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© 2021 KlarifyLife. All rights reserved.
Disclaimer:
In this policy, the investment risk in the investment portfolio is borne by the policyholder. The Linked Insurance products do not offer any liquidity during the first five years of the contract. The policyholders will not be able to surrender/withdraw the monies invested in Linked Insurance Products completely or partially till the end of fifth year.
A unit linked insurance plan (ULIP) is a type of life insurance policy that offers the dual benefits of life cover and investment. Essentially, you can secure the financial future of your loved ones through the offered life cover and have the option to grow your money through the investment component.
ULIPs invest your money in the financial markets, and you can get returns on maturity depending on the performance of your investment fund. However, your investment returns can also be affected by the various charges. Let’s explore these ULIP charges in detail.
Understanding the Various Types of ULIP Charges
ULIPs have many charges associated with them. Here are the key types of charges in ULIPs that you should know:
A. Base charges: These are the mandatory ULIP policy charges that every policyholder is required to pay.
1. Premium allocation: This covers the initial expenses involved in setting up your ULIP, such as underwriting and medical tests. Many insurers deduct this fee from your first-year premium.
2. Fund management: A fee for managing your investments, which is capped at 1.35% annually as per IRDAI regulations. This ensures your funds are professionally handled to help grow your wealth.
3. Mortality: The cost for providing life cover, calculated based on factors like age, gender, and lifestyle. Some ULIPs offer to refund the mortality fees upon policy maturity.
4. Policy administration: Fees for managing your policy, including tasks like paperwork and premium notifications. These charges typically remain consistent throughout the policy term, ensuring smooth administration of your ULIP.
5. Goods and Service Tax (GST): Taxes applied to your ULIP, covering services such as premium allocation and fund management.
B. Additional charges: These charges apply when you take specific actions with your ULIP, such as fund switches or partial withdrawals.
1. Fund switch: This is a charge that is levied if you switch between funds. Some insurers may offer a certain number of free fund switches. Always check for the number of yearly allowed fund switches by your insurer.
2. Partial withdrawal: You can partially withdraw your investment from your ULIP after the lock-in period in case of any financial emergencies, but you will have to pay a partial withdrawal charge.
3. Premium redirection: You can move your future ULIP premiums to different investment options (such as from equity to debt funds), but you will have to pay the premium redirection charge for such actions.
4. Surrender: When a ULIP is cancelled or discontinued by the policyholder before its maturity, it is termed as surrender. There is a surrender charge that is incurred when a policyholder surrenders their ULIP.
5. Rider: Riders are add-ons to your ULIP that increase its coverage. When you add a rider to your ULIP, you may have to pay a charge for it.
6. Guarantee: This is a charge for ULIPs that promise high guaranteed returns after a specific investment period. ULIPs generally give returns based on your investment (which is linked to the financial markets) performance, but there are some ULIPs that offer guaranteed returns. For example, a ULIP may be offering you 100% returns after 15 years, but you’ll incur guarantee charges for this.
Please note that depending on your case, there may be other ULIP charges (such as premium discontinuance, top-up) that you may have to pay.
Impact of ULIP Charges on Overall Returns
The different types of charges of a ULIP plan, including mandatory and additional fees, can significantly influence the overall returns of your plan. To maximise your returns, it is essential to understand and evaluate these charges carefully when selecting a ULIP, ensuring the plan aligns with your financial goals and offers value for your investment.
Minimising ULIP Charges
Since ULIPs come with various charges that can impact your maturity returns, take proactive steps to minimise these costs. Here are a few tips to get a ULIP plan with low charges:
· Buy a ULIP Early: Purchasing a ULIP when you’re young can help lower mortality charges since younger individuals are generally healthier.
· Add Only Essential Riders: Include only the riders that meet your specific needs to avoid unnecessary extra costs.
· Limit Partial Withdrawals: Make partial withdrawals only when absolutely necessary to keep your charges in check.
· Switch Funds Wisely: Avoid excessive fund switches, as each switch may come with additional charges. Plan your switches carefully to minimise costs.
· Compare Before Buying: Always compare the charges across different ULIPs and choose a plan with the lowest charges to maximise your returns.
Comparing ULIP Charges to Other Investment Options
Both ULIPs and mutual funds are good investment options; however, ULIPs tend to have more charges than mutual funds. For instance, in ULIPs, you have to pay a mortality charge for the life cover, which is not prevalent in mutual funds. Due to the various ULIP charges, typically, the return on investment can be lower than mutual funds.
However, the way to look at ULIPs is that they are offering not just investment but even a life cover to protect your family financially, which mutual funds don’t offer.
Evaluating the Benefits of ULIPs Despite the Charges
Despite the charges, the benefits of ULIP make it a compelling investment option:
1. Financial protection for your family: The life cover offered by ULIPs can help you in securing the financial future of your family.
2. Flexibility: ULIPs offer you the flexibility to choose how your money is invested. You can choose which fund to invest in and also do fund switches depending on your financial goals and risk appetite. Further, you can get additional coverage for your ULIP by adding interesting riders.
3. Tax benefits: You can get deductions on premiums paid towards ULIPs under the Income Tax Act, 1961. Also, the life cover payout made to your family when you pass away during the policy duration is tax exempt under the same act.
4. Regular savings: By having a ULIP, you will develop a habit of saving for your financial future.
Why Buy ULIPs?
ULIPs are a great fit for those who are looking to secure the financial future of their family as well as grow their money through a single financial product. However, one needs to understand ULIP charges carefully as they can impact the maturity returns.
Tax Disclaimer: Tax benefits & exemptions are subject to conditions of the Income Tax Act, 1961 and its provisions and tax Laws are subject to change from time to time. You are requested to seek tax advice from Chartered Accountant or personal tax advisor with respect to personal tax liabilities under the Income-Tax law
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