Concept of

Unit Linked Products

May 2005 Concept of UL

Background to Unit Linked
Policies
U.K. had the most successful development of
unit linked business worldwide

First UL policies were launched in the sixties

There was a rapid increase in new regular

premium business

Even more rapid increase in Single Premium

(grew to over 3x level of regular premiums in
by 1990s)

May 2005 Concept of UL

 Successful Markets
So ld Un it-lin ked plans In
Co untry fro m m arket sh are(%) year Co m m ents / (sou rces)

UK E arly Life Pension

1960 s 26% n/a 1975 M arket share is % of all
46% 44% 1985 new individual business
40% 55% 1995 (using AP plus 10% SP )
43% 59% 1996
40% 51% 1997
43% 52% 1998 (S ource : AB I)
40% 53% 1999

USA c1970 Univ ersal V ariable

but in 38% 4% 1985 M arket share is as UK
effect 24% 15% 1995 F igures exclude extra
from 22% 20% 1996 “dum p-ins”
late 21% 29% 1997
1970 s 20% 34% 1998 (Source : LIM RA )
19% 40% 1999

C an ad a Late 8% 1986 M arket share is as UK

1970 s 34% 1995 F igures exclude extra
38% 1996 “dum p-ins”
44% 1997
52% 1998 (Source : LIM RA )
54% 1999

Sw eden c1990 Life Pension M arket share is as UK

61% 33% 1996 (S ource : S wedish
82% 37% 1997 Insurance F ederation)
Irelan d/ E arly
th
Australia 1960 s Ov er 70% 1995 9 C olloquium ,
G roupeConsultatif

Neth erland s E arly 21% 1996 M arket share is % of all

1980 s 35% 1997 indiv idual life new AP
43% 1998
48% 1999 (A ssurantie M agazine)

May 2005 Concept of UL

 Why has unit linked been
successful?
Historically shares offer a satisfactorily real
investment return (Average 10 year return
around 12-14%)
Public awareness of investing, directly or
indirectly in the share market
Pressure to design products directly linked
to shares
A more modern approach to risk
management, transparency and bonus
distribution.

May 2005 Concept of UL

 Why link to Units?
 Direct access to investment gains
 Open ended investment funds
 Spread of investment
 Different risk profiles
 Accessible to small savers as well
 Published prices in local daily newspapers
 Strategic In-House Funds or managed by
reputed fund managers.

May 2005 Concept of UL

 What is Unit-Linking ?
Unit-linked policies are said to be
unbundled

Explicit charges are assessed against

the policy - the premiums paid
belong to the policy-owner (like a
bank deposit)

May 2005 Concept of UL

 What is Unit-Linking ?
Unit-linked policies make use of unit-linked
funds
 A unit-linked policy is one whose underlying
investments are identifiable and determine its
cash values.
Unit linked policies should be matched
 The unit-linked policy liability should be
matched by holding the appropriate asset or
assets to which it is linked.
Some life insurance element is added to
the coverage

May 2005 Concept of UL

 Benefits to The Customer
Transparency of charges
Flexibility
Control of investment risk
Prospect of better returns

May 2005 Concept of UL

Benefits to the Intermediary
Ability to meet client’s needs
The concept is easy to explain
Help get the client’s investment
rupee
Help retain clients (by advisory role,
quality sale, regular meetings)

May 2005 Concept of UL

 Benefits to The Company
Lower reserves and capital requirements:
 Unit linked products are less capital hungry
compared to traditional products. The weighting of
mathematical reserves in the computation of the
regulatory solvency margin is lesser for unit-linked
policies than traditional contracts.
Reduce investment risk to the company
 Guarantees in traditional products are costly
More profitable business versus with-profits
 Shareholders can take profits upfront
Happy clients and agents
Build-up investment expertise

May 2005 Concept of UL

 Uses of Unit-Linked
The key advantage of a fully flexible
Unit Linked product (Universal life) is
that it can be positioned as:
Endowments/Anticipated Endowments
Open-ended whole of life
Deferred pensions
Tax free annuity

May 2005 Concept of UL

 Traditional product
Cannot
Change
Premiu

Acquisition Savings Death Cash

m

and &
benefit value
maintenance amoun
expenses
t

Insurance
cost
Cannot
Change
Black Cannot
box Concept of UL Change
May 2005
 UL product
Can Change
Premium

Can Change

Distribution
cost
Customer Expenses
Investme and
nt account mortality
charges
returns value (like a
bank a/c)

Partial Death Benefit

withdrawal or
surrender Can Change
May 2005 Concept of UL
Advantages of Unit Linking
Choice of investments
several fund managers
several fund choice under each fund
manager
different risk profiles
switching between funds
Flexibility
Sum Assured
Premium Payment
Withdrawals

May 2005 Concept of UL

Advantages of Unit Linking
The roll-up advantage of Insurance – No tax on
maturity benefits helps unit linked products to
be positioned as –
 Savings plan
 Attractive Investment
 Annuities that are tax advantaged
Policyholder participates fully in the rewards
and risks - which is favorable for the company
in a declining interest rate scenario.
Rupee Cost Averaging – takes out the risk in
investments significantly.

