Insurance has been traditionally considered to be an essential part of a person’s portfolio. While it provides you with a safety blanket in any unfortunate circumstances like the death of your loved one, it cannot be treated as an investment that yields returns. Hence, for many young investors, insurance does not become a priority in their youth when ideally it is the perfect time to get it. This is where ULIPs come into the picture. ULIPs or Unit Linked Investment Plans are unique investment products that combine the benefits of insurance and mutual funds under the same roof. The returns of ULIPs are based on market conditions and are also subject to tax benefits.
However, there are many charges associated with an investment in ULIPs. Some of the charges are discussed below to give you a fair idea of what to expect.
Charges applicable to ULIPs
The charges related to investment in ULIPs are levied right from the start of investment till the time of surrender of such investment. Given below are the details of the same.
1. Premium allocation charges
Premium allocation charges are computed as a percentage of the premium that is to be levied by the insurer before allocating the policy. These charges are formed based on many components like underwriting cost, the commission of agent, medical expenses. The balance premium after deduction of these premium allocation charges is invested in the funds selected by the investor. These charges vary based on the lenders or plans.
2. Fund management charges
Fund management charges as the name suggests are the charges levied to manage the fund of the investor. These charges are levied as a percentage of the fund value by the insurer. The insurer arrives at these charges before the computation of the net asset value of the fund. The IRDA has laid down specific guidelines in this regard which provides that fund management charges cannot exceed more than 1.5% of the fund value.
3. Administration charges
Administration charges are the recovery of the basic charges that may be incurred by the insurer. These are monthly charges that may be in relation to the basic paperwork or services that are offered by the insurer. Administration charges are levied by canceling the units of the investor on a proportionate basis from each of such funds. These charges can be constant throughout the tenure of the plan or may vary based on a predefined rate of charge.
4. Mortality charge
Mortality charges are the charges for providing life cover for the insured. These charges are based on many factors like age, health, gender, etc. of the insured. Mortality charges are levied on a monthly basis and can be different or varied based on the guidelines of the insurer.
5. Partial withdrawal charges
ULIPs do not permit withdrawal from the scheme for the initial period of three years. Post this period, the investors are allowed to make partial withdrawals provided they meet the pre-set conditions. Such partial withdrawals are subject to specific charges which have to be paid by the investors. These charges can make your investment in Unit Linked Insurance Plans highly illiquid, which might prove difficult if you need funds in an emergency.
6. Surrender charges
Surrender charges are the charges that are levied when the investor prematurely surrenders ULIPs. These investment plans have a minimum lock-in period of 5 years. However, ULIPs can be surrendered before the completion of the lock-in period in case of any unforeseen circumstances which may not allow the regular premium payments. In such a case, the insured will levy the surrender charge which is calculated as a percentage of the annual premium amount. The surrender charges are in the range of Rs. 1,000 to Rs.3,000 for the first four years. After the completion of the fifth year, the surrender charges will not be levied by the insured.
7. Rider charges
Rider charges are the charges for any additional benefits that are added to the basic plan. These charges depend on the addition made and the policies of the insurer in this regard. For example : If you decide to go in for a critical illness cover after some years, you may have to incur extra charges on that addition.
8. Premium Redirection charge
You must be aware that ULIPs invest in market linked securities like debt and equities. You are allowed to choose investments into specific funds of the ULIP based on your risk appetite. When you choose certain funds, all future investments go into those funds. But all ULIPs, in general, allow you to make a certain number of switches per year. Any switch over the previously determined number will attract premium redirection charges.
There are many other charges that are levied on the ULIPs like premium reduction charges, guarantee charges, etc. The structure of these charges is not very transparent which may end eating into your premium and returns. So you should make investment decisions in ULIPs have to be made only after considering all these expenses. This will assure you of the returns and no unpleasant surprises on the way. Or it might be better to keep investments and insurance separate by going in for life and health insurance and mutual funds for all your investment needs depending upon your risk appetite and investment objectives.