Hdfc Life Insu.

8/2/2019 Hdfc Life Insu.

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An Analytical Report on Unit-Linked Products of HDFC SLIC LTD.

PART - I

INTRODUCTION

HDFC Standard Life Insurance Company Limited 1


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1

Part 1: INTRODUCTIONSummary

1.1 THE INSURANCE INDUSTRY

1.1.1 India Opens its Doors

In 1956 the Indian life insurance industry was made up

of 154 domestic life insurers, 16 foreign life insurers and 75provident funds, and was still governed by the Insurance Act of1938. During 1956, however, the Indian government, unhappywith the behavior of some industry members, decided tonationalize all the companies. The result was the Life Insurance Corporation of India (LIC) Act of1956 and the formation of the national insurer, LIC.

Over time the LIC has become an insurance giant. It employs around 120 000 staff andmore than 600 000 sales agents, and has more than 2000 branch offices. At the end of the 2001fiscal year, the LIC's financial statements showed a total income of Rs 547.4bn ($11.4bn). Theindustry remained relatively unchanged until 1990 when the Indian government, under pressure todismantle the LIC's monopoly, decided to allow foreign investment. The market finally opened upwhen the Insurance Regulatory & Development Authority (IRDA) Act of 1999 was passed andforeign players entered the Indian insurance arena subject to various conditions. In the nearly 10years it took to deregulate, the Indian market became quite an attraction for many US andEuropean players due to its tremendous growth potential. India has a population of more than a

billion people. Of these, it is estimated that around 300 million make up the consuming class. Witha high savings rate (approximately 27%) and a very low insurance penetration rate (1.5% of thegross domestic product) the opportunities are enormous.

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1.1.2 Entry restrictions

Deregulation came with certain conditions. Firstly, all new foreign players entering theIndian market must set up a joint venture with a local company, with total capital of approximately$20m. Secondly, the maximum share the foreign player can hold is 26%, with the local company(or companies) holding the balance. The shareholding rule has been one of the bigger hurdles forthe foreign players as local companies have not always been able to see a launch through tocompletion. It has not been unusual for joint ventures to falter only to be restarted with different

players.

When a new company is Indian no joint venture is required and at least two Indiancompanies are in the process of being licensed. Regulators are currently reconsidering the


This chapter consists of the introductory part of Insurance Industry, HDFC SLIC and

its partners HDFC and the Standard Life Assurance Company of Europe. It includes the

history and the background.


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foreign equity cap of 26%. Many foreign players hope it will be increased to at least 49% as theywould welcome the opportunity to increase their stake if this were allowed. In December 2000, thefirst new entrants' policies were sold when both ICICI Prudential and HDFC Standard Lifeannounced the milestone on the same day. As shown in the Table 1 on the next page, there are now12 new players selling insurance in India. Until now, all sales have been through agency

forces, which the new players are in the process of building. As a result of pressure from theindustry, however, amendments to the IRDA Act have recently been passed. The Insurance(Amendment) Act of 2002 allows, among other things, for alternative methods of distribution, withthe main two being banc assurance and brokers. All but one of the new insurers has set up agencyforces as their main method of distribution. Eg: - SBI Life intends to use the bank network to sellits products.

Table 1 : Indian life insurance joint ventures

Foreign Entity Local Company/Venture

AIG Tata

Allianz Bajaj

AMP Sanmar

Aviva Life Dabur

Cardiff State Bank of India Life

ING Life Vysya

Max New York Life Vysya

MetLife J & K Bank, Pallonji Group & others

Old Mutual Kotak Mahindra

Prudential ICICI

SLAC HDFC

Sun Life Birla

1.1.3 Bright Future

A bright future given that there were more than 150 insurance Companies operating inIndia in 1956 there seems no reason why, with many highly skilled, qualified Indian consumersand many people with an entrepreneurial spirit, the number of new players will not increasesubstantially from today's 12. Broker business will also increase to become the largest source of

premium income, although current legislation is slightly prohibitive. Banc assurance will also helpnew players capture a significant share of the market. Indian consumers are increasingly aware ofrisk and insurance. Combine this with the low penetration levels and the potential for reassuranceis clearly present. In addition, as regulations settle down, it is hoped that other forms of reinsurance

will be allowed.



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Regional officeRegional office

Branch officeBranch office

1992 26

1997 32

1998 41

1999 49

2000 67

2001 87

2002 1182003 142

Jun-03 151

No of Offices

HDFCs GEOGRAPHICALHDFCs GEOGRAPHICAL

SPREADSPREAD


1.2 HDFC LTD. (Housing Development Finance Corporation Limited)

1.2.1 Background

HDFC was incorporated in 1977 with the primary objective of meeting a social need thatof promoting home ownership by providing long-term finance to households for their housingneeds. Its the first private sector retail housing finance company. HDFC was promoted with aninitial share capital of Rs. 100 million.

1.2.2 Business Objectives

The primary objective of HDFC is to enhance residential housing stock in the countrythrough the provision of housing finance in a systematic and professional manner, and to promotehome ownership. Another objective is to increase the flow of resources to the housing sector by

integrating the housing finance sector with the overall domestic financial markets..

1.2.3 Organizational Goals

HDFCs main goals are to a) develop close relationships with individual households, b)maintain its position as the premier housing finance institution in the country, c) transform ideasinto viable and creative solutions, d) provide consistently high returns to shareholders, and e) togrow through diversification by leveraging off the existing client base.



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INTEGRATED FINANCIAL SERVICESINTEGRATED FINANCIAL SERVICES

SECURITISATION

Future Activities

DISTRIBUTION

HDFC CHUBB GENERALINSURANCE CO. LTD.


