“A Study of awareness of Financial Planning among

customers in context of investment in Traditional Market and

Insurance”
At

HDFC STANDARD LIFE INSURANCE COMPANY

CONNAUGHT PLACE NEW DELHI

Submitted towards the partial fulfillment for award of degree of Master of

Business Administration (M.B.A)
Under the guidance of:

Submitted by : Savita Gupta

MBA IV SEM., GJU,HISAR

Roll No. : 07061110040

GURU JAMBESHWER UNIVERSITY OF SCIENCE & TECHNOLOGY,HISAR

1
 TABLE OF CONTENTS

TOPIC PAGE NO.

1. INTRODUCTION 1

2. OBJECTIVES OF THE STUDY 2

3. METHODOLOGY 3

4. HISTORY OF INSURANCE 4

5. INDIAN INSURANCE INDUSTRY 6

6. MARKET SHARE 15

7. COMPANY’S PROFILE 18

8. CONCEPTUAL FRAMEWORK 23

9. FINANCIAL PLANNING PROCESS 32

10. TRADITIONAL MARKET VS INSURANCE 37

11. INVESTMENT IN MUTUAL FUND VS ULIPS 41

12. CONCLUSION 50

13. RECOMMENDATIONS 52

14. CHALLENGES AND LIMITATIONS 53

15. BIBLIOGRAPHY 54

2
 INTRODUCTION

Till few years ago one could easily see the monopoly observed by the Life Insurance Corporation

of India (L.I.C.) in the insurance sector in India. As the result of which Insurance was considered

merely as tool for protection against the financial losses that may arise due the occurrence of a

certain miss happening in the family (i.e. death of the bread earner of the family.

But with the formation of I.R.D.A. (Insurance Regulatory and Development Authority) and

emergence of the private players in the market, insurance has become a vital tool for Financial

Planning. Not only these private players have offered a very stiff competition to the L.I.C. but

also they have improved the quality of the services offered by these companies.

But the question which is still unanswered is about the awareness of financial planning. Are we

really aware of emergence of insurance as the tool of financial planning? How will these private

companies differentiate there products from traditional investment instruments like Mutual and

Equity shares? What is the future of these products?

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 OBJECTIVES OF THE STUDY

The Objective of the study is to determine the extent of awareness of financial planning in India

and the understanding of insurance among the masses. The Scope of the study involves

 To understand the concept of financial planning.

 To advice people to invest in the Unit Linked Products of HDFC Standard Life Insurance

Co.

 To compare traditional investment instruments (Mutual Funds etc. ) with investment in

Insurance.

 To analyze various Unit Linked Plans offered by HDFC Standard Life Insurance Company.

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 METHODOLOGY USED

The method for collecting information will be an extensive one. Researcher conduct market

surveys and collect information by the use of following source.

 Door to door free financial consultancy service .

 Internet sources

 News Papers

 Magazines

The information has been collected from both primary and secondary sources.

In case of primary sources the information was retrieved directly from the concerned people

and the authorities.

Door to door free financial consultancy service will be done with the view of collecting

information and generating leads and prospects for the products of HDFC SLIC.

Since Secondary data information published by others and companies & were easily

available and not much effort was required in obtaining that information

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 HISTORY OF INSURANCE

The history of life insurance in India dates back to 1818 when it was conceived as a

means to provide for English Widows. Interestingly in those days a higher premium was

charged for Indian lives than the non-Indian lives as Indian lives were considered more

riskier for coverage.

The Bombay Mutual Life Insurance Society started its business in 1870. It was the first

company to charge same premium for both Indian and non-Indian lives. The Oriental

Assurance Company was established in 1880. The General insurance business in India,

on the other hand, can trace its roots to the Triton (Tital) Insurance Company Limited, the

first general insurance company established in the year 1850 in Calcutta by the British.

Till the end of nineteenth century insurance business was almost entirely in the hands of

overseas companies.

Insurance regulation formally began in India with the passing of the Life Insurance

Companies Act of 1912 and the provident fund Act of 1912. Several frauds during 20's

and 30's sullied insurance business in India. By 1938 there were 176 insurance

companies. The first comprehensive legislation was introduced with the Insurance Act of

1938 that provided strict State Control over insurance business. The insurance business

grew at a faster pace after independence. Indian companies strengthened their hold on

this business but despite the growth that was witnessed, insurance remained an urban

phenomenon.

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The Government of India in 1956, brought together over 240 private life insurers and

provident societies under one nationalized monopoly corporation and Life Insurance

Corporation (LIC) was born. Nationalization was justified on the grounds that it would

create much needed funds for rapid industrialization. This was in conformity with the

Government's chosen path of State lead planning and development.

The (non-life) insurance business continued to thrive with the private sector till 1972.

Their operations were restricted to organized trade and industry in large cities. The

general insurance industry was nationalized in 1972. With this, nearly 107 insurers were

amalgamated and grouped into four companies- National Insurance Company, New India

Assurance Company, Oriental Insurance Company and United India Insurance Company.

These were subsidiaries of the General Insurance Company (GIC).

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 INDIAN INSURANCE INDUSTRY

Insurers

Prior to 23rd Oct 2000 Insurance industry in India, comprised mainly two players: the state

insurers:

Life Insurers:

Life Insurance Corporation of India (LIC)

General Insurers:

General Insurance Corporation of India (GIC) (with effect from Dec'2000, a National Reinsurer)

GIC had four subsidiary companies, namely (with effect from Dec'2000, these subsidiaries have

been de-linked from the parent company and made as independent insurance companies.

