Unit-Linked Insurance Policies in the Indian market- A Consumer Perspective

Rajagopalan, R (2005) Unit-Linked Insurance Policies in the Indian market- A Consumer Perspective. TAPMI, Manipal.


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In recent years, Unit-linked insurance products (ULIPs) have become very popular in the Indian markets. ULIP premiums have come to dominate the new premium incomes of private sector insurers and even that of the public sector giant Life Insurance Corporation of India. ULIPs are essentially savings vehicles with a very small component of life insurance. The policyholder retains the flexibility of investing his savings and switching them amongst the various styles of mutual funds operated by the insurance company. Unlike in traditional insurance products - term, whole-life or endowment insurance- the policyholder bears all the investment risks in the hope of higher expected returns on his savings. As such, they compete mainly with plain mutual funds. Plain mutual funds charge for their services in two forms: entry loads when new units are bought or exit loads when units are encashed; and a percentage of fund value to meet their expenses. In contrast, the charging structure under ULIPs is very complex and opaque. It is not very easy for a policyholder to assess the cumulative impact of these charges on his net fund value. Because of their relatively high initial expenses, ULIPs also levy very high surrender penalties if the policyholders want to withdraw in the initial years. Therefore, in the interest of transparency, the Insurance Regulatory and Development Authority of India (IRDA) requires insurers to give illustrated fund values and surrender values for their ULIPs. These illustrations have to be given at two different assumed rates of annual returns, currently 6% and 10% of fund value, irrespective of the nature of the unit fund involved. Using such illustrated values provided by the respective insurers, this paper analyses six different ULIPs to assess whether ULIPs offer a good savings vehicle. We use an alternative of buying a term insurance policy and investing the balance in a plain mutual fund earning the same return as the units under the ULIPs, i.e., 6% and 10%. In four out of the six ULIPs considered, we find that buying term insurance and investing in a plain mutual fund is a better option in terms of both death benefits and survival/ maturity benefits. In addition, this alternative offers more flexibility to the investors in future contributions. It is also less vulnerable to changes in tax treatment.

Item Type: TAPMI Working Papers
Subjects: General Management
Divisions: General Management and Enterpreneurship
Depositing User: Ms. Vanitha K
Date Deposited: 16 Nov 2018 09:41
Last Modified: 20 Nov 2018 09:04
URI: http://tapmi.informaticsglobal.com/id/eprint/343

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