Investing in a life insurance product without properly understanding how it works is the path to financial ruin. Life insurance products which are difficult to understand generally overcharge you with hidden fees.
You need to know what you are getting into before investing in a Ulip. This article shows you how Ulips work and their charges so that you can invest with confidence.
A unit linked insurance plan is a twin benefit plan giving you
Insurance + Investment
You pay a premium and invest in a unit linked insurance plan. The Ulip gives you a life cover (your life is insured) and this cost is deducted from the premium you pay. The Ulip has other expenses and these are deducted from the premium you pay.
The remaining amount (Premium – charges) is invested in equity (mutual funds and shares) even up to 100% if you are an aggressive investor. (You are willing to take risks for a higher return).
If you are a conservative investor your money is invested in debt (fixed income securities) even up to 100% where your money is more secure.
Your money can also be invested in a balance of debt and equity giving you a moderate return for a moderate risk called balanced fund. (50% debt : 50% equity).
You and a number of investors invest in a Ulip. The Insurer (life Insurance Company) pools this money together after deducting all applicable charges for life insurance and other costs.
The remaining amount is invested in equity, debt or a mix of both (equity + debt) depending on your preference. A fund manager is appointed by the Insurer to manage this investment and give you a good return.
The amount invested by you and other investors is divided into units (smaller parts) and you get units in proportion to the investment you have made.
If the investment is made in equity the value of the units rise and falls in line with the stock markets.
A Ulip has a compulsory lock in of 5 years. You cannot withdraw your money for this time. Invest in a Ulip only if you have a long term horizon (You must stay invested for five years and you need to be sure of what you are doing).
What is meant by NAV in Ulips?
The Ulip has a net asset value (NAV) which gives you the value of your investment
The NAV of the Ulip is updated each day from Monday to Friday after closing hours of the stock market.
You can switch your investment from equity to debt or a balanced fund (debt + equity) and vice versa in Ulips. This must be done under the same plan.
Fees in Ulips
Premium allocation charge : This is charged to you out of the premiums you pay for (fees/commissions) of the distributors (agents who sell the Ulip).
About 7% of the premiums you pay are charged as premium allocation charge.
Mortality charges : When you invest in a Ulip you are given a life cover (Your life is insured).The charges depend on age, gender your health condition and the amount of insurance you take.
Fund management charges : The Insurer (Life Insurance Company) charges you fees for the management of your investment. The fees are charged from the premiums you pay.
The fund manager manages the assets of the fund (fees are 1.35% of the total value of all the assets /investments managed by the fund manager).
Policy administration charges : These are the fees charged for managing expenses (administration and paperwork) for the smooth running of the Ulip (Fund).
Surrender charges : If you surrender the Ulip before 5 years (lock in) you have to pay the surrender charges. A maximum of INR 6000 is charged on surrender (You cannot be charged more than this).
Switching charges : If you switch funds under a plan.
If you (policy holder) die then your nominee’s (family) get the death benefit. The death benefit depends on the type of Ulip.
If it is Type 1 Ulip (Your family gets either the sum assured or the fund value) whichever is higher on your (policyholders) death.
If it is a Type 2 Ulip (Your family gets both the fund value and the sum assured) on your (policyholders) death. The premiums you pay in Type 2 Ulip are higher as your life insurance costs are higher.
The full maturity value of the Ulip is paid to you at the end of the policy term if you have paid all your premiums.
This article gives you an idea on how Ulips work and you can invest with confidence.
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