The charges in ULIPs are difficult to understand and identify. We have to assess the charges levied in the ULIPs to know the long-term impact on return on our investment. Let us first accept one thing that as all the financial products which are sold through a mediator and agents, they will push only those products in which they are getting higher commission.
There are lots of arguments and discussion both in favour of and also against ULIP plans offered by Life Insurance Cos. Mutual fund Advisors will suggest their client to buy term insurance and put the balance amount in mutual fund schemes. They will always advise you to keep insurance and investment separately. Insurance Agents, on the other hand, try to push ULIP plans as a combination of insurance and investment option with tax benefit. This tug of war is still continuing, and is never ending.
It is a basic that insurance is a long-term product compared to Mutual Fund. ULIPS which are mostly missold to customer, are either for lower premium term say for 5 years or for lower insurance cover i.e. 7 to 10 times of premiums paid. Finalising an investment product without knowing its inbuilt charges can spoil and make your financial goals go haywire. Therefore it is better to know, assess and compare the charges in ULIPs and arrive at an informed decision:
1) Allocation charges:
This charge is a charge as percentage of premium paid. Allocation Charge is very high in initial years mostly in first year and then it comes down to 2% or even nil in later years, depending on which plan you choose. Let us understand with an example. Suppose you are buying a ULIP plan with an annual premium of Rs.50,000 and the allocation in the first year is 90% and from 2nd to 5th year is 96% and thereafter 99% till balance tenure of the policy. In this case your allocation charges for 1st year shall be 10% of the premium i.e. Rs.5,000/-, 2nd to 5th year 4% of the premium i.e. Rs.2,000/- and 1% of the premium i.e. Rs.500 thereafter till you pay the premium. If you stop paying premium than theses charges are not applicable. On the other hand schemes of mutual funds do not have entry load. So there are no upfront charges in case of investment in mutual funds.
2) Policy Administrative Charges:
This charge is either a fix charge expressed in absolute money terms or expressed as percentage of either premium or insurance cover. The insurance cos. design these charges very smartly. In some plans these increases by certain percentage every year. Allocation charges relatively easy to identify and understand against these charges which are very complex and difficult to understand. There were many products with 100% allocation of premium and with no allocation charges and were sold heavily on the basis of there being no allocation charges. All these plans had these hidden charges, which nobody noticed. Even today there are many products with similar features. These charges continue till your plan is alive even though you stop paying the premium. Let us understand this further. We have two different products in which one has PAC of Rs. 600 in first year and is going up by 5% every year and other has 1.25% charges on the life cover throughout term. Your PAC, in 1st case, will be Rs. 600 first year, Rs.630 2nd year and Rs. 660 in third year and so on. It will increase by 5% every year. In 2nd case, suppose you are paying premium of Rs. 30,000 and have opted for 3 lacs sum assured then this charge will be 1.25% on sum assured i.e. Rs. 3,750 every year till your policy is alive. One has to carefully understand implications of fixed and variable PAC on the returns for longer term product.
3) Surrender Charges:
Liquidity is the major factor in deciding any investment avenue. Therefore, you should also know surrender charge, before you buy an insurance plan. If you have not paid minimum 5 years premiums, the surrender charge will be much higher. As per new guidelines of IRDA, there should not be any surrender charges after premiums have been paid for 5 years. Still we have to be very cautious before finalizing any specific ULIP product for purchase.
4) Mortality Charges:
This charge is nothing but the cost of insurance cover you have opted for. The major difference between term plan and ULIP is, that in case of term plan the premium which is practically the mortality charges is fixed at the inception of the tenure and is fixed for the entire term. However in case of ULIPs, mortality charges are levied as per the current age of the insured and increases every year. Mortality charges in case of ULIP are recovered on the net balance sum assured i.e. actual sum assured minus present fund value. Mortality Charges are deducted monthly in ULIPs by canceling equivalent no of units from units accumulated in your account.
5) Fund Management Charges:
This charge is levied as percentage of the total fund value. As per new guidelines by the IRDA, this cannot be more than 1.35% in ULIP Plan. One must also compare fund performance of the ULIP with mutual fund schemes and their benchmarks to know whether they are good to hold or required to be discontinued.
6) Guarantee Charge:
As the name itself suggests this charge is levied whenever there is guaranteed returns offered in the ULIP plan at the end of the term. All 7 year highest NAV guaranteed plan has these charge inbuilt in the plan.
7) Discontinuance Charge:
This charge is levied if any premium is not paid during the first 5 years of the policy. These charges are mostly expressed in percentage terms of the annual premium or fund value subject to minimum and maximum of certain amount. The minimum amount is Rs. 1,000 and maximum amount is Rs. 3000 if annual premium payable is less than Rs. 25,000. In case where annual premium is more than Rs. 25,000 than the minimum charge is Rs. 2,000 and maximum is Rs. 6,000.
These charges are levied for any change request be it change of address, change in nominee, and change in premium frequency or for partial withdrawal. The charge is generally between Rs. 100 to Rs. 250 per transaction during the year.
9) Switching Charges:
Every insurance company allows you to switch your funds from one fund to another fund minimum 3 to 4 times in a year free of charge. After that they may charge you Rs. 100 for any additional switch you make. Carry forward of switches is not allowed. There are few plans in the market where all the switches made are allowed free of cost.
One must know all these charges in ULIP products before finalising for any fresh investment or even for continuing further with existing ULIP.