 The Oriental Insurance Company Limited

 The New India Assurance Company Limited,

 National Insurance Company Limited

 United India Insurance Company Limited.

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Private Life Insurers:

S.No. Registration Date of Reg. Name of the Company

Number

1 101 23.10.2000 HDFC Standard Life Insurance Company Ltd.

2 104 15.11.2000 Max New York Life Insurance Co. Ltd.

3 105 24.11.2000 ICICI Prudential Life Insurance Company Ltd.

4 107 10.01.2001 Kotak Mahindra Old Mutual Life Insurance Limited

5 109 31.01.2001 Birla Sun Life Insurance Company Ltd.

6 110 12.02.2001 Tata AIG Life Insurance Company Ltd.

7 111 30.03.2001 SBI Life Insurance Company Limited .

8 114 02.08.2001 ING Vysya Life Insurance Company Private Limited

9 116 03.08.2001 Bajaj Allianz Life Insurance Company Limited

10 117 06.08.2001 Metlife India Insurance Company Pvt. Ltd.

11 121 03.01.2002 AMP Sanmar Life Insurance Company

Limited.*

12 122 14.05.2002 Aviva Life Insurance Co. India Pvt. Ltd.

13 127 06.02.2004 Sahara India Insurance Company Ltd.

14 128 17.11.2005 Shriram Life Insurance Company Ltd.

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 INTRODUCTION OF VARIOUS INSURANCE COMPANIES

HDFC Standard Life Insurance Company Ltd. is one of India’s leading private life insurance

companies, which offers a range of individual and group insurance solutions. It is a joint

venture between Housing Development Finance Corporation Limited (HDFC Ltd.), India’s

leading housing finance institution and one of the subsidiaries of Standard Life plc, leading

providers of financial services in the United Kingdom. Both the promoters are well known

for their ethical dealings and financial strength and are thus committed to being a long-term

player in the life insurance industry – all important factors to consider when choosing your

insurer

Max New York Life Insurance Co. Ltd.

Max India:

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Max India Limited is a multi-business corporation that has business interests in telecom

services, bulk pharmaceuticals, electronic components and specialty products. It is also the

service oriented businesses of healthcare, life insurance and information technology.

New York Life:

New York Life has grown to be a fortune 100 company and an expert in life insurance. It was

first insurance company to offer casf dividends to policy owners. In 1894, New York Life

pioneered the then unheard-of concept of insuring women at the same rate as men.

Thereafter, it continued to introduce a series of firsts – a disability benefit clause in 1920,

unemployment insurance in 1992, and complete customer care on the Web in 1998.Today

New York Life has over US $ 138 billion in assets under management and over 30,000 agents

and employees worldwide. The October 2000 Fortune Survey named New York Life amongst

the top three most admired life and health insurance companies worldwide. With over 3

million policy holders, New York Life is a leading provider of insurance in a host of countries

world wide

ICICI Prudential Life Insurance Company is a joint venture between ICICI Bank, a premier

financial powerhouse and Prudential plc, a leading international financial services group

headquartered in the United Kingdom. ICICI Prudential was amongst the first private sector

11
insurance companies to begin operations in December 2000 after receiving approval from

Insurance Regulatory Development

Authority.ICICI Prudential's equity base stands at Rs. 11.85 billion with ICICI Bank and

Prudential plc holding 74% and 26% stake respectively.

The MetLife companies are a leader in group benefits that serve 88 of the top one hundred

FORTUNE 500®* companies, and provide benefits to 37 million employees and family

members through its plans sponsors in the U.S. The MetLife companies are also ranked #1 in

group life and #1 in commercial dental in the U.S.

In India, MetLife was incorporated in 2001, and aims to differentiate itself through

customized need based selling, simple and innovative products, and technology-backed

service experience, to tread its path to build financial freedom for everyone. The partners of

MetLife are: KARVY, GEOJIT SECURITIES, WAY2WEALTH, MINI MUTHOOTHU.

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ING Vysya Life Insurance Company Private Limited (the Company) entered the private life

insurance industry in India in September 2001.product It also distributes products in close

cooperation with the ING Vysya Bank network. The Company has a customer base of over

3,00,000 & is headquartered at Bangalore.

Equity partners: ING Group, Exide Industries Limited, Gujarat, Ambuja Cements

Limited, Enam Group.

Bajaj

Allianz Life Insurance Co. Ltd. is a joint venture between two leading conglomerates- Allianz

AG, one of the world's largest insurance companies, and Bajaj Auto, one of the biggest 2 and

3 wheeler manufacturers in the world.

Allianz Group is one of the world's leading insurers and financial services providers.

Founded in 1890 in Berlin, Allianz is now present in over 70 countries with almost 174,000

employees. At the top of the international group is the holding company, Allianz AG, with its

head office in Munich. Allianz Group provides its more than 60 million customers worldwide

with a comprehensive range of services in the areas of Property and Casualty Insurance, Life

and Health Insurance, Asset Management and Banking.

Aviva is UK’s largest and the world’s fifth largest insurance Group. With a history dating back to

1696, Aviva has a 35 million-customer base worldwide. It has more than £332 billion of assets

under management. In India, Aviva has a long history dating back to 1834. At the time of

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nationalisation it was the largest foreign insurer in India in terms of the compensation paid.

In India, Aviva has a joint venture with Dabur, one of India's oldest, and largest Group of

companies. A professionally managed company, Dabur is the country's leading producer

of traditional healthcare products.

In accordance with the government regulations Aviva holds a 26 per cent stake in the joint

venture and the Dabur group holds the balance 74 per cent share.

