Five Ulip Charges That You Must Know
Author: Naveen Kumar
Investors are often attracted to unit linked insurance plans (Ulips) offered by life insurance companies thanks to the combination they provide. They not only provide tax savings since they are eligible for tax deductions under Section 80C for premiums, but they also provide the typical high growth from their equity investments in the long term.
However, a common oversight of Ulip investors relates to the lack of awareness of various charges associated with Ulips. These charges make a dent on the returns i.e. you get to earn less from the investment and save less. Thanks to interventions made in the recent years by the insurance regulator, Insurance Regulatory and Development Authority (IRDA), Ulip charges have come down. However, they are significant enough for any potential investor to take a very close look.
So, what are the various Ulip charges? While the amount of Ulip charges varies from one Ulip to another, and among life insurance companies. At the same time, all Ulips typically have these five charges.
Premium allocation charges This is the first charge that is levied on your Ulip. It is a percentage of your annual premium. This charge basically recovers the cost of distribution, commission payment, underwriting and so on. It is typically higher in the initial part of the Ulip, mostly in the first year.
Policy administration charges To service the policy and to meet the administrative expenses, administration charge is levied. It is a percentage of the annual premium and deducted on a monthly basis. The charge is higher in the first five years of the Ulip term. Then, it is discontinued or charged at a lower rate.
Fund management charges This is charged for availing the investment expertise of the fund manager and the fund management team. Over the years, this charge has come down substantially. For many new Ulips, this is around 1.35% for equity funds and 0.75% for debt funds.
Mortality charges This charge is for the life insurance coverage provided by the Ulip and is deducted on a monthly basis from your money with the life insurance company. This is mostly charged based on sum at risk for the life insurance company. So, with time, as you pay more premiums, your money grows and savings increases, the mortality charge comes down.
Discontinuance charges While Ulips have a five-year lock-in period, you can discontinue the policy even after paying the first premium. Of course, you will have to wait out the lock-in period to get your money. Once you surrender your policy during the lock-in period, your money is shifted to a discontinued fund and stays there till the completion of the lock-in period. A charge is also levied for discontinuance of the policy.
Apart from helping investors take informed decisions, awareness of Ulip charges also help you not fall for marketing spiels by some people selling Ulips. They typically project abnormally high returns for Ulips. Remember, IRDA allows sales illustrations for 4% and 8% returns only. The high returns projected by some could be a way of masking the impact of the charges.
Above all, an investor needs to ask whether the Ulip charges are justified for the benefits being provided and whether the features will fulfill the person’s specific needs. In fact, that can be a good acid test for any investment product.
Suggested video: 5 Ulip Charges You Must Know