May 2005 Concept of UL

Advantages of Unit Linking
In a traditional product, once you fix
the Sum assured and the term, the
premium is fixed (age and gender are
also fixed)

In a unit linked product, you can

provide different levels of cover for the
same level of premium. So, the
customer has flexibility to balance
savings and protection needs.

May 2005 Concept of UL

 Disadvantages
Usually there is no guaranteed maturity
value.

Unpredictable performance: unit values may

go down as well as up. Requires risk taking
ability by customer.

Surrender penalties on cashing out early.

May 2005 Concept of UL

Key Issues in an UL Product
 Death Benefit  Charges
 Increase/Decrease in  Admin
DB  Investment
 Riders management
 Top-Up
 Premiums – RP/SP/Top  Policy fee
Ups  Alteration
 Fund Options  Mortality/Riders
 Switching  Allocation of Premium
 Bid-Offer Spread  Surrenders,
 Paid Up, Premium Withdrawals
Holiday

May 2005 Concept of UL

 Death Benefit
Option to pay:
 Sum Assured or Fund Value, whichever is higher.
 Sum Assured + Fund Value

The first one has the advantage of

competitive quotation, while the second has
the advantage of better protection.

Flexibility to choose from a range of Sum

Assured for a given premium. Have a Min.
and Max. SA linked to premium.

May 2005 Concept of UL

Death Benefit Structures
Face
2,000
amou
nt

1,500
Death
benefit

10million

Net amount
of risk 500
Account
value
0
35 40 45 50 55 60 65
Age

May 2005 Concept of UL

 Death Benefit Structures
Face Type 2 Face
Type 3
amou amou
nt
2,000 nt
2,000 Death
Death benefit
benefit
Account
1,500 1,500 value

10 million 10million

Face
Net amount
amou
of risk
500 500
nt
Account Net amount
value of risk
0 0
35 40 45 50 55 60 65 35 40 45 50 55 60 65

age age
May 2005 Concept of UL
 Increase/Decrease Death
Benefit
Increase DB by
 Indexing to inflation (Escalation, with option for
Policyholder to decline)
 At pre-specified Periods
 within pre-specified limits
 With or w/o UW
 Increasing regular premium/top-ups

Decrease DB by choice or at pre-specified

intervals.

May 2005 Concept of UL

 Riders
Large rider choice increases complexity
Flexibility in riders also increases admin costs and
easy management of policy benefits
Common riders offered:
 Accidental Death benefit, Accidental Disability, Critical
Illness, HC/Surgical Benefit, Waiver of Premium/Payor
benefit.
These benefits may be charged by:
 Explicit
additional premium
 Deduction from the fund through unit cancellation

May 2005 Concept of UL

 Premiums
Premiums can be:
Regular Premium
Single Premium
Top Ups (can be paid anytime)

Regular premiums can be payable on

due dates or anytime (in universal
life products)

May 2005 Concept of UL

 Fund Options
Funds Managed
In-House Investment Management/AMC
Funds Choice
Asset Class Funds (Pure Equity, Pure
Debt, Pure Cash, Gold, Real Estate etc.)
Mixed Funds (Usually have a portion of
debt and equity in the fund)
Customer usually has the choice of
allocating money between funds

May 2005 Concept of UL

 Fund Options
The greater the number of funds, the
greater the need for sales agents to act as
investment advisors.

It is likely to generate more switching,

increasing the administrative burden.

A large number of funds will decrease the

projected balances to be held in individual
funds, which hinders the company’s ability
to negotiate favourable wholesale terms.

May 2005 Concept of UL

 Switching
Number of free switches per year –
market practice is to allow 3 free
switches.

Amount charged after free switches

can be –
fixedamount
a % of the switched amount.

May 2005 Concept of UL

 Allocation of premium
Various allocation structures available –
Choice is fundamentally between
transparent (Bajaj Allianz, ICICI) and non-
transparent (AVIVA) for the customer.

Most companies prefer a transparent

structure.

The market has gradually moved from low

allocation, high commission to low
commission high allocation products.

May 2005 Concept of UL

 Bid-Offer Spread
Bid-offer spreads are effectively a
form of non-allocation of premium.

They can facilitate a higher headline

allocation rate, sometimes in excess
of 100%.

May 2005 Concept of UL

 Withdrawals
Full/Partial Withdrawals allow liquidity, a key
differentiator from traditional products.
Partial Withdrawal can have limits:
 Min. balance
 Max. withdrawal amount

Time to allow partial/full withdrawals – 2 to 3

years, depends on product profitability.
Surrender Penalties also may be there for early
withdrawals to protect company profits.