SBI Life Insurance is a joint venture between the State Bank of India and Cardif SA of France. SBI

Life Insurance is registered with an authorised capital of Rs 500 crore and a paid up capital of Rs

350 crores. SBI owns 74% of the total capital and Cardif the remaining26%.

 State Bank of India enjoys the largest banking franchise in India. Along with its 7 Associate

Banks, SBI Group has the unrivalled strength of over 14,000 branches across the country, the

largest in the world.

Cardif is a wholly owned subsidiary of BNP Paribas, which is The Euro Zone’s leading Bank.

BNP is one of the oldest foreign banks with a presence in India dating back to 1860. It has 9

branches in the metros and other major towns in the country.

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Cardif is a vibrant insurance company specialising in personal lines such as long-term savings,

protection products and creditor insurance.

Birla Sun Life Insurance Company Limited is a joint venture between The Aditya Birla Group, one

of the largest business houses in India and Sun Life Financial Inc., a leading international

financial services organisation. The local knowledge of the Aditya Birla Group combined with the

expertise of Sun Life Financial Inc., offers a formidable protection for your future.The Aditya

Birla Group has a turnover close to Rs. 33000 crores with a market capitalisation of Rs. 53400

crores (as on 31st March 2006). It has over 72000 employees across all its units worldwide. It is

led by its Chairman - Mr. Kumar Mangalam Birla. Some of the key organisations within the group

are Hindalco, Grasim, Aditya Birla Nuvo, etc. Sun Life Financial Inc. and its partners today have

operations in key markets worldwide, including Canada, the United States, the United

Kingdom, Hong Kong, the Philippines, Japan, Indonesia, India, China and Bermuda. Sun Life

Financial Inc. had assets under management of over US$343 billion, as on 31st March,2006. Sun

Life Financial Inc. is a leading player in the life insurance market in Canada.

Current State of Play

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 Starting in early 2000, the Insurance Regulatory and Development Authority started granting

charters to private life and general insurance companies.

All of the private companies had foreign partners in life business. Almost all general insurance

companies also have foreign partners. One such charter was very special. The State Bank of

India(SBI) announced a joint venture partnership with Cardif SA of France (the insurance arm of

BNP Paribas Bank). Since the SBI is a bank, the Reserve Bank of India (RBI) needed to clear the

participation of the SBI because banks are allowed to enter other businesses on a “case by case”

basis. Thus, the SBI became the test case. The latest group to receive an outright charter for

operating a life insurance company is Shriram Life Insurance Company Ltd. (17.11.2005).

Sahara group came to the Insurance industry on 06.02.2004. Sahara’s entry is notable for two

reasons. First, Sahara would be the only company to enter the Indian life insurance market

without any foreign partner. It thus becomes the only purely domestic company to be granted a

license to operate in the insurance sector. Second, it operates the largest Non-Bank Financial

Company in India. It would become the first Non-Bank Financial Company to operate in the life

insurance sector.

Reliance Group also jumped into the insurance sector with a name of Reliance Life Insurance

some months back. How ever the company came into existence after buying 100%stake in AMP

Sanmar Life Insurance Company Ltd.

Market share for premiums: life market

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NAME OF THE PLAYER MARKET SHARE (%)

2003-2004 2005-2006 Growth

LIC 87.22 82.3 -0.08

ICICI PRUDENTIAL 4.43 5.63 1.2

BIRLA SUN LIFE 1.90 2.56 0.66

ING VYSYA 0.35 0.37 0.02

BAJAJ ALLIANZ 0.87 2.03 1.16

SBI LIFE 0.89 1.80 0.91

HDFC STANDARD LIFE 1.15 1.36 0.21

TATA AIG 1.10 1.29 1.19

MAX NEW YORK LIFE 0.81 0.9 0.09

AVIVA 0.46 0.79 0.33

AMP SANMAR 0.16 0.26 0.10

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 MARKET SHARE (%)

LIC
ICICI PRUDENTIAL
BIRLA SUN LIFE
ING VYSYA
BAJAJ ALLIANZ
SBI LIFE
HDFC STANDARD LIFE
TATA AIG
MAX NEW YORK LIFE
AVIVA
AMP SANMAR

MARKET SHARE AND GROWTH PERCENTAGE

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19
 COMPANY’S PROFILE

HDFC Standard Life Insurance Company Ltd. is one of India’s leading private life insurance

companies, which offers a range of individual and group insurance solutions. It is a joint venture

between Housing Development Finance Corporation Limited (HDFC Ltd.), India’s leading housing

finance institution and one of the subsidiaries of Standard Life plc, leading providers of financial

services in the United Kingdom. Both the promoters are well known for their ethical dealings

and financial strength and are thus committed to being a long-term player in the life insurance

industry – all important factors to consider when choosing your insurer.

HDFC IS A HIGHLY DIVERSIFIED GROUP. ITS GROUP COMPANIES ARE:

1. HDFC Limited

2. HDFC Bank Limited

3. HDFC Securities Limited

4. HDFC Asset Management Company Limited

5. HDFC Realty Limited

6. CIBIL

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HDFC STANDARD LIFE INSURANCE COMPANY LTD.

It is the name which is working as one of the best private insurance company in insurance

sector. HDFC Standard Life Insurance Company Ltd was incorporated on 14th August 2000.It got

the certificate of registration on 23rd October.

Standard Life

Standard Life is Europe's largest mutual life assurance company. Standard Life, which has been

in the life insurance business for the past 175 years, is a modern company surviving quite a few

changes since selling its first policy in 1825. The company expanded in the 19th century from its

original Edinburgh premises, opening offices in other towns and acquiring other similar

businesses.