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1.3 SLAC (Standard Life Assurance Company)

1.3.1 Background


Table 2 : Standard Life - Founded 1825,

Head Office Edinburgh, Scotland (UK) PresenceUnited Kingdom 31 branches

Canada 11 "

Ireland 7 "

Germany 1 "

Austria 1 sales office

Spain 31 branches

Hong Kong 1 representative office

China 2 representative office

Founded in 1825Mutual Life Insurance Company since 1925Largest mutual life insurance company in EuropeAA2 rated by Moodys in December 2002AA rated by Standard & Poors in January 2003Assets under management 83.3 bn as on 15.11.2002Largest life and pension provider in the UK


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Table 3 : Unrivaled reputation For qualityYear Award

2002 company of the year



1999 company of the decade




1995 4 star service award

1994 overall best company



1991 3 star service award

1990 best mortgage services


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1.4 HDFC SLIC (HDFC Standard Life Insurance Company)

1.4.1 Background

The Partnership

HDFC and Standard Life first came together for a possible joint venture, to enter the LifeInsurance market, in January 1995. It was clear from the outset that both companies shared similarvalues and beliefs and a strong relationship quickly formed. In October 1995 the companies signeda 3 year joint venture agreement. Around this time Standard Life purchased a 5% stake in HDFC,further strengthening the relationship.

The next three years were filled with uncertainty, due to changes in government andongoing delays in getting the IRDA (Insurance Regulatory and Development authority) Act passedin parliament. Despite this both companies remained firmly committed to the venture.

In October 1998, the joint venture agreement was renewed and additional resource madeavailable. Around this time Standard Life purchased 2% of Infrastructure Development FinanceCompany Ltd. (IDFC). Standard Life also started to use the services of the HDFC Treasurydepartment to advise them upon their investments in India. Towards the end of 1999, the openingof the market looked very promising and both companies agreed the time was right to move theoperation to the next level. Therefore, in January 2000 an expert team from the UK joined a hand

picked team from HDFC to form the core project team, based in Mumbai. Around this timeStandard Life purchased a further 5% stake in HDFC and a 5% stake in HDFC Bank.

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

promoted by HDFC to enter the mutual fund market. The Mutual Fund was launched on 20th July2000.

The Incorporation

The company was incorporated on 14th August, 2000 under the name of HDFC StandardLife Insurance Company Limited. Their ambition from as far back as October 1995 was to be thefirst private company to re-enter the life insurance market in India. On the 23rd of October 2000,this ambition was realized when HDFC Standard Life was the only life company to be granted acertificate of registration. HDFC are the main shareholders in HDFC Standard Life, with 81.4%,while Standard Life owns 18.6%. Given Standard Life's existing investment in the HDFC Group,this is the maximum investment allowed under current regulations. HDFC and Standard Life havea long and close relationship built upon shared values and trust. The ambition of HDFC StandardLife is to mirror the success of the parent companies and be the yardstick by which all otherinsurance company's in India are measured.



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1.4.2 Presence in India



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1.4.3 Features

First private life insurance company First company to declare bonus (third bonus declared on 29.4.2003) Presence in more than 50 locations

Outlook money award for the best new insurance company (refer annexure)

1.4.4 Mission

They aim to be the top new life insurance company in the market. This does not just meanbeing the largest or the most productive company in the market, rather it is a combination ofseveral things like-

Customer service of the highest order

Value for money for customers

Professionalism in carrying out business

Innovative products to cater to different needs of different customers

Use of technology to improve service standards

Increasing market share

1.4.5 Values

SECURITY: Providing long term financial security to our policy holders will be ourconstant endeavor. They will be doing this by offering life insurance and

pension products.

TRUST: They appreciate the trust placed by their policy holders in them. Hence, they aimto manage their investments very carefully and live up to the trust.

INNOVATION: Recognizing the different needs of their customers, they are offering arange of innovative products to meet those needs.

Their mission is to be the best new life insurance company in India and these are the valuesthat will guide us in this.



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PART - II

THE CURRENTSCENARIO

10HDFC Standard Life Insurance Company Limited 11


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Part 2: THE CURRENT SCENARIOSummary

2.1 The Insurance Industry

3 types of platforms are used the world over to design life insurance products : Traditional Life (Past)

Universal Life (Present)

Variable Life (Future)

In past, the products had been designed using the Traditional Life platform. Though stillthis platform is used, but now the Insurers have turned towards the 2nd platform i.e. UniversalLife. Future does expect the entry of the Variable Life plat-formed products.


PAST

CURRENT

FUTURE

This chapter explains the basics of designing the insurance products as well as the

current scenario of the insurance products and HDFC Standard Life Insurance

Company Ltd.


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2.1.1 Traditional Life

The most basic form of insurance based on concept of sharing

Everybody contributes to the common pool

Policyholder contributes premium and gets values on happening of specified event

Company plays active role managing the pool and is responsible for the policy values Smoothening

Bonuses

2.1.2 Universal Life ( for detail refer section Product Description)

An insurance policy with mutual fund like operation

Concept of individual policy account and sub accounts in this account

Liquidity and access to cash values built up under the policy

Transparency and Flexibility in premium payments as well as other policy terms


Table 4 : Pros & Cons

Advantages Disadvantages

Simplicity Not so very transparent

Company playing active role Lack of Asset choice

Bonuses and guarantees Inflexibility as compared to other forms

Smoothening Low Liquidity

Various plans to suit different end objectives



Transparent & flexible Risk of NAV fluctuations

Policyholder playing active role Continuous Monitoring

Liquidity Fund charges

Interest guarantees Illustrations

No Lapsation / Grace Cost of features

Investment choices

Returns


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2.1.3 Variable Life

The most flexible form of insurance yet to come in India.

Very active role of policyholder. Investments determined by him.

Company more in advisory role.

Possible combination with Universal life to offer greatest flexibility.

2.1.4 Finally

Product development requires proper selection of platforms. Selection of platforms is adecision that a company takes after careful study of number of factors. Similarly a company isat the liberty to introduce different products that are designed using different platforms at thesame time.

While deciding on the key question Which policy to be chosen? one has to take intoconsideration not only just the flexibilities or the features that a platform offers but even moreimportant point that Whether it satisfies the need or not? These features look very attractive

but they have their own costs and implications on the policy values.




Transparent & flexible Only for learned investors

Policyholder playing major role Risk of Investment

Liquidity Continuous Monitoring

Investment choices Fund charges

Returns Cost of features


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2.2 HDFC SLIC

The company generated new business premium of Rs. 232.5 crore in 2003-04 on annualpremium income (API) basis. It registered a year-on-year growth of 76% and its corporate agencychannel, including its bancassurance business grew by 150% to Rs 50 Cr. The recently launched

unit linked business received good market response and contributed 27% of business generatedsince its launch.

