With an advent of ULIPs, the question of ‘Should I invest in long term investment plans?’ has disappeared from the minds of the investors. Unit-Linked Insurance Plan [ULIP] is a plan wrapped with a combination of investment and insurance. Investment in ULIPs simply generates the possibility of higher returns as well as safer protection.
Unlike mutual funds, when you invest in a ULIP plan, an insurance company will deduct the charges which are applicable before the units are allotted. Later, the premium amount is invested in either of the three types of funds: equity, debt, or balanced funds. These ULIP charges totally depend upon the insurance companies and their plans. If you are inquisitive to understand the charge structure, go through these listed below before investing in a ULIP:
List of ULIP charges
Mortality charges
There are certain charges applicable for when you are provided with a life cover. These charges are dependent on certain factors like the age of an investor and the sum assured. Moreover, it is deducted on monthly basis. These charges are known as mortality charges.
For instance, Raj is a 30-year-old male with sum assured of Rs. 10 Lakhs and mortality charge of Rs. 2,740. Suppose the monthly mortality charges is Rs.252. If the net asset value by the end of the month is 23.35, then 10.8 units will be deducted from his balance.
Policy administration charges
As the name suggests, Policy administration charge is levied by the cancellation of units as well as is a fee for the administration of the plan. These charges are either flat throughout the entire policy or can vary at a predetermined range. Here, charges that cover paperwork, premium intimation, and so forth are considered.
For instance, as the Policy administration charge for the first year is 0, Raj doesn’t have to pay Policy administration charges. By the second year, he has to pay the charges on annual basis. Additionally, the service tax applicable on these charges are deducted on monthly basis as well.
Fund management charges
When you invest in a ULIP Policy, you are given the liberty to select from either equity funds, debt funds or balanced funds. Therefore, insurance companies charge you with a fee in order to manage these funds. However, before arriving at NAV, fund management charges are deducted.
For instance, Raj has chosen a fund management value of 1.25% for himself. So, the total charge paid for fund management by him is 1.25% of the corresponding fund value. These fund management charges are adjusted in the unit NAVs.
Premium allocation charges
Before investing in ULIPs, there is a percentage of the designated sum which is deducted in the initial years of the policy. Premium allocation charges generally include initial, renewal as well as commission charges.
For instance, 10% of Raj’s premium is deducted for the purpose of premium allocation.
Surrender charges
Failure to pay the premium within the lock-in period paves way for the payment of surrender charges. These charges are deducted from the total sum, if you indulge in premature encashment of units that are either partial or full.
Surrender charges are officially stated in the guidelines of the Insurance Regulatory and Development of India [IRDA]. Moreover, these charges are calculated on the basis of annual based premium.
Now that you have a clearer idea about the charge structure of the ULIPs, do not think twice about, ‘Why should I invest in ULIP?’ Make an informed decision and get the best ULIP plan for yourself.