Standard Life currently has assets exceeding over £70 billion under its management and has the

distinction of being accorded "AAA" rating consequently for the past six years by Standard &

Poor.

Some Facts about the Company

Founded in 1825.

Mutual Life Insurance Company since 1925.

Largest mutual life insurance company in Europe.

Head Office:Edinburgh,Scotland (U.K.)

Assets under management over Rs 707836 crores (£ 89.2 bn) Total assets under

management : Rs. 707836 Crores.

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 New premium income 2003 :Rs. 76277 Crores.

AA2 rated by Standard & Poor’s and Moody’s.

First entry in India-1847.

Last claim settled in 1997-Madhya Pradesh.

THE PARTNERSHIP

HDFC and Standard Life came together for a possible joint venture, to enter the Life Insurance

market, in January 1995.It was clear from the out set that both companies shared similar values

and benefits and a strong relationship quickly formed. Towards the end of the year 1999, the

opening of the market looked very promising and both companies agreed the time as the right

time to move the operation to the next level.

Therefore, in January 2000 an expert taem from U.K. joined hands with a hand picked taem

from HDFC to form a core project team based in Mumbai

Around this time Standard Life purchased a further 5% stake in HDFC and a 5% stake in HDFC

Bank,

In a further development Standar Life agreed to participate in the Asset Management Company

promoted by HDFC to enter the mutual fund market. The mutual fund aws launched on 20 th July

2000.

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INCORPORATION OF HDFC STANDARD LIFE INSURANCE CO. LTD.

The company was incorporated on 14th August 2000 under the name of HDFC Standard Life

Insurance Company Limited.

Their ambition since October was the only life insurance company to be granted the certificate

of registration.

HDFC are the main share holders in HDFC Standard Life Insurance Co. Ltd. With 76% and

Standard Life owns 24%

AWARDS AND ACCOLADES

 India’s best managed company by Asia money magazine - 1995 and 1996

 Most competitive Indian company by Euro money – 1997

 One of the 5 best Indian Boards by Business Today -1997

 Best presented accounts 1994-95 and 1996-97 (3rd place) - in the SAARC region by the

South Asian Federation of Accounts in the financial sector category

 Rated as one of the best companies in India for strategy & management and investor

relations by Asia money – 1998

 Excellence in service industry by the Indian Institute of Marketing Management & Top

Management Club (Pune) -1998

 Shield for the best presented accounts for banks and financial institutions - over 11

times (8 years in a row)

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 1999 IMC Ramakrishna Bajaj National Quality Award in the service category

 CII-EXIM Bank Commendation Certificate for commitment to Total Quality Management

– 2000

 Asia money declared HDFC as the second best managed company in India – 2001

 Euro money identified HDFC as one of Asia’s top 10 best managed companies in the

finance sector – 2001

 Rated as the Best Non-Banking Financial Company in Asia by Institutional Investor

Research Group.

ORGANISATIONAL HEADS

 Chairman(HDFC Ltd.) : Mr. Deepak Parekh

 C.E.O. & M.D. (HDFC SLIC) : Mr. Deepak Satawalekar

 G.M. Sales : Mr. Suresh Mahalingam

 Head Retail Sales : Mr. Dilip Gazarao

 National sales training Manager : Mr. Frederick D’Souza

 Regional Manager : Mr. Satish Soni

HEAD OFFICE:

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HDFC Standard Life Insurance Company Limited, Ramon House, 169 Bacbay Reclamation,

Mumbai-400020.

CONCEPTUAL FRAME

WORK

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WHAT IS INSURANCE?

Insurance is pooling of risks. In a contract of insurance, the insurer(insurance company)

Agrees/undertakes, in consideration of a sum of money(premium), to make good the loss

suffered by the insured against a specified risk such as fire and any other similar contingency or

compensate the insured/beneficiaries on the happening of a specified event such as accident or

death.

Life insurance is a contract for the payment of a sum of money to the person assured (or failing

him/her, to the person entitled to receive the same) on the happening of the event insured

against.

What Is Investment?

Investment may be said as keeping a sum of money aside from the present savings with the

view of earning returns on it. It is done on the cost of sacrifice of present consumption of that

part of money.

Why Invest?

 Financial reasons

1. To earn returns.

2. To protect and increase capital.

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3. To supplement income.

 Non Financial reasons

1. To have money for important events.

2. To provide for contingencies.

Where one can invest?

Securities Market:

a. Money Market

b. Bond Market

c. Mortgage Market

d. Stock Market

e. Foreign Exchange Market

f. Derivatives Securities Market

Depository Institutions:

a. Commercial Banks

b. Thrift Institutions

Other Financial Institutions:

a. Insurance Companies

b. Securities firms and investment banks

c. Mutual funds

d. Finance companies

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e. Pension funds

What Is Risk?

When we use the word “Risk, we mean either an event which leads to a variations from the

most likely outcome in either direction (e.g. the risk of structure collapsing) or the probability of

occurrence of such an event.

To live is to risk dying

To hope is to risk despair

To try is to risk failure

But risks must be taken, because greatest

hazards in life is to risk nothing.

Meaning and definition of Risks:

The entire modern world process has to face numerous risks and uncertainties. Thus in business,

as in private life, there are dangers and risks of every kind. The concept of risk may explained as

the possibility of unfavorable results from any occurrence.

Risks arise due to uncertainties in regard to cost, loss or damage. The loss or damage may be

related to financial loss or non financial loss.

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The risk may mean that there is a possibility of loss or damage. It may or may not happen.

