A life insurance policy is an excellent investment product that provides both life insurance and an investment-cumulative savings plan with healthy returns. An investor can prepare for the protection of his or her family during times of trouble and some key life events that occur around the policy’s maturity.
While standard insurance policies are beneficial, they become much more appealing when the returns are capital market-linked. This is exactly what Unit-Linked Investment Plan (ULIP) are; they provide the best of both worlds while also assisting investors in reducing their tax exposure.
ULIP is an insurance policy that combines investing and insurance elements into a single plan. In a ULIP plan, a portion of your premium is used to pay for insurance, while the remainder is invested in a fund of your choice (which is managed by a fund manager).
Furthermore, ULIPs let you employ top-up features such as transferring between funds, lowering or raising the amount of protection, surrendering your policy, and obtaining extra riders.
What is a ULIP policy?
A ULIP plan is a life insurance policy that provides life insurance with market-linked returns. When you select a ULIP plan in India, you establish a solid habit of saving and investing on a regular and disciplined basis.
This is critical for long-term financial planning and achieving life objectives. Because the primary characteristic of the best ULIP plans is market-linked returns, there are some risks involved, and an investor should be aware of these risks before investing in a ULIP policy.
11 Hidden ULIP Charges That No one Will Tell You
The insurer imposes a variety of modest charges based on policyholders’ behaviours. Most of the expenses will be avoided if the investor arranges their investment wisely.
The IRDAI, India’s insurance regulator, caps yearly ULIP plan premiums at 2.25 per cent for the first ten years of the policy term. The fees are to be evenly dispersed throughout the lock-in period. Let’s look over the many forms of ULIP charges:
1. Premium Allocation Charges
When the ULIP policy is issued, the insurer performs several activities, including underwriting the policy, medical exams, commission costs, etc. These are all one-time fees that must be made in the first year.
They are deducted from the first year’s premium by the insurer. For instance, if the ULIP plan premium allocation charges are 15% and the premium is 40,000, 6,000 would be deducted as ULIP charges, and 34,000 will be invested.
2. Administration Charges
The administration of the policy is charged. This price is collected every month and is generally the same throughout the term or varies at a predetermined pace. Charges are imposed by cancelling units from funds in proportion to the rate.
If you wish to invest in ULIP insurance, you must pay administrative costs, which are subtracted from the policy’s maintenance cost. The policy’s upkeep covers all documentation, premium notifications, and so forth. This fee might be constant during the insurance or fluctuate at a predetermined rate.
3. Fund Management Charges
These charges, which IRDAI caps at 1.5 percent per year and payable as a percentage of the fund value, go towards administering your money. It is computed before computing the NAV and does not appear in the net asset value.
These fees are imposed for fund management and are deducted before calculating the Net Asset Value (NAV). The IRDA has set a ceiling on these costs, stating that insurance firms cannot levy fund management fees that exceed 1.35 per cent each year. Some ULIP plans offer fund management expenses as low as 1.25 per cent, which can make a significant difference in your results.
4. Discontinuance or Surrender Charges
A discontinuation fee is imposed if the ULIP plan is relinquished prematurely within four years. There are no surrender costs after the fifth year. The costs can range between Rs 1,000 to Rs. 4,000, depending on the premium, and are calculated as a proportion of the fund’s value and premium. The IRDAI provides the foundation for these costs, which cannot exceed the insurer’s acquisition cost.
5. Partial Withdrawal Charges
In times of need, investors have the option of withdrawing from the ULIP plan after the first three years. However, according to the policy provisions, early withdrawal incurs some penalties.
6. Mortality Charges
When you purchase a ULIP plan, the insurance provider assesses a fee for the insurance protection upon death, generally referred to as the mortality charge.
Thus, the mortality fee is the actual insurance cost and is often subtracted from other expenses in the ULIP plan before investing your money. The good news is that some of the top ULIP plans have meagre mortality charges and work hard to keep them as low as possible.
The insurer charges these costs to offer death insurance to the insured after considering age, health conditions, and the insurer’s mortality table.
7. Switching Charges
Investors are permitted to alter the fund into which their premium is invested a couple of times each year without incurring any fees. Following the exhaustion of the free limit, each changeover incurs costs ranging from ₹ 100-500, depending on the insurer’s terms.
8. Premium Redirection Charges
You can direct future premiums to a reduced-risk fund without modifying the fund or making any changes to the existing fund structure. You will incur some additional expenses as a result of doing so.
9. Rider Charges
The additional costs are charged if an investor adds a rider to the ULIP plan to obtain additional advantages. An investor, for example, must pay additional premiums for a critical illness rider on a ULIP policy.
10. Guarantee Charges
If an investor chooses guaranteed returns under the policy, the insurer will levy specified costs to assure the payout. They are used because ULIPs generally provide market-linked returns rather than guaranteed returns. These are used on ULIPs with a high NAV guarantee.
11. Miscellaneous Charges
The insurer levies some modest costs within the miscellaneous charge category. If a policyholder desires to modify the premium frequency from half-yearly to annually, they must pay a little fee, and so on.
Wrapping It Up
Overall, a ULIP plan may be an excellent investment choice for your long-term financial objectives. When investing in the best ULIP plans, you must, however, verify the performance of the funds.
Before investing in ULIPs, you should be informed of the fees that come with them. This will maximise the benefits of your ULIP and provide you with a better knowledge of your investment portfolio. Furthermore, you will be able to make an educated selection to achieve your financial objectives.