Another significant achievement for HDFC Standard Life was that the cumulativeinsurance coverage, i.e. the sum assured for the policyholders, crossed the Rs. 13,500 crore markduring the year. The company has covered over 450,000 lives so far.

The growth in business in the past twelve months had been driven by HDFC Standard Lifepartnering very closely with its bancassurance partners, consolidating its presence across locationsby increasing its sales force of trained financial consultants and introducing new insurance andpension solutions on the unit linked platform.

The company started the year with presence in 49 cities - one of the widest presencesamong all new life insurance companies. Over the year, it built greater depth in these markets andhad 17,100 financial consultants as on 31st March 04 compared to 10,500 financial consultants on31st March 03. All the new entrants have been trained to understand the needs of the consumer

provide the right advice and maintain high service standards. This quality of advice is reflected inthe healthy persistence ratio of the companys business - both on the individual and the group side.

In January 2004, the company launched its unit linked insurance and pension plans throughspecially trained and certified Financial Consultants.HDFC Standard Life sees its pre-sale advice

as a clear differentiator. In pursuance of this strategy, HDFC Standard Life is the only company tohave a special training followed by a test before allowing Financials Consultants to advisecustomers on its unit linked products.



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PART - III

ABOUT THE

PROJECT

16



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Part 3: THE PROJECTSummary

3.1 PROFILE

TO PROVIDE MARKET ANALYSIS FOR THE UNIT LINKED PRODUCTS, NEWLYLAUNCHED BY HDFC SLIC IN JANUARY 04.

THIS INCLUDED:-

ANALYSING MARKET POTENTIAL.

ANALYSING MARKETS VIEW OF THE PRODUCT.

PROVIDING SALES & COMPANY-LEADS.

PROMOTING THE PRODUCT ITSELF.

TO ACHIEVE THE ABOVE OBJECTIVES WE WERE REQUIRED TO PERFORMTHE FOLLOWING:-

UNDERGOING PRODUCT TRAINING ON THE UNIT LINKEDPRODUCTS.

BASED ON THE OBJECTIVES, DESIGNING A QUESTIONNAIRE FORTHE CLIENTS (Refer Annexure).

UNDERGOING TRAINING FOR MASS PRESENTATIONS USINGGADGETS LIKE LCD & LAPTOP.

GIVING POWERPOINT PRESENTATIONS AT PLACES LIKE SCHOOLS,COLLEGES & GOVERNMENT OFFICES.


This chapter consists of the introductory part of the project. It includes the project

profile and the details of the products included in the project.


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3.2 THE PRODUCTS DESCRIPTION

The product given to us for this project was THE UNIT LINKED PRODUCTS. As theseproducts were designed using the Universal Life platform, it provides the investors with better

investment options. These products offered by the HDFC Standard Life Insurance is completelydifferent from the other conventional products. These products offer better risk cover, tax benefits,flexibility in premium payment, better investment options and thereby increase the chances of

better returns over the investment. Here the investment done is converted into units and so theproducts are named The UNIT LINKED PRODUCTS. The investment amount is divided by thenet asset value to arrive at the number of units.

With the conventional policies the role of the investor was limited. The investor hadabsolutely no idea where his invested money was being used by the company. The investor playeda passive role. The company itself had to decide where to invest the pool of money gathered. Sothe company played an active role. But with these new products, HDFC SLIC gave the investors

the freedom & liberty to make the decisions about their own investment.

3.3 THE UNIT LINKED PRODUCTS

3.3.1 Features

UnbundledSeparate identification of parts is possible i.e. investment element,

expense, administration charges and benefit charges are shown

separately.

Market LinkedValue of policy is linked to net assets. Investment risk and rewards are

transferred from the insurer to the client.

Explicit ChargesConsequence of unbundling results into charges which may or may not

be guaranteed.

TransparentRegular results are given to the clients and the client has the idea about

his investment.

The 2 Unit Linked Products are: The Endowment Plan

The Pension Plan



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3.3.2 THE ENDOWMENT PLAN

The Endowment Plan is a life insurance plan. Here a person can insure his/her life withthe company to cover the risk of his/her death over the family.

Features

1. Choice of Investment Funds2. Switching3. Redirection4. Premium Payment Flexibility5. Premium Topups6. Premium Holidays7. Choice of Risk Cover

8. Withdrawals9. Tax Benefits10. Death Benefits11. CI Benefits (if chosen)12. AD Benefits (if chosen)13. Surrender Benefits14. Paid Up Benefits15. Maturity Benefits16. Age and Term Limits17. Minimum Premium Payable

Features Detailed

1. Choice of Investment Funds (Compared)

The Endowment Plan offers the investor with the choice of five funds.Types of funds:

o Liquid Fund

o Secure Managed Fund

o Defensive Managed Fundo Balanced Managed Fund

o Growth Fund



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G r ow

th


Liquid FundThe liquid fund invests in Bank Deposits and high quality short-

term money market instruments. The fund is designed to be cash secureand has a very low level of risk, however unit prices may occasionallygo down due to the use on short-term money market instruments.

Secure Managed FundThe secure managed fund will invest in Government Securities

and Bonds issued by companies or other bodies with a high creditstanding, however a small amount of working capital may be invested incash to facilitate the day-to-day running of the fund. The fund has a lowlevel of risk but unit prices may still go up or down.

Defensive Managed Fund

15% to 30% of the Defensive Managed fund will be invested inhigh quality Indian equities. The remainder will be invested inGovernment Securities and Bonds issued by companies or other bodieswith a high credit standing, though a small amount of working capitalmay be invested in cash to facilitate the day-to-day running of the fund.The fund has a moderate level of risk with the opportunity to earn higherreturns in the long term from some equity investment, unit prices may go up or down

Balanced Managed Fund30% to 50% of the Balanced Managed fund will be invested in

high quality Indian equities. The remainder will be invested inGovernment Securities and Bonds issued by companies or other bodieswith a high credit standing, though a small amount of working capitalmay be invested in cash to facilitate the day-to-day running of the fund.The fund has a higher level of risk with the opportunity to earn higherreturns in the long term from the higher proportion invested in equities,unit prices may go up or down

Growth FundThe Growth fund invests in high quality Indian equities. In

addition a small amount of working capital may be invested in cash tofacilitate the day-to-day running of the fund. The fund has higher levelof risk with the opportunity to earn higher returns in the long term fromthe investment in equities. Unit prices may go up or down

The investor here is given the liberty to choose between the types of funds. The investor isgiven the freedom to change his investment fund any working day. The investor can bifurcate hisinvestment into parts and make the investment accordingly.