Methods of handling Risks:

The following methods are usually adopted for handling risks-

 Prevention of risks (or) Avoiding of risks.

 Reduction of risks.

 Shifting of risks (or) Transferring of risks.

 Acceptance of risks

 Spreading of risks.

MORE RISK means MORE RETRURN.

It’s a universal concept that with higher returns, higher is the risk. The concept is true

everywhere from daily life situations to more complex investment situations. The one who takes

more risk is ought to get more returns.

One can say “take risk, but don’t gamble”. Risk takers move ahead with their eyes open.

Gamblers shoot in the dark.

Risk taking is relative. The concept of risk varies from person to person and can be a result of

training. To both a trained mountain climber and a novice, mountain climbing is risky, but to the

trained person it is not irresponsible risk taking, responsible risk taking is based on knowledge,

29
training careful study, confidence and competence-factors that give you the courage to act

while facing fear.

In short one can say that risk must be taken in a well calculated manner. Risk can never be

avoided; it can only be minimized by diversifying it.

Diversification can de done by not investing in a single stock, but distributing the money in

different stocks. So that if one fetches the loss, other should compensate for it.

THE INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY

Reforms in the Insurance sector were initiated with the passage of the IRDA Bill in the

Parliament in December 1999. The IRDA since its formation as a statutory body in April 2000 has

stuck to its schedule of framing regulations and registering the private sector insurance

companies.

The other decisions taken simultaneously to provide the supporting systems to the insurance

sector and in particular the life insurance companies was the launch of the IRDA’s online service

for issue and renewal of licenses to agents.

Since being set up as an independent statutory body the IRDA has put in a framework of globally

compatible regulations.

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WHAT IS FINANCIAL
PLANNING?

31
“People don’t plan to fail,
they fail to plan."
What is Financial Planning?

Financial planning is the process of establishing personal and financial goals of an individual and

his/her family and meeting them through proper management of his/her personal finance. The

financial goals may involve buying a home or a car, children's marriage and education, funds for

medical treatment, retirement and vacation abroad.

What Financial Planning can do for you?

 Better your life style.

 Fulfill your business/personal ambition.

 Plan for after retirement.

 Can fulfill immediate and long term needs.

 Can create, preserve and maximize your wealth

In short Financial Planning is all about your life.

Who Is A Financial Planner?

32
Financial planners determine their client's short, medium and long-term aspirations. They use

their knowledge and skill in the field of Financial Planning to develop, implement and monitor

the financial plan, which is tailor-made to the client's needs, aspirations and situation.

A financial planner is an expert in establishing and defining the client-planner relationship;

gathering client data; analysing and evaluating the client's financial status; developing and

presenting financial planning recommendations and/or alternatives; implementing the financial

planning recommendations and monitoring the financial planning recommendations. Using this

process financial planner can help his clients work out where they want to be financially what

needs to be done to be there. Financial planner specifically gives his analysis and advice on

personal financial statements, investments, taxation, debt and risk management, cash flows,

insurance, stocks, trusts, retirement and other components of personal finance.

33
FINANCIAL PLANNING PROCESS

34
 What Role Should Insurance Play in Your Financial Plan?

Insurance is one of life's necessities and probably the least-understood financial product.

Insurance reimburses people for covered losses in the event of an unfortunate occurrence

such as an illness, accident, or death. At the same time, it can encourage prevention and

safety measures, provide investment capital, lend money, and help to reduce anxiety for

society at large. As a mechanism against loss of income and a means of safeguarding

assets, many Indians have insurance in one form or another. These coverages may

include public coverage, such as disability insurance, a health care policy from an

employer, or personal insurance to protect property such as homes, computers, and cars.

You may save money in your pension and other investments and have capital in your

home. But if you don't know exactly what your life insurance policy covers or have only

glanced at your employer-provided health and disability insurance policies, you're

neglecting an important aspect of your financial plan.

Until something happens, such as a car accident, an illness, or the death of a loved one,

paying for insurance may seem like buying something you'll never use. But even if

younever submit a claim, insurance is an investment in your future, as important as

pensions and personal investments. Indeed, many financial planners argue that you

35
should have an adequate insurance safety net in place before considering investment

strategies.

Equity Linked Insurance

Insurance markets around the world are changing. The public has become aware of investment

opportunities outside the insurance sector, particularly in mutual fund type investment.

Policyholders want to enjoy the benefits of equity investment in conjunction with insurance

protection, and insurers around the world have developed equity-linked contracts tomeet this

challenge.

Equity-linked insurance appears to have been introduced first in the Netherlands in 1953,

andspread to the U.K. in 1957. In Canada, equity linked policies have been issued since 1967.

The linked business has spread to the U.S. in late 70’s. Germany introduced equity-linked

endowment insurance recently. In India, Unit Trust of India introduced Unit Linked

Insurance Product (ULIP) in 1971 with limited risk coverage. Insurance business in the country

has traditionally been dominated by endowment policies.

Sale of money back and term insurance policies has gained momentum in early nineties. In the

last 3 years (which marked private sector entry and interest rates decline in the economy)

insurers are exploring the hereto untapped area of Unit Linked Insurance (ULI) in which the

policyholders decide on fund management while getting insurance protection. The first linked

policy from insurer’s stable was introduced in February, 2001 by Life Insurance Corporationof

India and majority of the private insurance companies have joined the fray soon after.

36
Policyholders now have a variety of unit linked individual insurance and pension products under

single premium and / or non-single premium payment modes with various

riders attached. Linked group insurance products are also available. As per the data compiled by

the IRDA, 2,45,199 linked policies were sold and premium of Rs.545.4 crores were collected

(Sum assured Rs.5233.04 crores) for the 9-month period ended December, 2003.

