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ANNUAL REPORT 2007-08

Box Item 1

TRENDS IN LIFE INSURANCE BUSINESS—UNIT LINKED INSURANCE PLANS

It wasn’t too long back when the good old endowment plan was the preferred way to insure oneself against an eventuality and to set aside some savings to meet one’s financial objectives. The traditional endowment policies were investing funds mainly in fixed interest Government securities and other safe investments to ensure the safety of capital. Thus the traditional emphasis was always on security of capital rather than yield. However, with the inflationary trend witnessed all over the world, it was observed that savings through life insurance were becoming unattractive and not meeting the

aspirations of the policyholders.

The policyholder found that the sum assured guaranteed on maturity had really depreciated in real value because of the depreciation in the value of money. The investor was no longer content with the so called security of capital provided under a policy of life insurance and started showing a preference for higher rate of return on his investments as also for capital appreciation. It was, therefore found necessary for the insurance companies to think of a method whereby the expectation of the policyholders could be satisfied. The object was to provide a hedge against the inflation through a contract of insurance. Decline of assured return endowment plans and opening of the insurance sector saw the advent of ULIPs on the domestic insurance horizon. Today, the Indian life insurance market is riding high on the unit linked

insurance plans.

ULIPs and its Features

Unit linked insurance plans (ULIPs) are insurance plans that combine the benefit of investment with insurance. They give the investor an option to put a part of their premium in various investment portfolios and derive the benefits depending upon the performance of the funds chosen by them. ULIPs were launched at an opportune time when stock markets had just taken off. Being market- linked, they were major beneficiaries of the secular rise in stock markets.

ULIPs have gained high acceptance due to the attractive features they offer. These include:

  • 1.

    Flexibility

    • 1.

      Flexibility to choose Sum Assured.

    • 2.

      Flexibility to choose premium amount.

    • 3.

      Option to change level of Premium even after the plan has started (Top up facility).

    • 4.

      Flexibility to change asset allocation by switching between funds.

  • 2.

    Transparency

    • 1.

      Changes in the plan & net amount invested are known to the customer.

    • 2.

      Convenience of tracking one’s investment performance on a daily basis.

  • 3.

    Liquidity

    • 1.

      Option to withdraw money after few years (comfort required in case of exigency).

    • 2.

      Low minimum tenure.

    • 3.

      Partial / Systematic withdrawal allowed

  • 4.

    Fund Options

    • 1.

      A choice of funds (ranging from equity, debt, cash or a combination).

    • 2.

      Option to choose fund mix based on desired asset allocation.

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