With LIC launching two ULIP schemes in recent times, the flavor of the season seems to be ULIP. Agents are by and large not too keen to sell ULIPs. Having burnt their fingers earlier, this is understandable. However there is no need to put a blanket ban on selling ULIPs. ULIPs are complicated products. Selling ULIP requires basic knowledge of the financial markets and the basics of financial planning. I will be writing a series of articles to explain ULIPs as a financial product and also explain how and to whom ULIPs can be and should be sold. It is important to note that we should not deviate from ethical selling. Continue reading after the two colored boxes below ……

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Attention all Managers/SBAs/Development Officers/CLIAs train your agents this week on the subject of this article.

We begin by understanding the difference between traditional endowment and ULIPs. Since agents understand traditional better, this is a useful starting point.

­­­­­­­­­­­­­­­­­­Mortality Charge: In conventional insurance the mortality charges are, in most cases, based on the level premium principle. That is the mortality charges remain the same throughout the policy term. In ULIPs by and large mortality charges are charged on the principle of increasing premium. That is to say the mortality charge increases along with the age of policyholder.

Payment of Mortality Charge: In conventional insurance the mortality charge is paid by the policy holder as per the payment mode chosen: monthly, quarterly, half-yearly or annual. In ULIPs the mortality charges are deducted every month from the policyholder’s fund.

Investment Component: In conventional insurance, all plans or products do not carry an investment component in the premium loading. Only those plans that are participating (with profits) or those plans that have a return of premium carry an investment component. In ULIPs a part of the premium is towards mortality charges and expenses and the other part is investment. Since the main purpose of ULIPs is investment, a much higher proportion of the premium is invested as compared to conventional plans.

Investment of premium: In conventional insurance investments are mostly made in government securities, infrastructure and other avenues that are generally considered to be safe, that have lower investment risks. This is as per the investment norms laid down by IRDA. In ULIPs investments are made mostly in market securities (especially equity and debt markets) that carry a higher risk with higher expected returns. The policy holder can choose from a range of investment options stretching from very risky to low risk.

IRDA Control over Investments: In conventional insurance there are specific guidelines laid down by IRDA directing the investment of policyholder’s money into safe and secure avenues. In ULIPs there are no much guidelines. Companies are free to design their own investment strategy and seek approval of the same from IRDA. In granting this approval, safety and security of policyholder’s money (as in the case of conventional insurance) is not one of the considerations that IRDA takes into account.

Risk Cover: In conventional insurance the risk cover is guaranteed in the nature of sum assured chosen by the policyholder, both as death benefit and as maturity benefit. In ULIPs (after IRDA issued guidelines in this respect) the sum assured is guaranteed only on death and not as maturity benefit. The maturity benefit is the fund value stated in terms of NAV at the time of maturity. Under certain conditions (such as partial withdrawal within 2 policy years prior to death), the death benefit also stands reduced.

Withdrawals: In a conventional life insurance policy, withdrawals can be made as per the surrender value tables (for policies with a maturity benefit). However for a ULIP withdrawals cannot be made within the first five policy years and subsequently either a partial or complete withdrawal is allowed to the extent of the fund value as existing at the time of withdrawal.

Transfer of Risk: In conventional insurance the risk of investments (the possibility of low earnings or loss on investments) is borne by the life insurance company. The sum assured is guaranteed to the policy holder. Whereas in ULIPs the risk of investments is borne by the policyholder. In case the investments result in a loss, the life insurance company will not contribute to the fund to make up the loss of the policyholder. So potentially the policyholder can stand to gain a lot of money or lose all of it.

Riskiness of Investments: In conventional insurance the risks of investment are low. This is because the bulk of investments are made in treasury bills, AAA rated companies, profit making PSUs, and in sectors such as electricity, roads, irrigation, etc. All such investments carry lower risks to the investor. In ULIPs investments are made in higher risk investments. Except for money market fund or bond fund (a fund that invests in mostly in treasury bills and other money market instruments), most funds will carry medium to high risk, since the money is invested in shares and debentures. The policyholder in a ULIP bears this higher risk.

Possibility of Loss: There is virtually no risk of a financial loss in conventional insurance. That is to say there is a very high probability (almost a certainty) that the sum assured (plus accrued bonuses) will be received by the policyholder on maturity, or by his or her nominee on death. In ULIPs there is a very high possibility of loss. Not only is the maturity benefit not guaranteed, there is a probability that the policyholder will not even receive back the premium amounts he has paid.

Possibility of Returns: In conventional insurance there is very little possibility of high returns, since investments are made in low return and low risk securities – mostly in fixed income securities. In ULIPs there is a possibility of high returns – since investments are also made in shares and other market securities.

Choice of investment avenues: In conventional insurance the policyholder does not have a choice to direct his investments to a lower risk or a higher risk investment. This is decided by law and followed by the company. In ULIP policyholders are usually given 4 choices for directing their investments. Every ULIP will have an equity fund, a debt fund, a balanced fund and a bond fund. This gives an opportunity to the policyholder to decide his investments as per his desired risk exposures or his willingness to take risks, because each fund represents a different risk-return solution..

Freedom to Change his Choice: Since the policyholder does not have a choice in deciding his investments in conventional insurance in the first place, the question of exercising such a choice during the term of the policy does not arise. In conventional insurance the policyholder cannot decide where his or her money will get invested. It is determined by law. In ULIPs the policyholder has the choice to move from a lower risk to a higher risk or vice-versa during the policy term. Most ULIPs have free switching clauses to effect such changes.

Type of Insurance Cover: In conventional insurance a customer can choose the type of insurance contract. He can choose a term policy or an endowment policy or a whole life or money back plan. In ULIP, the insurance cover is a term cover.

Ownership: In conventional insurance the policyholder owns the policy document. He has no other claim of ownership. In ULIPs the policyholder owns the policy document and the units in his or her name.

Look out for more articles in the immediate future on ULIPs and how to sell them. Follow ethically correct practices to earn your customer’s trust and confidence and to establish yourself as a successful agent. For a life insurance agent to be successful he or she should …

Sell Risks Not Returns

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