What is the cost structure of a ULIP and how much you have to pay?
Unit-linked Insurance Plans are popular due to the provision of dual benefits of investing in the capital market along with covering for risk. Without having any other option, the insurance companies had to impose a certain amount of ULIP charges for the customers at the time of paying a premium. You can only rely more on this combination of insurance and mutual fund if you are well-revised with the cost structure. This will help you choose the best ULIP plans at an affordable cost.
photo/Gerd Altmann
The main difference between ULIP and mutual fund is that the former charges for single combined total expense ratio but there is a long list of charges in ULIP plans. The policyholders compel the buyers to put 50%-60% of their money in the 1st premium paid. Many of the policyholders are not aware of the fact that only the balance amount is invested for the stock rest at the time of signing the cheque. Moreover, there are other things that you should know about your returns depending more on the plans.
Mortality Charges
All of the charges have included this factor for the policy buyers only to ensure their life covers. Similar to a health insurance, there are various factors including the amount of coverage, age and health status are evaluated.
- The charges largely depend on age.
- For a 30-year-old man, these charges can be approximately 1.3%. It can extend to 6% or 6.4% for a 50 years old man.
The ULIP mortality charges are deducted monthly but there may not be additional charges if you do not opt for a life cover. At the time of paying for an investment product wrapped in an insurance policy, the primary focus remains on the investment. The policy document holds the details of mortality calculation with the utilization of the mortality charge table.
Premium Allocation Charges
The charges are deducted from the premium amount and they are deducted at a fixed rate. However, the customer may have to pay the charges at a high rate at the beginning of the policy year. Generally, involving renewal and initial costs along with commission costs of the mediator, the ULIP premium allocation charges are calculated.
- When the premium allocation charge is 12% on the premium of Rs. 1 lakh, the policy will deduct 12,000.
- You will have Rs. 88,000 left for allocating into rest of the fund options.
- These charges are considered as front-loaded and included on renewal premium.
The charges vary from policy to policy (regular or single premium) and the frequency of premium (yearly, quarterly and monthly). However, the consumer will not have to pay one penny for the premium allocation charge while paying for online unit linked insurance plan.
Policy Administration Charges
Policy administration charges are levied on the unit-linked insurance plans differing at a pre-determined tariff. Varying in every year with a certain percentage of sum assured or inflation, the charges are normally fixed per month.
In a simplified manner, these charges may be flat across the policy term and are only deducted for the administrative expenses for the insurance company’s effort towards the maintenance of the plan. Without showing a drastic change in the rate for the beginning of 3-5 years, the ULIP plan charges can hike by a fixed rate per year.
Surrender Charges
Following the structure of Discontinuance Policy, your money will be restricted when the premium payments are not paid any more in the beginning 5 years. However, if there are no surrender charges applied when the policy is discontinued form or after the fifth year. Following is the chart on years elapsed since initiation and the highest deduction in yield,
- 5 years – 4.00%
- 8 years – 3.30%
- 11 years – 2.75%
- 15+ years – 2.25%
The insurance companies are bound to follow the IRDA guidelines on the charges and the surrender charge cannot exceed 50 points on yearly basis on the unit fund value. The policymaker cannot impose any other charges other than this.
Fund Switching Cost
When you are moving your investments or funds, you are compelled to pay a certain amount for charges. Usually, insurance companies permit up to 3 fund switches per year without charging an extra penny. However, the subsequent switching fund charges may vary from Rs. 100 or Rs 250. In this way, you can pay for the plan with lowest charges for securing your wealth with ease.
The deduction amount may be a cause due to the cancellation of the funds and a lower amount of ULIP charges may be levied if the plan is chosen through online mode.
It is better to go through the guidelines of the Insurance Regulatory Development Authority of India for understanding any other hidden charges. Also, you should invest in fund assessing your risk profile and calculating age.
Author: Vikas Singh Gusain