100%SHORT TERM

MONEYMARKET

100%SHORT TERM

MONEYMARKET

70-85%LONGTERM

MONEYMARKET

15-30%EQUITYMARKET

50-70%LONGTERM

MONEYMARKET

30-50%EQUITYMARKET

100%EQUITYMARKET


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Example: Mr. X invests Rs. 1,00,000 . He wishes to invest Rs. 40,000 in Secure Fund,40,000 in Defensive Fund and the rest in the Growth Fund. After a week MR. X finds that theequity market is on a boom, so he changes the Growth Funds investment to Rs. 40,000 andreduces the balance of the Defensive Fund to Rs. 20,000. After 4 days the market falls. So againMR. X requests the company to transfer his full investment from Growth Fund to the SecureFund.

The person can plan his investment strategy according to his style and can make changestimely without any extra cost.

Market Comparison

Table 7Type

of FundLiquid Fund

SecureManaged

DefensiveManaged

BalancedManaged

Growth

Investment

Instrument

Bank Deposits

/Short-termmoney

Govt

Securities& Bonds

15-30%

in equities

30-50%

in equities Equities

HDFC SL Available Available Available Available Available

ICICI Pru Not Available Available Not Available Available Not Available

Birla Sun Life Not Available Available Available Not Available Not Available

Om Kotak Not Available Available Available Available Not Available

2. Switching

When a client has invested his money in different proportions among the variousinvestment funds, he can transfer those investments from one fund to another. This is called asSwitching. Switching is allowed any number of times during a year and has no charges for thesame. The changes are made on T+1 basis.

Example: MR. X chooses to invest his premium of Rs.10,000 in Short Term MoneyMarket. Suppose 4 months later he speculates a boom in the Equity Market, then he can transfer ofhis investment from Short Term Money Market to Equity Market, this is called Switching.



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3. Redirection

Every time a client pays premium, he is allowed to select the fund/s for investment. Eachtime he can select different investment strategy without using a Switch, this is called Redirection.

Example: MR. X chooses to invest his premium of Rs.10,000 in Short Term MoneyMarket. Suppose a year later he speculates a boom in the Equity Market and hence he pays the

premium but invests it into the Equity Market, thus he redirects his new money without switchinghis old money.

4. Premium Payment Flexibility (Compared)

Here the investor is allowed to change the premium amount any time after the completionof the first three years of regular premium payment. The premium can be altered to any extent i.e.

it can either be increased, decreased, reduced to zero. But the only compulsion is for the first threeyears. The investor can select the mode of payment i.e. yearly, half yearly, quarterly. Premiumamountcan be paid by cash, local cheque, demand draft or standing order. Outstation cheques and

post dated cheques not allowed

If a person skips the premium in between the term of first three years, his policy lapses andhe will be charged 25% on the due amount. The rest of the amount is returned to him and his

policy is closed. He on no terms can reopen this policy again.

Example 1: MR X has paid the premium of Rs. 10,000 each for the first two years. He didnot pay the premium for the third year. So the company will charge 25% on the 10,000 due as

lapsatation charge and cut it from the 20,000 paid by him. MR. X will receive the rest amount.

Example 2: MR X has paid the premium of Rs. 10,000 each for the first three years. Hedoes not wish to pay the premium for the fourth year. In that case his policy will continue with the

balance of Rs. 30,000 at the end of the fourth year instead of Rs. 40,000. Now for the fifth yearonwards, he wants to make more investment. So, MR. X increases his premium amount and paysRs. 15,000 as regular premium henceforth. He is even allowed to decrease the amount to minimumof Rs.5,000 or even increase it again.

Market Comparison

Table 8

OrganizationRegularPremium Increases

PremiumReduction

HDFC SL Allowed Allowed

ICICI Pru Not Allowed Not Allowed

Birla Not Allowed Not Allowed

Om Kotak Not Allowed Not Allowed



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5. Premium Topups:

Premium Topups refer to that amount paid in excess of the premium amount. This producteven offers the facility to the investor to invest more than his regular amount whenever he wishesto do so. Minimum Premium Topup is Rs. 5,000 and maximum is no limit.

Example: MR X has paid the premium of Rs. 10,000 each for the first three years. For thefourth year he wants to take the tax benefit and so he pays Rs. 10,000 as regular premium and paysRs. 10,000 extra as Premium Topup. He in future can even make a Topup, increase or decrease the

premium whenever required.

6. Premium Holidays:

After the completion of the first three years of regular premium payment the investor is freeto enjoy all the facilities provided to him. If an investor does not pay the premium, he is said to be

on a holiday referred to as Premium Holidays. An investor can go on the Premium Holiday for anynumber of years i.e. even for rest of the term after paying the three regular premiums.

7. Choice of Risk Cover:

Client can choose the level of risk cover by selecting one of the predetermined cover levelsdepending on the entry age.

Example: MR. X is of age 48 and has the option of low and medium risk cover of his 20years of policy term. He opts for medium risk. He pays regular premium of Rs. 20,000 for 5 years.After 5 years, he dies. In this case, his family will get Rs. 80,000 plus return on these 80,000 for 4years and Rs.2,00,000 as risk cover. If he had opted for low risk cover, his family would have gotRs. 1,00,000 only.

Choosing any risk cover, the investment is divided into respective proportions for riskcharge and investment. If a person offers high risk then his risk charge will be higher as comparedto medium and low risk cover options. This will in turn reflect as lesser investment proportions andresult into lesser investment returns. It depends upon the person to select the risk cover keeping inmind his life and lifestyle. If a person has to travel very often, there is a fear of accidental death. Inthat case he can opt for high risk cover.