The salient features of the unit linked insurance products are:

 Investment options ranging from 100% in liquid, risk free investment to 100% in

equity fund are available for the policyholders to choose suitable options for

them.

 The policy also offers facility for asset reallocation and portfolio rebalancing.Another

feature of the product is complete transparency whereby expenses interalia mortality

charges are disclosed.

 There is also flexibility with regard to risk coverage and premium payment.

 Easy liquidity through partial withdrawals, loans and surrenders.

Evaluation of these products is primarily on three aspects viz., returns, risk and other service

related issues. Investment performance and charges are the two main components determining

the level of return and would be the deciding factor for drawing the customers into this nascent,

investment oriented market. This article takes a closer and critical look at the charges of unit

37
linked insurance products (section 2) and their impact on return to policyholder (section 3). The

last section identifies the issues and suggestions for regulation.

What makes ULIPs a total financial planning package?

 Potential for Superior returns by switching between Equity & Debt

 Anytime Liquidity

 No Long Term Commitments

 Flexible Insurance Cover

 100% Tax Free Returns on Withdrawals & Maturity

 Why some insurance advisors still promote traditional plans only?

 Traditional plans are simple to sell and are easily accepted by customers due to its

presence all these years. ULIPs need understanding of Equity and Debt markets and in-

depth knowledge of various competitive investment products and insurance plans too,

to provide the best customized solution. Besides, Commissions are higher in traditional

plans. Some advisors may be looking at that too!

So, your ULIP can be made to work as an……….

 Endowment Plan by not withdrawing for many years and create tax-free wealth till you

retire, or

 Money-Back Plan by withdrawing as and when you require funds, or

38
 Children’s Plan by withdrawing funds for higher studies, marriage expenses or

 Whole-Life Plan by not withdrawing at all till 70 or 80 years of age, or

 Pension Plan by withdrawing every month after you retire.

TRADITIONAL

MARKET

VS

INSURANCE

39
 Why not invest in Traditional Market?

Whenever insurance is compared to investment in traditional market ,the thing which comes

first to our mind is how insurance is better investment instrument as compared to traditional

market. While comparing insurance we talk about Unit Linked Insurance Products because

Traditional insurance products can not be compared to opportunities available in share market ,

bond market, Government bonds and securities, Mutual Funds, Foreign exchange market etc.

The ULIPs are very frequently compared with Mutual funds. The reason is their resemblance

with each other as far as their design and funds are concerned.

Due to similarities of ULIPs and Mutual funds, I have laid stress on comparing them thoroughly

so that a clear cut image can be made.

40
 Investment in Share market:

Advantages:

 High rate of returns.

 Wide range of options available to the Investors.

 Easy liquidity.

 Help of brokers is easily available.

 Speculations can be fruitful sometimes.

Disadvantages:

 Lack of expertise can cause huge losses.

 Investors must have complete knowledge of the market.

 No protection from any miss happening.

 Influenced by greed of some people.

 Substantial amount of money is required to invest in the market.

 Investments made are not flexible.

 Very high risk.

41
 Investment in Government bonds and securities:

Advantages:

 Very low risk promises safe investments.

 Tax benefits up to certain limit.

 Better rate of interest then banks.

 No big deal of expertise is required.

Disadvantages:

 Very low returns.

 No hedge against inflation.

 Liquidity is not easy.

 No options for Investors.

 Less flexible.

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 Investment in Mutual fund Vs Investment in ULIPS

Are unit-linked insurance plans good?

Most insurers in the year 2004 have started offering at least a few unit-linked plans. Unit-linked

life insurance products are those where the benefits are expressed in terms of number of units

and unit price. They can be viewed as a combination of insurance and mutual funds.

The number of units that a customer would get would depend on the unit price when he pays

his premium. The daily unit price is based on the market value of the underlying assets (equities,

bonds, government securities, et cetera) and computed from the net asset value.

The advantage of unit-linked plans is that they are simple, clear, and easy to understand. Being

transparent the policyholder gets the entire upside on the performance of his fund. Besides all

the advantages they offer to the customers, unit-linked plans also lead to an efficient utilisation

of capital.

Unit-linked products are exempted from tax and they provide life insurance. Investors welcome

these products as they provide capital appreciation even as the yields on government securities

have fallen below 6 per cent, which has made the insurers slash payouts.

According to the IRDA, a company offering unit-linked plans must give the investor an option to

choose among debt, balanced and equity funds. If you opt for a unit-linked

43
endowment policy, you can choose to invest your premiums in debt, balanced or equity plans.

If you choose a debt plan, the majority of your premiums will get invested in debt securities like

gilts and bonds. If you choose equity, then a major portion of your premiums will be invested in

the equity market. The plan you choose would depend on your risk profile and your investment

need.

The ideal time to buy a unit-linked plan is when one can expect long-term growth ahead. This is

especially so if one also believes that current market values (stock valuations) are relatively low.

So if you are opting for a plan that invests primarily in equity, the buzzing market could lead to

windfall returns. However, should the buzz die down, investors could be left stung.

If one invests in a unit-linked pension plan early on, say when one is 25, one can afford to take

the risk associated with equities, at least in the plan's initial stages. However, as one approaches

retirement the quantum of returns should be subordinated to capital preservation. At this stage,

investing in a plan that has an equity tilt may not be a good idea.

Considering that unit-linked plans are relatively new launches, their short history does not

permit an assessment of how they will perform in different phases of the stock market. Even if

one views insurance as a long-term commitment, investments based on performance over such

a short time span may not be appropriate.

