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A Study of awareness of Financial Planning among
customers in context of investment in Traditional Market andInsurance
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
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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. COMPANYS 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
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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.
SinceSecondarydata information published byothersandcompanies & wereeasily
availableandnotmucheffort wasrequiredinobtainingthatinformation
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HISTORY OF INSURANCE
The history of life insurance in India dates back to 1818 when it was conceived as a
meansto provideforEnglish Widows. Interestinglyinthosedaysahigherpremium was
charged for Indian lives than thenon-Indian livesas Indian lives wereconsideredmore
riskierforcoverage.
The Bombay Mutual Life InsuranceSocietystarted its business in 1870. It wasthefirst
company to charge same premium for both Indian and non-Indian lives. The Oriental
Assurance Company wasestablished in 1880. The General insurance business in India,
ontheotherhand,cantraceitsrootstothe Triton (Tital) Insurance Company Limited,the
firstgeneral insurancecompanyestablished in theyear 1850 in Calcutta by the British.
Till theendofnineteenthcentury insurance business wasalmostentirely inthehandsof
overseascompanies.
Insurance regulation formally began in India with the passing of the Life Insurance
Companies Actof1912 and the providentfund Actof1912.Several fraudsduring 20's
and 30's sullied insurance business in India. By 1938 there were 176 insurance
companies. Thefirstcomprehensive legislation wasintroduced withthe Insurance Actof
1938 that providedstrictState Control over insurance business. The insurance business
grew at a faster pace after independence. Indian companies strengthened theirholdon
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 togetherover 240 private life insurers and
provident societies under one nationalized monopoly corporation and Life Insurance
Corporation (LIC) was born. Nationalization was justifiedon thegrounds that it would
createmuch needed funds for rapid industrialization. This was in conformity with the
Government'schosen pathofState lead planninganddevelopment.
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 wasnationalized in 1972. Withthis,nearly 107 insurers were
amalgamatedandgroupedintofourcompanies- National Insurance Company, New India
Assurance Company, Oriental Insurance Companyand United India Insurance Company.
These weresubsidiariesofthe 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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PrivateLife Insurers:
S.No. Registration
Number
Date of Reg. Name of the Company
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.
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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.
INTRODUCTION OF VARIOUS INSURANCE COMPANIES
HDFC Standard Life Insurance Company Ltd. is one of Indias 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.), Indias
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
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Max New York Life Insurance Co. Ltd.
Max India:
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
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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
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.
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Cardif is a wholly owned subsidiary of BNP Paribas, which is The Euro Zones 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.
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.
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Current State of Play
Starting in early 2000, the Insurance Regulatory and Development Authority started granting
chartersto private lifeandgeneral insurancecompanies.
Allof the privatecompanieshad foreign partners in life business. Almostall general insurance
companies also have foreign partners. One such charter was very special. The State Bank of
India(SBI) announceda jointventure partnership with CardifSA ofFrance (theinsurancearmof
BNP Paribas Bank).SincetheSBI isa bank,the Reserve BankofIndia (RBI) neededtoclearthe
participationoftheSBI because banksareallowedtoenterotherbusinessesona case bycase
basis. Thus, the SBI became the test case. The latest group to receive an outright charter for
operatinga lifeinsurancecompanyisShriram Life Insurance Company Ltd. (17.11.2005).
Saharagroup came to the Insurance industryon 06.02.2004.Saharas entry is notable for two
reasons. First, Sahara would be the only company to enter the Indian life insurance market
withoutanyforeign partner. Itthus becomes theonly purelydomesticcompany to begranteda
license to operate in the insurance sector. Second, it operates the largest Non-Bank Financial
Companyin India. It would becomethefirst Non-BankFinancial Companytooperateinthe life
insurancesector.
Reliance Groupalso jumped into the insurancesectorwithanameofReliance Life Insurance
somemonths back. How everthecompanycameintoexistenceafter buying100%stakein AMP
SanmarLife Insurance Company Ltd.
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Market share for premiums: life market
NAME OF THE PLAYER MARKETSHARE (%)
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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MARKETSHARE (%)
LIC
ICICI PRUDENTIAL
BIRLA SUN LIFE
ING VYSYA
BAJAJALLIANZ
SBILIFEHDFCSTANDARDLIFE
TATA AIG
MAXNEW YORK LIFE
AVIVA
AMP SANMAR
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MARKET SHARE AND GROWTH PERCENTAGE
87.22
4.43
1.9
0.35
0.87
0.89
1.15
1.1
0.81
0.46
0.16
82.3
5.63
2.56
0.37
2.03
1.8
1.36
1.29
0.9
0.79
0.26
-0.08
1.2
0.66
0.02
1.16
0.91
0.21
1.19
0.09
0.33
0.1
-50 0 50 100
LIC
ICICIPRU
DENTIAL
BIRLA
SUNLIF
EINGVY
SYA
BAJAJALLIANZ
SBILIFE
DFCS
TAND
ARDLIFE
TATA
AIG
MAXNE
WYORKLI
FE
AVIVA
AMPSANM
AR
MARKET
SHARE (%) Growth
%
MARKET
SHARE (%)
2005-2006
MARKETSHARE (%) 2003-
2004
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COMPANYS PROFILE
HDFC Standard Life Insurance Company Ltd. is one of Indias 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.), Indias 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.