8. Withdrawals


Table 9

Age Bands LOW MEDIUM HIGH

18-40 5 times annual premium 10 times annual premium 20 times annual premium

41-50 5 times annual premium 10 times annual premium Not available

51 and above 5 times annual premium Not available Not available


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The Policy Value in excess of the Sum Assured can be withdrawn without any cost. Thusindirectly the policyholder can treat its account as a savings account. Currently there are nowithdrawal charges.

Example:

Table 10

Policy Value Sum AssuredAmount ofWithdrawal

Comments

500000 200000 25000 Allowed

200000 500000 10000 Not allowed

500000 500000 10000 Not allowed

600000 500000 5000 Not allowed

9. Tax Benefit.

Premium paid is eligible for section 88 benefits No capital gains tax on switching Section 10 10D benefit allowed subject to some conditions

Keeping in mind the above provisions, The Endowment Plan investors are given theprivilege of all the above tax provisions. As mentioned above premium of any sort is eligible for

tax exemption under section 88. Any sum received under a life insurance policy gets benefit undersection 10 10D, including any sum allocated by way on bonus on such a policy other than :

any sum received under a key-man policy any sum received under an insurance policy in respect of which the premium paid

in any of the years during the term of the policy exceeds twenty per cent of theactual sum assured

Provided that the terms of this section shall not apply to death claims.

Below is given a table which shows how much of tax can be saved.

Table 11INCOME TAX

SECTION

GROSS ANNUAL SALARY HOW MUCH TAX CAN YOU SAVE?

Sec. 88

< Rs. 1.5 Lakh Rs. 12,000 on investment of Rs. 60,000.

Rs. 1.5 Lakh - Rs. 5 Lakh Rs. 10,500 on Investment of 70,000.

> Rs. 5 Lakh Nil

10. Death Benefits:



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It is the benefit that is received by the policyholders family after his death. Under thisbenefit the family receives greater of the Policy Value and the Sum Assured.

Example:

Table 11

Policy Value Sum Assured Death Benefit15000 150000 150000

45000 150000 150000

75000 150000 150000

105000 150000 150000

135000 150000 150000

165000 150000 165000

195000 150000 195000

225000 150000 225000

11. CI Benefits (if chosen):

It is the benefit that is received by the policyholder on diagnosis of a Critical Illness. Underthis benefit he receives greater of the Policy Value and the Sum Assured. Diseases covered hereare:

Cancer,

Coronary Artery By-pass Graft surgery (CABG),

Heart Attack,

Kidney Failure,

Major Organ Transplant, Stroke

Example:

Table 12

Policy Value Sum Assured Death Benefit

15000 150000 150000

45000 150000 150000

75000 150000 150000

105000 150000 150000

135000 150000 150000

165000 150000 165000

195000 150000 195000

225000 150000 225000

12. AD Benefits (if chosen):



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It is the benefit that is received by the policyholders family on the Clients AccidentalDeath. Under this benefit the family receives additional amount equal to the sum assured inaddition to the death benefit.

Example:

Table 13Policy Value Sum Assured Accidental death Benefit

15000 150000 300000

45000 150000 300000

75000 150000 300000

105000 150000 300000

135000 150000 300000

165000 150000 315000

195000 150000 345000

225000 150000 375000

13. Surrender Benefits:

policyholder can surrender the policy at any time

policy value less the surrender charge would be payable surrender charge is 25% of 3 years outstanding premium policy surrendered after payment of 3 years premium will bear no charges complete policy value will be returned under that condition.

Examples:

Table 14

Premiumamount

ModeAnnualPremium

No of Premium

paid

Amountpaid till

surrender

3 yearspremium

Balanceof 3

years

SurrenderCharge

10000 Yearly 10000 1 10000 30000 20000 5000

5000 Half yearly 10000 3 15000 30000 15000 3750

3000 Quarterly 12000 8 24000 36000 12000 3000

8000 Half yearly 16000 6 48000 48000 0 0

7000 Quarterly 28000 13 91000 84000 0 0

14. Paid Up Benefits:



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Policyholder can make the policy paid up, provided Three years premium have been paid, and The policy has acquired sufficient value (Rs 15,000 at present)

In other cases the policy will lapse and the policy value less charges would bereturned to the policyholder

Paid up policy can be reinstated at any time without collecting arrears of premium

Examples:

Table 15UnitisedFund

Sum AssuredNo of yearspremium paid

Comments

500000 200000 5 Allowed

200000 500000 3 Allowed

500000 500000 2 Not allowed

600000 500000 1 Not allowed

10000 500000 5 Not allowed

15. Maturity Benefits:

At Maturity, the Policy Value (value of units in the policyholders account) wouldbe paid regardless of the Sum Assured.

Examples:

Table 16

Policy Value Sum Assured Maturity Benefit

15000 150000 15000

45000 150000 45000

75000 150000 75000

105000 150000 105000

135000 150000 135000

165000 150000 165000

195000 150000 195000

225000 150000 225000

16. Age and Term Limits:



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17. Minimum Premium Payable (Compared)


Table 18

Minimum Premium HDFCSL ICICI Pru Birla Sun Life Om Kotak

Regular Premium 10000 p.a 18000 p.a. Min S.A 50000 10000 p.a.

Regular premium increase 5000 p.a. N.A. N.A N.A

Single Premium Top Ups 5000 10000 N.A. N.A

The age and term limits under ULEP are as follows:

Table 17Deathcover

Accelerated critical

illness cover (ACI)

Accidental death

benefit cover (ADB)

Minimum Term 10 10 10

Maximum Term 30 30 30

Maximum Maturity Age 75 65 70

Minimum Age at Entry 18 18 18

Maximum Age at Entry 60 55 55

If any of the ACI or ADB covers are chosen, the common age and term limits will apply.

The age of the life assured is calculated as age last birthday.


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3.3.3 THE PENSION PLAN

The Pension Plan is a Retirement Plan. Here a person can cover the risk of living toolate. It is to secure the income after retirement.

Features

1. Single Premium Contract2. Choice of Investment Funds3. Premium Payment Flexibility4. Premium Topups5. Premium Holidays6. Choice of Pension7. Switching8. Redirection

9. Tax Benefits10. Death Benefits11. Surrender Benefits12. Paid Up Benefits13. Vesting Benefits-14. Age and Term Limits

Features Detailed

1. Single Premium Contract

The Pension Plan can be started as a Single Premium Contract i.e. the investor can pay thefull amount at the starting of the contract for a single time only. In future, not paying any premiumwill cause no trouble on his investment. Using the Single Premium Contract, the policy can besurrendered after six months. The minimum amount that is required to start the contract as a SinglePremium is Rs. 25,000.

