Health Insurance Guide

UNIT-linked insurance plan which is popularly known as 'ULIP' is the flavour of the season. The conventional Insurance policies have a fixed relationship between the premium and the sum assured. Whereas ULIP allows the policyholder to choose his own sum assured within certain limits, for any given premium. The policyholder may then have the right to adjust his sum assured up or down, again within certain limits according to his circumstances.

Features of a Unit Linked Insurance Plan
Unit linked insurance plan (ULIP) is life insurance solution that provides for the protection and flexibility in investment. The investment is denoted as units and is represented by the value that it has attained called as Net Asset Value (NAV). The policy value at any time varies according to the value of the underlying assets at the time.

ULIP provides multiple benefits to the consumer. The benefits include:
" Life protection
" Investment and Savings
" Flexibility - in Sum assured, to increase the sum assured, investment, etc
" Adjustable Life Cover
" Investment Options
" Transparency
" Options to take additional cover against - Death due to accident, Disability, Critical illness etc
" Liquidity
" Tax planning

Unit linked Insurance plan provides insurance protection against the risk of death combined with a provision for long term investment in the equity market, which are structured differently. ULIPS are basically an investment type of plan, wherein the Life assured decides the quantum of contribution which he can set aside on a regular basis towards premium. He also has the flexibility to decide the risk cover, i.e the Sum Assured for his policy.

Based on the Sum assured and the contribution for the policy, insurer deducts charges towards life insurance mortality charges i.e, risk premium, administration charges and fund management charges. The rest of the premium is invested in funds that invest money in stocks or bonds.

The policyholder's share in the fund is represented by the number of units held in his account. The value of the unit is determined by the total value of all the investments made by the fund divided by the total number of units.

At any point of time i.e., maturity or surrender, the cash value will be equivalent to the number of units held by the insured multiplied by the unit price. In case of death claim, it will be unit value, plus the sum assured if any under the policy.

Pricing of Units

Method of pricing the units depend on whether the company is purchasing or selling assets (stocks). While purchasing of assets the units will be priced on Appropriation basis and while selling of assets the Expropriation basis of pricing will be applied.

Different method of pricing is adopted to safeguard the existing policyholders from the inflow and outflow of funds due to purchase/sale of units.

Appropriation Price
This will be applied when the fund is expanding. In this method of pricing, the unit price is calculated as follows:

Unit Price = (Market value of fund + expenses for purchase of assets + current assets + income - charges - current liabilities) / Number of units in the fund.

Expropriation Price
Expropriation Price will be applied when the fund is contracting. In this method of pricing, the unit price is calculated as follows:

Unit Price = (Market value of fund - expenses for sale of assets + current assets + income - charges - current liabilities) / Number of units in the fund. The bid/offer spread

There are two different prices for a stock. One is a Bid price and the other is Offer price. Bid price is the price at which you can sell the shares and the offer price is the price at which you can buy them. The first is always lower than the second, and the difference between them is called the spread.

Insurance companies offer a range of funds like Growth Fund (Equity Fund), Balanced Fund, Secured Fund, Income Fund etc. The insured can direct the company to invest his contribution in the fund of his choice.

Balanced Fund

This type of fund buys a combination of common stock, preferred stock, bonds and short-term bonds, to provide both for income and capital appreciation while avoiding excessive risk. Such diversified holdings ensure that these funds will manage downturns in the stock market without too much of a loss.

Growth fund

This fund aims to achieve capital appreciation by investing in growth stocks. They focus on companies that are experiencing significant earnings or revenue growth, rather than companies that pay out dividends. The hope is that these rapidly growing companies will continue to increase in value, thereby allowing the fund to reap the benefits of large capital gains. In general, growth funds are more volatile than other types of funds, rising more than other funds in bull markets and falling more in bear. Income fund

This fund emphasizes on current income in the form of dividends or payments from bonds, rather than emphasizing growth. Income funds are considered to be conservative investments, since they avoid growth of stocks.

How is it different from conventional insurance plan?

Unit-linked insurance plans are distinct from the more familiar 'with profits' policies sold for decades by the Life Insurance Corporation. In conventional insurance plans, the sum assured is decided by both the insured and insurer jointly. Insured will opt for a sum assured based on his family's requirements and the insured will agree to that sum assured based on the insured's repaying capacity. 'With profits' policies are called so because investment returns (profits) are distributed to policyholders in the form of a bonus, which is declared on a yearly basis based on the Company's performance in a year.

In 'with profits' policies, the insurance company credits the premium to a common pool called the 'life fund,' after setting aside funds for the risk premium on life insurance and management expenses.

Every year, the insurer calculates how much has to be paid to settle death and maturity claims. The surplus in the life fund left after meeting these liabilities is credited to policyholders' accounts in the form of a bonus.

In both 'with profits' policies as well as unit-linked policies, a large part of the first year premium goes towards paying the agents' commissions and other expenses of the management.

But Unit linked polices has an edge over other forms of insurance because -
" Liquidity is high,
" Return on Investment is high,
" investor knows exactly what is happening to his money,
" investor can choose the assets in to which his funds are to be invested
" investor gets the same returns that the fund earns, he also bears the investment risk.
" transparency makes the product more competitive.

ULIPs claim to give an investor the best of both worlds - high returns and risk cover.

Top Ups

Insurance companies allow an insured to make lump-sum investments in excess of the regular premiums. They are called top-ups and are charged at a much lower rate - usually one to two per cent. The expenses incurred on a top-up including agent commissions are much lower compared to the regular premiums.

Some insurers, like Aviva, also give credit on top-ups. For instance, if you pay in Rs.100 as a top up, the actual allocation to units will be for Rs.101 instead of Rs.100. If we keep the regular premiums to the minimum and increase the top ups, we can save up on charges, enhancing returns in the long run.

Switching

Most of the Insurers provide switching facility. Switching refers to sweeping of funds either partially or fully from one fund to another. This is subject to certain charges and completion of minimum period from inception of policy. Normally insurers maintain multiple funds consisting of varied portfolios and the policy holder is free to choose his fund type.

After sometime if the assured wants to move his fund to another fund owing to the increased returns, security of funds etc. he is free to switch his funds.

Conclusion

In the changing scenario of economic development where the globe has shrunk to a village, everyone has to seek the ways and means of exploiting the opportunity to one's best ability. Insurance companies give this opportunity to small investors who have money but lack intelligence in the field of investment in the capital market. Unit linked products help small investors also to play a role in the share market with minimum risk and maximum profit.