New premium income 2003 :Rs. 76277 Crores.
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AA2 rated by Standard & Poors and Moodys.
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 20th
July
2000.
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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 Asias 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
y Chairman(HDFC Ltd.) : Mr. Deepak Parekh
y C.E.O. & M.D. (HDFC SLIC) : Mr. Deepak Satawalekar
y G.M. Sales : Mr. Suresh Mahalingam
y Head Retail Sales : Mr. Dilip Gazarao
y National sales training Manager : Mr. Frederick DSouza
y Regional Manager : Mr. Satish Soni
HEAD OFFICE:
HDFC Standard Life Insurance Company Limited, Ramon House, 169 Bacbay Reclamation,
Mumbai-400020.
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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.
3. To supplement income.
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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
e. Pension funds
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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.
The risk may mean that there is a possibility of loss or damage. It may or may not happen.
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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.
Its 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 dont 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,
training careful study, confidence and competence-factors that give you the courage to act
while facing fear.
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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 IRDAs 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?
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People dont 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?
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.
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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.
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FINANCIAL PLANNING PROCESS
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What Role Should Insurance Play in Your Financial Plan?
Insurance isoneof life'snecessitiesand probably the least-understoodfinancial product.
Insurancereimburses peopleforcovered lossesintheeventofan unfortunateoccurrence
suchasan illness,accident,ordeath. Atthesametime, itcanencourage preventionand
safetymeasures, provide investmentcapital, lendmoney,andhelp toreduceanxietyfor
society at large. As amechanism against lossof income and ameansof 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,orpersonal insuranceto protect propertysuchashomes,computers,andcars.
You may savemoney in your pension andother investments and have capital in your
home. Butifyou don'tknow exactly whatyour lifeinsurance policycoversorhaveonly
glanced at your employer-provided health and disability insurance policies, you're
neglectinganimportantaspectofyourfinancial plan.
Until somethinghappens,suchasacaraccident,an illness,orthedeathofa lovedone,
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
should have an adequate insurance safety net in place before considering investment
strategies.
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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 70s. 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 insurers stable was introduced in February, 2001 by Life Insurance Corporationof
India and majority of the private insurance companies have joined the fray soon after.
Policyholders now have a variety of unit l inked individual insurance and pension products under
single premium and / or non-single premium payment modes with various
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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
linked insurance products (section 2) and their impact on return to policyholder (section 3). The
last section identifies the issues and suggestions for regulation.
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What makes ULIPs a total financial planning package?
y Potential for Superior returns by switching between Equity & Debt
y Anytime Liquidity
y No Long Term Commitments
y Flexible Insurance Cover
y 100% Tax Free Returns on Withdrawals & Maturity
y Why some insurance advisors still promote traditional plans only?
y 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.
y Endowment Plan by not withdrawing for many years and create tax-free wealth till you
retire, or
y
Money-Back Plan by withdrawing as and when you require funds, or
y Childrens Plan by withdrawing funds for higher studies, marriage expenses or
y Whole-Life Plan by not withdrawing at all till 70 or 80 years of age, or
y Pension Plan by withdrawing every month after you retire.
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TRADITIONAL
MARKET
VS
INSURANCE
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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.
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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.
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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
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
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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.
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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.
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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
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
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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.
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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
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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.
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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%.
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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
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ULIPs vs Mutual Funds. Head to Head
ULIPs
Mutual Funds
Investment
amounts
Determined by the investor and
can bemodified as well
Minimum investment amounts are
determined by thefundhouse
Expenses
No upper limits, expenses
determined by the insurance
company
pper limits forexpenses chargeable to
investorshave beenset by theregulator
Portfolio
disclosure Notmandatory* Quarterly disclosures aremandatory
Modifying asset
allocation
Generally permittedforfreeorat a
nominal cost
Entry/exit loadshave to be borne by the
investor
Tax benefits
Section 80 benefits are available
on all investments
Section 80 benefits are available only
oninvestmentsintax-savingfunds
* 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
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CONCLUSION
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 childrens 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
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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.
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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.
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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
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Bibliography
Books Reffered:
1. Kothari, C.R., Quantitative Techniques, 2nd
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, 1st 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.