2. Choice of Investment Funds (Compared)

The Endowment Plan offers the investor with the choice of five funds.Types of funds:

o Liquid Fund

o Secure Managed Fund

o Defensive Managed Fund

o Balanced Managed Fund

o Growth Fund



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Liquid FundThe liquid fund invests in Bank Deposits and high quality short-

term money market instruments. The fund is designed to be cash secureand has a very low level of risk, however unit prices may occasionallygo down due to the use on short-term money market instruments.

Secure Managed FundThe secure managed fund will invest in Government Securities

and Bonds issued by companies or other bodies with a high creditstanding, however a small amount of working capital may be invested incash to facilitate the day-to-day running of the fund. The fund has a lowlevel of risk but unit prices may still go up or down.

Defensive Managed Fund

15% to 30% of the Defensive Managed fund will be invested in high quality Indianequities. The remainder will be invested in Government Securities and Bonds issued bycompanies or other bodies with a high credit standing, though a small amount of workingcapital may be invested in cash to facilitate the day-to-day running of the fund. The fundhas a moderate level of risk with the opportunity to earn higher returns in the long termfrom some equity investment, unit prices may go up or down

Balanced Managed Fund30% to 50% of the Balanced Managed fund will be invested in high quality Indian

equities. The remainder will be invested in Government Securities and Bonds issued by

companies or other bodies with a high credit standing, though a small amount of workingcapital may be invested in cash to facilitate the day-to-day running of the fund. The fundhas a higher level of risk with the opportunity to earn higher returns in the long term fromthe higher proportion invested in equities, unit prices may go up or down

The investor here is given the liberty to choose between the types of funds. The investor isgiven the freedom to change his investment fund any working day. The investor can spread hisinvestment into parts and make the investment accordingly.

Example: MR. X invests Rs. 1,00,000 . He wishes to invest Rs. 40,000 in Secure Fund,

40,000 in Defensive Fund and the rest in the Balanced Fund. After a week MR. X finds that theequity market is on a boom, so he changes the Balanced Funds investment to Rs. 40,000 andreduces the balance of the Defensive Fund to Rs. 20,000. After 4 days the market falls. So againMR. X requests the company to transfer his full investment from Balanced Fund to the SecureFund. The person can plan his investment strategy according to his choice and can make changesin that strategy without any extra cost.

Market Comparison

Table 19Typeof Fund

Liquid Fund Secure ManagedDefensiveManaged

BalancedManaged


100%SHORT TERM

MONEYMARKET

100%SHORT TERM

MONEYMARKET

100%EQUITYMARKET

15-30%EQUITYMARKET

70-85%LONGTERM

MONEYMARKET

30-50%

EQUITYMARKET

50-70%LONG

TERMMONEY

MARKET


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Investment

Instrument

BankDeposits /Short-term money

Govt Securitiesand Bonds

15-30%in equities

30-50%in equities

HDFC SL Available Available Available Available

ICICI Pru Not Available Available Not Available Available

Birla

Sun LifeNot Available Available Available Not Available

Om Kotak Not Available Available Available Available

3. Premium Payment Flexibility (Compared)

Here the investor is allowed to change the premium amount any time after the completionof the first three years of regular premium payment. The premium can be altered to any extent i.e.it can either be increased, decreased, reduced to zero. But the only compulsion is for the first three

years. The investor can select the mode of payment i.e. yearly, half yearly, quarterly. Premiumamountcan be paid by cash, local cheque, demand draft or standing order. Outstation cheques andpost dated cheques not allowed

If a person skips the premium in between the term of first three years, his policy lapses andhe will be charged 25% on the due amount. The rest of the amount is returned to him and his

policy is closed. He on no terms can reopen this policy again.

Example 1: MR X has paid the premium of Rs. 10,000 each for the first two years. He didnot pay the premium for the third year. So the company will charge 25% on the 10,000 due aslapsatation charge and cut it from the 20,000 paid by him. MR. X will receive the rest amount.

Example 2: MR X has paid the premium of Rs. 10,000 each for the first three years. Hedoes not wish to pay the premium for the fourth year. In that case his policy will continue with the

balance of Rs. 30,000 at the end of the fourth year instead of Rs. 40,000. Now for the fifth yearonwards, he wants to make more investment. So, MR. X increases his premium amount and paysRs. 15,000 as regular premium henceforth. He is even allowed to decrease the amount to minimumof Rs.5,000 or even increase it again.



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Market Comparison

Table 20

OrganizationRegularPremium Increases

PremiumReduction

HDFC SL Allowed Allowed

ICICI Pru Not Allowed Not Allowed

Birla Not Allowed Not Allowed

Om Kotak Not Allowed Not Allowed

4. Premium Topups:

Premium Topups refer to that amount paid in excess of the premium amount. This producteven offers the facility to the investor to invest more than his regular amount whenever he wishesto do so. Minimum Premium Topup is Rs. 5,000 and maximum is no limit.

Example: MR X has paid the premium of Rs. 10,000 each for the first three years. For thefourth year he wants to take the tax benefit and so he pays Rs. 10,000 as regular premium and paysRs. 10,000 extra as Premium Topup. He in future can even make a Topup, increase or decrease the

premium whenever required.

5. Premium Holidays:

After the completion of the first three years of regular premium payment the investor is freeto enjoy all the facilities provided to him. If an investor does not pay the premium, he is said to beon a holiday referred to as Premium Holidays. An investor can go on the Premium Holiday for anynumber of years i.e. even for rest of the term after paying the three regular premiums.

6. Choice of Pension

Here, the liberty is given to the investors of the Pension Plan that if in future they find thatany other company is offering better pension compared to HDFC SLIC, with their request thecompany will transfer their Pension Plan to the company name they mentioned, without anycharges. The option remains with the investor to continue their Pension Plan with the company orto go to some other company which might offer better Pension options.