44
 ULIPs Vs Mutual Funds: Who's better?

Unit Linked Insurance Policies (ULIPs) as an investment avenue are closest to mutual funds in

terms of their structure and functioning. As is the case with mutual funds, investors in ULIPs are

allotted units by the insurance company and a net asset value (NAV) is declared for the same on

a daily basis.

Similarly ULIP investors have the option of investing across various schemes similar to the ones

found in the mutual funds domain, i.e. diversified equity funds, balanced funds and debt funds

to name a few. Generally speaking, ULIPs can be termed as mutual fund schemes with an

insurance component.

However it should not be construed that barring the insurance element there is nothing

differentiating mutual funds from ULIPs.

45
 How ULIPs can make you RICH!

Despite the seemingly comparable structures there are various factors wherein the two differ.

In this article we evaluate the two avenues on certain common parameters and find out how

they measure up.

1. Mode of investment/ investment amounts

Mutual fund investors have the option of either making lump sum investments or investing

using the systematic investment plan (SIP) route which entails commitments over longer time

horizons. The minimum investment amounts are laid out by the fund house.

ULIP investors also have the choice of investing in a lump sum (single premium) or using the

conventional route, i.e. making premium payments on an annual, half-yearly, quarterly or

monthly basis. In ULIPs, determining the premium paid is often the starting point for the

investment activity.

This is in stark contrast to conventional insurance plans where the sum assured is the starting

point and premiums to be paid are determined thereafter.

ULIP investors also have the flexibility to alter the premium amounts during the policy's tenure.

For example an individual with access to surplus funds can enhance the contribution thereby

ensuring that his surplus funds are gainfully invested; conversely an

46
individual faced with a liquidity crunch has the option of paying a lower amount (the difference

being adjusted in the accumulated value of his ULIP). The freedom to modify

premium payments at one's convenience clearly gives ULIP investors an edge over their mutual

fund counterparts.

2. Expenses

In mutual fund investments, expenses charged for various activities like fund management, sales

and marketing, administration among others are subject to pre-determined upper limits as

prescribed by the Securities and Exchange Board of India.

For example equity-oriented funds can charge their investors a maximum of 2.5% per annum on

a recurring basis for all their expenses; any expense above the prescribed limit is borne by the

fund house and not the investors.

Similarly funds also charge their investors entry and exit loads (in most cases, either is

applicable). Entry loads are charged at the timing of making an investment while the exit load is

charged at the time of sale.

Insurance companies have a free hand in levying expenses on their ULIP products with no upper

limits being prescribed by the regulator, i.e. the Insurance Regulatory and Development

Authority. This explains the complex and at times 'unwieldy' expense structures on ULIP

offerings. The only restraint placed is that insurers are required to notify the regulator of all the

expenses that will be charged on their ULIP offerings.

47
Expenses can have far-reaching consequences on investors since higher expenses translate into

lower amounts being invested and a smaller corpus being accumulated. ULIP-related expenses

have been dealt with in detail in the article "Understanding ULIP expenses".

3. Portfolio disclosure

Mutual fund houses are required to statutorily declare their portfolios on a quarterly basis,

albeit most fund houses do so on a monthly basis. Investors get the opportunity to see where

their monies are being invested and how they have been managed by studying the portfolio.

There is lack of consensus on whether ULIPs are required to disclose their portfolios. During our

interactions with leading insurers we came across divergent views on this issue.

While one school of thought believes that disclosing portfolios on a quarterly basis is mandatory,

the other believes that there is no legal obligation to do so and that insurers are required to

disclose their portfolios only on demand.

Some insurance companies do declare their portfolios on a monthly/quarterly basis. However

the lack of transparency in ULIP investments could be a cause for concern considering that the

amount invested in insurance policies is essentially meant to provide

for contingencies and for long-term needs like retirement; regular portfolio disclosures on the

other hand can enable investors to make timely investment decisions

As was stated earlier, offerings in both the mutual funds segment and ULIPs segment are largely

comparable. For example plans that invest their entire corpus in equities (diversified equity

48
funds), a 60:40 allotment in equity and debt instruments (balanced funds) and those investing

only in debt instruments (debt funds) can be found in both ULIPs and mutual funds.

If a mutual fund investor in a diversified equity fund wishes to shift his corpus into a debt from

the same fund house, he could have to bear an exit load and/or entry load.

On the other hand most insurance companies permit their ULIP inventors to shift investments

across various plans/asset classes either at a nominal or no cost (usually, a couple of switches

are allowed free of charge every year and a cost has to be borne for additional switches).

Effectively the ULIP investor is given the option to invest across asset classes as per his

convenience in a cost-effective manner.

This can prove to be very useful for investors, for example in a bull market when the ULIP

investor's equity component has appreciated, he can book profits by simply transferring the

requisite amount to a debt-oriented plan.

4. Flexibility in altering the asset allocation

As was stated earlier, offerings in both the mutual funds segment and ULIPs segment are largely

comparable. For example plans that invest their entire corpus in equities (diversified equity

funds), a 60:40 allotment in equity and debt instruments (balanced funds) and those investing

only in debt instruments (debt funds) can be found in both ULIPs and mutual funds.

49
If a mutual fund investor in a diversified equity fund wishes to shift his corpus into a debt from

the same fund house, he could have to bear an exit load and/or entry load.

On the other hand most insurance companies permit their ULIP inventors to shift investments

across various plans/asset classes either at a nominal or no cost (usually, a couple of switches

are allowed free of charge every year and a cost has to be borne for additional switches).