May 2005 Concept of UL

 Premium Holiday
Another key advantage of UL policies.

During premium holiday, the benefit of protection

continues, even if premiums are not paid, so long
as there are units available.

Huge customer benefit, because the customer is

not obligated to continuation of premium
payments for life insurance protection to continue.

Easy to explain and sell to the customer.

May 2005 Concept of UL

 Charges
The charges in UL policies can be:
 Non-Allocated portion (Used for commission
payment, sales team salaries and overrides,
infrastructure, etc.)
 Mortality (Charged usually on a one year basis)
 Rider Charges
 Investment Management Charges – usually as a
% of the funds)
 Admin Charges – Flat fee/% of fund
 Policy Fee
 Other Charges (to recover initial costs like
medical, stamp duty, etc.)

May 2005 Concept of UL

 The Power of Systematic
Investment
Regular premium Unit Linked Plans
are like Systematic Investment Plans
– They reduce the risk of investing in
equities significantly.

You do not need to time the market.

You get the benefit of Rupee Cost

Averaging

May 2005 Concept of UL

 The Power of Systematic
Investment
Let us look at 3 funds, with an
investment of Rs. 1000 per annum.
13.00

12.00

Months Amount Invested Fund A Fund B Fund C

1 1000 10.00 10.00 10.00
2 1000 10.20 9.18 10.97 11.00

3 1000 10.40 8.60 10.80

4 1000 10.60 8.92 10.22
5 1000 10.80 10.20 10.00 10.00

6 1000 11.00 11.80 11.43

7 1000 11.20 12.37 11.85
8 1000 11.40 12.60 11.58 9.00
9 1000 11.60 12.58 11.04
10 1000 11.80 12.37 11.05
11 1000 12.00 11.72 11.50 8.00
12 1000 12.00 12.00 12.00

7.00
1 2 3 4 5 6 7 8 9 10 11 12

Fund A F und B Fund C

May 2005 Concept of UL

 The Power of Systematic
Investment
Months Amount Invested Fund A Fund B Fund C Fund A Fund B Fund C
1 1000 10.00 10.00 10.00 100.00 100.00 100.00
2 1000 10.20 9.18 10.97 98.04 108.93 91.16
3 1000 10.40 8.60 10.80 96.15 116.28 92.59
4 1000 10.60 8.92 10.22 94.34 112.11 97.85
5 1000 10.80 10.20 10.00 92.59 98.04 100.00
6 1000 11.00 11.80 11.43 90.91 84.75 87.49
7 1000 11.20 12.37 11.85 89.29 80.84 84.39
8 1000 11.40 12.60 11.58 87.72 79.37 86.36
9 1000 11.60 12.58 11.04 86.21 79.49 90.58
10 1000 11.80 12.37 11.05 84.75 80.84 90.50
11 1000 12.00 11.72 11.50 83.33 85.32 86.96
12 1000 12.00 12.00 12.00 83.33 83.33 83.33
Total Units 1086.66 1109.30 1091.20
Total Investment Value 13039.90 13311.59 13094.38

Higher amounts because of rupee

cost averaging despite volatility
May 2005 Concept of UL
A real life example…NSE NIFTY
Average
Units Value of Annual
Allocated Units Return,
Close at Closing Cumulative Cumulative (Endof with a 3%
Date Price Investment Price Investment Units year) dividend
3-Jul-90 279.02 100000 358.40 100000 358.40 114311 14%
2-Jan-91 318.95 100000 313.53 200000 681.33 390281 48%
1-Jan-92 572.82 100000 174.57 300000 861.89 642042 38%
4-Jan-93 744.92 100000 134.24 400000 1011.85 1096586 44%
3-Jan-94 1083.74 100000 92.27 500000 1121.90 1326243 33%
2-Jan-95 1182.14 100000 84.59 600000 1234.32 1120776 14%
1-Jan-96 908.01 100000 110.13 700000 1388.27 1304349 12%
1-Jan-97 939.55 100000 106.43 800000 1530.49 1654766 13%
1-Jan-98 1081.2 100000 92.49 900000 1659.17 1477991 7%
1-Jan-99 890.8 100000 112.26 1000000 1827.16 2909203 19%
3-Jan-00 1592.2 100000 62.81 1100000 1917.81 2405514 11%
1-Jan-01 1254.3 100000 79.73 1200000 2067.12 2181433 7%
1-Jan-02 1055.3 100000 94.76 1300000 2230.26 2453625 7%
1-Jan-03 1100.15 100000 90.90 1400000 2380.65 4552391 16%
1-Jan-04 1912.25

May 2005 Concept of UL

 Thank You

May 2005 Concept of UL