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7. Switching

When a client has invested his money in different proportions among the variousinvestment funds, he can transfer those investments from one fund to another. This is called asSwitching. Switching is allowed any number of times during a year and has no charges for thesame. The changes are made on T+1 basis.

Example: MR. X chooses to invest his premium of Rs.10,000 in Short Term MoneyMarket. Suppose 4 months later he speculates a boom in the Equity Market, then he can transfer ofhis investment from Short Term Money Market to Equity Market, this is called Switching.

8. Redirection

Every time a client pays premium, he is allowed to select the fund/s for investment. Each

time he can select different investment strategy without using a Switch, this is called Redirection.Clients can choice to redirect any renewal premium in any proportion across all funds

Example: MR. X chooses to invest his premium of Rs.10,000 in Short Term MoneyMarket. Suppose a year later he speculates a boom in the Equity Market and hence he pays the

premium but invests it into the Equity Market, thus he redirects his new money without switchinghis old money.

9. Tax Benefit.

Premium paid is eligible for section 88 benefits No capital gains tax on switching Section 10 10D benefit allowed subject to some conditions Section 80CCC benefit allowed under ULPP

Table 20INCOME TAX

SECTION

GROSS ANNUAL

SALARY

HOW MUCH TAX CAN YOU SAVE?

Sec. 88

< Rs. 1.5 Lakh Rs. 12,000 on investment of Rs.

Rs. 1.5 Lakh Rs. 5 Rs. 10,500 on Investment of

> Rs. 5 Lakh Nil

Sec. 80 CCC Across all income Upto Rs. 3,000 saved on



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10. Death Benefit

The policy value and the sum assured of Rs 1000 would be paid. Here Rs. 1000 is paidover and above the policy value.

Table 21Policy Value Sum Assured Death Benefit

15000 1000 16000

45000 1000 46000

75000 1000 76000

105000 1000 106000

135000 1000 136000

165000 1000 166000

195000 1000 196000

225000 1000 226000

11. Surrender Benefits

policyholder can surrender the policy at any time under regular premium contract

and after six months under single premium contract policy value less the surrender charge would be payable surrender charge is 20% of 3 years outstanding premium under regular premiumpolicies currently no surrender charge for single premium policies but we reserve the rightto charge in future

surrender charge calculation under regular premium policies is shown below

Table 22

Premiumamount Mode

AnnualPremium

No of

Premiumpaid

Amount

paid tillsurrender

3 yearspremium

Balance

of 3years

SurrenderCharge

10000 Yearly 10000 1 10000 30000 20000 4000

5000 Half 10000 3 15000 30000 15000 3000

3000 Quarterly 12000 8 24000 36000 12000 2400

8000 Half 16000 6 48000 48000 0 0

7000 Quarterly 28000 13 91000 84000 0 0

surrender charge is 20% of 3 years outstanding premium under regular premiumpolicies



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no surrender charge under single premium policies at present. However we reserve theright to charge in future

12. Paid Up Benefits:

Policyholder can make the policy paid up, provided Three years premium have been paid, and The policy has acquired sufficient value (Rs 15,000 at present)

In other cases the policy will lapse and the policy value less charges would bereturned to the policyholder

Paid up policy can be reinstated at any time without collecting arrears of premium

Examples:

Table 23UnitisedFund

Sum AssuredNo of yearspremium paid

Comments

500000 200000 5 Allowed

200000 500000 3 Allowed

500000 500000 2 Not allowed

600000 500000 1 Not allowed

10000 500000 5 Not allowed

13. Vesting Benefits

The investor has to mention the date from which his pension should start. The date selectedby the investor is known as the vesting date from which he will get regular pension as annuity. Theway in which the investor wants his pension, is his choice. Once the vesting date is crossed, theinvestor will get regular pension, by the already set terms and conditions.

14. Age and Term Limits


The age and term limits under ULP P are as follows:

Table 24

Regular Premium Single Premium

Minimum Term 10 5

Maximum Term 40 40

Minimum Vesting Age 50 50

Maximum Vesting Age 70 70

Minimum Age at Entry 18 18

Maximum Age at Entry 60 65

The age of the life assured is calculated as age last birthday.


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PART - IV

THE ANALYSIS

36



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Part 4: THE ANALYSISSummary

4.1 HYPOTHESIS TESTING

For the purpose of hypothesis testing the attribute we have measured is the respondents

intention to buy the Unit Linked Products from HDFC SLIC. We have used Z test for the

same.

The Null Hypothesis Ho = THE MARKET POTENTIAL OF THE UNIT LINKED

PRODUCTS IS HIGH (approx. 65%).

The Alternate Hypothesis H1 = THE MARKET POTENTIAL OF THE UNIT

LINKED PRODUCTS IS NOT HIGH (>60%).


This chapter consists of the details about the analysis and the interpretation of the data

collected during the project. It includes the hypothesis testing, sample size calculation,

product analysis and the market analysis in detail.


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4.2 SAMPLING

4.2.1 The Pilot Study

We had done a pilot survey of 15 respondents out of which we had got 12 respondentsinterested in the product. This gave us the ratio of .8 (p) interested respondents to .2 (q) non-interested respondents.

4.2.2 The Sample Size

No. of samples (pilot survey) =20

The probability of success (Ph0) = 20/13 = 0.65

(Qh0) = (1-.65) = 0.35

Desired Confidence level = 90% (Z=1.64)

Desired Interval Range = 0.10

Standard error of the Proportion (S) = 0.10/1.64 = 0.061

Sample size = p*q/S2

= 0.65*0.35/0.00372= 65 (rounded)



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4.3 THE TEST RESULT

The Critical Test Value = +1.64

Standard Deviation (S) = ((Pho*Qho)/n)1/2 where

Sample Size (n) = 65

Hypothesized P (Pho) = .65

Hypothesized Q (Qho) = .35

S = .061

P = .63 (refer pg.48)

Z = (P -Pho)/Sp

Z = (.63 - .65)/.051 = -.39

As Z calculated -.39 falls between +1.64, hence the Null Hypothesis Ho is accepted.

Thus with 95% confidence level we can say that the Market Potential of the Unit Linked Productsis high around 65%.



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4.4 MARKET ANALYSIS

4.4.1 The Market Share

LIC has been dominating the Market since a long time. Though the private players havestarted giving tough competition to LIC and also decreased its Market Share, LIC still holds a big

piece of the cake. As shown in the chart belowLIC still holds around 90%of the Market while therest is distributed among the private players.

