he has serviced clients like you. When your agent recommends a ULIP of X company ask him a few product-related questions to test him and also ask him why the other products should not be considered.

Insurance advice at all times must be unbiased and independent and your agent must be willing to inform you about the pros and cons of buying a particular plan. His job should not just begin by filling the form and end after he deposits the cheque and gives you the receipt. He should keep a track of your plan and inform you on a regular basis. The key is to go for an advisor who will offer you value-added products.

5. Does your ULIP offer a minimum guarantee?

In market linked product if your investment’s downside can be protected, it would be a huge advantage. Find out if the ULIP you are considering offers a minimum guarantee and what costs have to be borne for the same. This will enable you to make an informed choice.

Ask any individual who has purchased a life insurance policy in the past year or so and chances are high that the policy will be a unit linked insurance plan (ULIP). ULIPs have been selling like proverbial ‘hot cakes’ in the recent past and they are likely to continue to outsell their plain vanilla counterparts going ahead. So what is it that makes ULIPs so attractive to the individual? Here, we have explored some reasons, which have made ULIPs so irresistible.

1. Insurance cover plus savings

To begin with, ULIPs serve the purpose of providing life insurance combined with savings at market-linked returns. To that extent, ULIPs can be termed as a two-in-one plan in terms of giving an individual the twin benefits of life insurance plus savings. This is unlike comparable instruments like a mutual fund for instance, which does not offer a life cover.

2. Multiple investment options

ULIPs offer a lot more variety than traditional life insurance plans. So there are multiple options at the individual’s disposal. ULIPs generally come in three broad variants:

• Aggressive ULIPs (which can typically invest 80%-100% in equities, balance in debt)
  
  
• Balanced ULIPs (can typically invest around 40%-60% in equities)
  
  
• Conservative ULIPs (can typically invest upto 20% in equities)
  
  Although this is how the ULIP options are generally designed, the exact debt/equity allocations may vary across insurance companies. Individuals can opt for a variant based on their risk profile. For example, a 30-Yr old individual looking at buying a life insurance plan that also helps him build a corpus for retirement can consider investing in the Balanced or even the Aggressive ULIP. Likewise, a risk-averse individual who is not comfortable with a high equity allocation can opt for the Conservative ULIP.

3. Flexibility

Individuals may well ask how ULIPs are any different from mutual funds. After all, mutual funds also offer hybrid/balanced schemes that allow an individual to select a plan according to his risk profile. The difference lies in the flexibility that ULIPs afford the individual. Individuals can switch between the ULIP variants outlined above to capitalise on investment opportunities across the equity and debt markets. Some insurance companies allow a certain number of ‘free’ switches. This is an important feature that allows the informed individual/investor to benefit from the vagaries of stock/debt markets. For instance, when stock markets were on the brink of 7,000 points (Sensex), the informed investor could have shifted his assets from an Aggressive ULIP to a low-risk Conservative ULIP.

Switching also helps individuals on another front. They can shift from an Aggressive to a Balanced or a Conservative ULIP as they approach retirement. This is a reflection of the change in their risk appetite as they grow older.

4. Works like an SIP

Rupee cost-averaging is another important benefit associated with ULIPs. Individuals have probably already heard of the Systematic Investment Plan (SIP) which is increasingly being advocated by the mutual fund industry. With an SIP, individuals invest their monies regularly over time intervals of a month/quarter and don’t have to worry about ‘timing’ the stock markets. These are not benefits peculiar to mutual funds. Not many realise that ULIPs also tend to do the same, albeit on a quarterly/half-yearly basis. As a matter of fact, even the annual premium in a ULIP works on the rupee cost-averaging principle. An added benefit with ULIPs is that individuals can also invest a one-time amount in the ULIP either to benefit from opportunities in the stock markets or if they have an investible surplus in a particular year that they wish to put aside for the future.

Please go through this list. It is designed as the starting point to help you make the right choice while purchasing a life insurance policy. Answer the questions with your policy in perspective and eliminate any conflicting doubts that might arise.

• Is your life insurance so arranged that the proceeds stand exempted from the claims of creditors, in case you have any? Will it stand against any judgment passed by a court of law?
  
  
• If and when desired, will the cash values of the insurance policy result in the largest possible income for yourself?
  
  
• In case, you have named your children as beneficiaries, do all of them participate? In case your children are minors, can your expenses be correctly and swiftly liquidated?
  
  
• In case of an unexpected emergency, will the settlement provision prove sufficiently flexible? Or will your benefactor’s interests be jeopardised?
  
  
• Are all beneficiary designations correct and complete? Do your beneficiaries need to be altered due to new family circumstances?
  
  
• Is there a chance of your current life insurance policy being subject to probationary delays or unnecessary additional expenses?
  
  
• Do your grandchildren, if any obtain equal shares in your estate?
  
  
• Are the beneficiary clauses formulated in a way that they perform your last wishes to their fullest, with no violation whatsoever?
  
  
• Will your spouse be guaranteed the most favourable income from the insurance proceeds?
  
  
• Is the extent to which your life insurance policy providing income absolutely clear in your mind?
  
  
• Can your spouse outlive the income provided?
  
  
• Is your insurance policy arranged in a manner to create an income for your child’s educational and marriage expenditure?
  
  
• Shouldn’t you provide a cash fund for your spouse’s last expenses?
  
  
• Have you taken full advantage of the best possible exemptions from tax?
  
  
• Is the insurance policy so arranged that your spouse will be provided with similar income advantages as yourself, if he or she outlives you?
  
  
• Is there a chance of saving more if you opt to change the frequency of the payment of premium?
  
  
• Is there a non-forfeiture option provided? Would a change in the non-forfeiture option be beneficial?
  
  
• Would the proceeds of your life insurance policy be subject to double taxation if you predecease your spouse?
  
  
• Is the plan of distribution of your life insurance coordinated with your general property? 
  
  
• Do you now own a substandard policy? If so, do the conditions that caused the extra rating still exist?
  
  
• Are there any "gaps" left in your "earning years"? For instance, your agent might go on selling you short-term policies, all of them maturing between 50-55 years of age. Eventually you will be resigned to a zero-insurance status when you actually need it the most