Planning to Buy an Insurance policy…..??? Good decision but have you ever considered the charges included in ULIPs….??? Many people do this mistake, by listening to the magical words of insurance agents people will generally end up in buying the wrong products with huge charges. IndianMoney.com is making an effort to educate our readers about the charges and charge structure of ULIPS. Since we have mentioned in our previous articles there are best and worst ULIPs, now it is your responsibility to prefer which one to buy.
Following are the major charges under ULIPs
From the premium received, a certain percentage will be appropriated towards charges, this is known as Premium Allocation Charge. This is a charge levied at the time of receipt of premium. Generally the percentage shall be mentioned in the offer document. These are generally shown as % of the premium. Premium Allocation Charge could vary according to many factors such as policy year in which the premium is paid, the premium size, premium payment frequency and the premium type. Normally these charges are higher during the first few years and can come down to zero latter.
Example : If premium = Rs.10000 & Premium Allocation Charge: 10% of the premium; then the charge is: Rs.1000 and Balance amount of premium is Rs.9000 will be utilized to purchase units.
Some companies may mask these charges using different names. Therefore an investor must be very careful in reading the chart showing the total charges.
Fund Management Charge is levied as a percentage of the value of assets and shall be appropriated by adjusting the Net Asset Value. This is a charge levied at the time of computation of NAV, which is usually done on daily basis.
Example : If Fund Management charge (FMC) is 2% p.a. your fund value before FMC is Rs.100000/- and Fund after this charge will be Rs.98000/-. 2000 rupee will go as FMC.
Policy administration charges are the charges that the company takes out from the paid premium towards payment to the sales people such as Insurance agent or banks, etc. This charge is not covered under premium allocation charges or the fund management expenses. It may be showed as a fixed amount or a percentage of the premium or a percentage of sum-assured.
Normally this charge is levied at the beginning of each policy month from the policy fund by canceling units for equivalent amount. This could be flat throughout the term of the policy or vary at a pre-determined rate. Generally these charges are higher during the first few years and can come down to zero latter.
Surrender Charges are levied on the unit fund at the time of surrender of insurance contract before the planned maturity date. This charge is usually expressed either as a percentage of the fund or as a percentage of the annualized premiums. Some companies do not charge anything after first three years but some companies charge till the end of 10th year.
This a charge levied when you shift your investment from one fund to another. of monies from one fund to another available within the product. The charge will be usually a flat amount per each switch.
Switching is done to preserve our profits or to protect our principle. During market highs or the beginning of a recession a switch from equity oriented funds to debt oriented funds will protect your profits. ULIPs generally offer a number of switches ranging from 4 to 12 for free in a year.
Mortality charge is the cost of life insurance cover. This will be levied either by cancellation of units or by debiting the premium but not both. Mortality charge may be levied at the beginning of every policy month. The method of computation will be explicitly specified in the policy document.
Riders are add-on policies that give additional insurance benefits apart from the basic plan. The charges are generally low compared to the benefits added. Some of the popular riders are related to accident cover, disability cover, critical illness cover and waiver of premium. This charge is levied at the beginning of each policy month from the fund.
ULIPs generally allow withdrawal after the stipulated 3 years. However there may be charges if there is request for more than one withdrawal in a year. Some plans may restrict the amount of withdrawal to a percentage of the available fund.
This is a charge levied on the unit fund at the time of part withdrawal of the fund during the contract period.
Miscellaneous charges are levied for any alterations within the contract, such as, increase in sum assured, premium redirection, change in policy term etc. The charge is shown as a flat amount levied by cancellation of units.
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