In all, LIC alone holds 81% of the market while the Private Players alone holds only 2%.Private Players also share 15% market with LIC. Thus the outline is that LIC holds 96% of themarket and Private Players have 17% of the market. But still 2% of the market is untapped.

M AR K E T S H A

81%

15%2%2%

LIC

BOTH

PRIVAT

NONE



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4.4.2 The Driving Factor

There were four factors that were given to the respondents along with a choice ofmentioning any other factor that has driven them to buy the policy that they already had.They were as follows:

1. Credibility/Familiarity of the company.2. Relation with the Agent.3. Rebates4. No other company was available

The results were:

Th e D riving Fac

52%

24%

11%

13%

credibility

pe rsonal relatino other co .

rebates

We can clearly say from the above chart that Credibility/Familiarity of the Company hasbeen the driving factor of the Industry. Though people are loosing faith in LIC, but still there is lotto be fought for gaining the market share for Private Players. To win that share companies willhave to increase their Credibility and win peoples faith.



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4.4.3 The Products Share

The products share here means the Market share of different types of Policies.The three basic types of policies mentioned here are:

1. Savings1.1 Money Back1.2 Long Term

2. Protection3. Retirement

The result was as follows:

Product Shares

31%

16%

9%

44% savingsmoney back

savings long

term

Protection

Retirement

Savings Money Back policy was preferred by 32 (44%) out of 65 people surveyed. For theSavings Long Term policy, preference was 23 out 65 respondents. Clearly Savings policies hereconstitute 75% of the Market.

Whereas for the Protection and the Retirement policies the preferences were 12 and 7

respondents respectively.



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4.5 PRODUCT ANALYSIS

4.5.1 Features

Ranking

On the basis of the ratings given to the Features of the Unit Linked Products by therespondents, here is the ranking of the features.

1. Transparency2. Wide Investment Option3. Flexibility in Premium Payment4. Safety5. Premium Holiday6. Overall Facility (withdrawals, switching, etc.)

Individual Ratings

The ratings for the individual features are as follows:

1. Transparency

TRANSPARENCY

43%

46%

11%

VERY IMP

IMP

NOT IMP

Transparency was the best liked feature by the people. 28 respondents found it to be veryimportant and 30 respondents felt it was important. Only 7 people out of 65 felt that this featurewas not important. Hence we could say that this feature has potential to attract people.



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2. Wide Investment Option

WIDE INVESTMENT OPTIONS

40%

49%

11%

VERY IMP

IMP

NOT IMP

Wide Investment Options was the second best liked feature by people. 26 respondents

found it to be very important and 32 respondents felt it was important. Only 7 people out of 65 feltthat this feature was not important.

So 89% of the respondents were attracted with this feature of the product. Hence we couldsay that this feature also has a potential to attract clients.



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3. Flexibility in Premium Payment

PREMIUM PAYMENT FLEXIBILITY

43%

42%

15%

VERY IMP

IMP

NOT IMP

Premium Payment Flexibility was also liked by the people. 28 respondents found it to bevery important and 27 respondents felt it was important. Only 10 people out of 65 felt that thisfeature was not important. Thus we could say that this feature has potential to attract people.

4. Safety

SAFETY

37%

48%

15%

VERY IMP

IMP

NOT IMP

Safety was also preferred by the people. 24 respondents found it to be very important and31 respondents felt it was important. Only 10 people out of 65 felt that this feature was notimportant. Thus we could say that this feature has potential to attract people.



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5. Premium Holiday

PREMIUM HOLIDAYS

37%

41%

22%

VERY IMP

IMP

NOT IMP

Premium Holidays was not so much preferred by the people. 24 respondents found it to bevery important and 27 respondents felt it was important. 14 people out of 65 felt that this featurewas not important. Thus we could say that this feature has little potential to attract people. Thereason could be because people by policy to invest and not to enjoy premium holidays.



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6. Overall Facility (withdrawals, switching, etc.)

OVERALL FACILITY

22%

55%

23%

VERY IMP

IMP

NOT IMP

Amazingly there were 15 people out of 65 who felt that the overall facilities of Switching,

Withdrawals, Redirection, etc were not at all important. Only 14 respondents found it to be veryimportant but still 36 respondents felt it was important. Thus we could still say that this feature haslittle potential to attract people.

Hence all the features of the Unit Linked Products were generally liked by people andfound to be important and required. So through this analysis we could conclude that all the featuresof the products are necessary and none of them are unattractive.



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4.5.2 The Potential Market

MARK ET POTENTI

63%

37%

Potential

Non Potentia

As already stated in the hypothesis testing, there is high Market Potential for the UnitLinked Products. 41 respondents out of 65 were interested in the product. Whereas only 24respondents showed no interest in the product. Clearly the market potential of this product is very

high.



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4.6 THE FINDINGS

The Unit Linked Products has a high Market Potential.

The product unawareness ratio is still high in the market.

People are choosing insurance products by their needs but

company by its Credibility.

The market is into a constant fear of closing down of

schemes after the Government closing some of its schemes

like UTI.

Due to VRS (Voluntary Retirement Scheme) scheme, there

is a huge market for the Pension Plan. But again the

market is requiring immediate Pension Plans.



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4.7 RECOMMENDATIONS

The Company could focus on increasing the Market

Awareness about the Unit Linked Products.

The Company could win the markets faith with increased

credibility in peoples mind.

The Company could provide immediate Pension Plan to

the market using the VRS schemes.



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4.8 BIBLIOGRAPHY

BOOKS

COOPER, D.R. and SCHINDLER, P.S., BUSINESS RESEARCH METHODS, TATAMcGRAW-HILL, New Delhi, 2003.

LEVIN, R.I. and RUBIN, D.S., STATISTICS FOR MANAGEMENT, PEARSON EDUCATION,Delhi, 2002

WEBSITES

WWW.HDFCINSURANCE.COM

WWW.IRDA.ORG

WWW.ICICI-PRU.COM

WWW.REDIFFMAIL.COM

WWW.SIFY.COM

WWW.BUSINESS-STANDARD.COM

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