Effectively the ULIP investor is given the option to invest across asset classes as per his

convenience in a cost-effective manner.

This can prove to be very useful for investors, for example in a bull market when the ULIP

investor's equity component has appreciated, he can book profits by simply transferring the

requisite amount to a debt-oriented plan.

5. Tax benefits

ULIP investments qualify for deductions under Section 80C of the Income Tax Act. This holds

good, irrespective of the nature of the plan chosen by the investor. On the other hand in the

mutual funds domain, only investments in tax-saving funds (also referred to as equity-linked

savings schemes) are eligible for Section 80C benefits.

Maturity proceeds from ULIPs are tax free. In case of equity-oriented funds (for example

diversified equity funds, balanced funds), if the investments are held for a period over 12

months, the gains are tax free; conversely investments sold within a 12-month period attract

short-term capital gains tax @ 10%.

50
Similarly, debt-oriented funds attract a long-term capital gains tax @ 10%, while a short-term

capital gain is taxed at the investor's marginal tax rate.

Depite the seemingly similar structures evidently both mutual funds and ULIPs have their unique

set of advantages to offer. As always, it is vital for investors to be aware of the nuances in both

offerings and make informed decisions

51
 ULIPs vs Mutual Funds. Head to Head

  ULIPs Mutual Funds

Investment Determined by the investor and Minimum investment amounts are

amounts can be modified as well determined by the fund house

No upper limits, expenses

determined by the insurance Upper limits for expenses chargeable to

Expenses company investors have been set by the regulator

Portfolio

disclosure Not mandatory* Quarterly disclosures are mandatory

Modifying asset Generally permitted for free or at a Entry/exit loads have to be borne by the

allocation nominal cost investor

Section 80C benefits are available Section 80C benefits are available only

Tax benefits on all ULIP investments on investments in tax-saving funds

* There is lack of consensus on whether ULIPs are required to disclose their portfolios. While some

insurers claim that disclosing portfolios on a quarterly basis is mandatory, others state that there is no

legal obligation to do so

CONCLUSION
52
Life Insurance is now being regarded as a versatile financial planning tool. Research indicates

that Indians have four basic financial needs during their life time:

1. Asset accumulation such as buying a house or a car.

2. Protecting their family

3. Securing their children’s education

4. Planning for their retirement.

India being a country of vast population of over one billion with only 33.2% of the insurable

population in India possessing Life insurance, the country has a vast potential which has been

left untapped now.

Till some years back, most of the people used to invest in traditional market (i.e. Equity, Bonds,

Mutual funds, Government securities and bonds etc.), but with the emergence and popularity of

Unit Linked Insurance products, the mindset has changed. One can see that insurance is a better

choice while making investment decisions because of features like:

1. Tax savings

2. Better returns

3. Protection from any miss happening.

The need of the hour is recognize the power of the Financial Planning. One who can draw out a

well defined financial plan according to his needs would expect good returns from the market in

the long run. How ever the awareness of financial planning among the consumers is still low but

with the increase in purchasing power of the customers and

53
with coming up of new innovative products customers have started to plan for their financial

needs and in coming years the awareness is expected to increase.

Thus insurance industry has tremendous growth opportunities provided that it meets the

expectations of the customers. The changing products of insurance with changing needs of the

customers can be a major cause for the growth of the insurance industry.

54
 RECOMMENDATIONS

 Need to innovate and use differentiated strategies in sales, distribution and marketing.

 Distribution channel should be made more efficient.

 The edge of the ULIPs over the products like mutual funds and investment in equities

should be appropriately promoted and should be made known to the people.

 The quality of the sales force should be improved.

 Right customer identification and thus segmentation which needs to be accurate.

 The population residing in the rural areas must be prompted to invest in Insurance

products.

 Customer should be informed beforehand about the fluctuating returns from the market.

 After sales services should be improved

 Claim settlement etc. should be made less harassing.

55
 CHALLENGES AND LIMITATIONS

1. Lack of financial assistance caused the study to be limited over a confined area.

2. Lack of awareness among people about insurance as a investment product remained

the cause for not getting proper responses from some of the people.

3. As the Unit Linked plans are market dependent and have certain amount of risk associated

with them, people do not easily trust them.

4. Aggressive sales strategy of Private insurance players may cause inconvenience to some

people. Thus they do not furnish correct information in the questionnaire filled by them

56
 Bibliography

Books Reffered:

1. Kothari, C.R., Quantitative Techniques, 2 nd edition, New Delhi, Vikas Publishing House

Pvt. Ltd. 1984.

2. Khan, M.Y., Financial services, 3rd edition, New Delhi, TATA McGraw Hill Publishing

Company Ltd., 2004.

3. Saunders, Anthony & Cornett, Millon, Marcia, Financial Markets and Institutions-A

Modern Perspective, 2nd edition ( International edition),New York, Mc Graw Hill/Irwin an

imprint of the Mc Graw Hill Companies, Inc., 2003.

4. Peraswamy, P., Principles and Practices of Insurance, 1 st edition,Himalaya Publishing

house 2003.

Internet sites:

1. www.moneycontrol.com

2. www.indiacore.com

3. www.personalfn.com

4. www.myiris.com

5. www.thehindu.com

6. www.hdfcinsurance.com

7. www.metlife.com

8. www. Bajajallianzlife.com

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9. www.tata-aig-life.com

10. www.sbi-insurance.com

11. www.google.com

12. www.ingvysya.com

Research papers:

Sinha, Tapen, An Analysis of the Evolution of Insurance in India, CRIS Discussion Paper Series

III,The University of Nottingham, 2005.

58