- Date : 31/10/2019
- Read: 5 mins
Before you invest in a unit-linked investment plan (ULIP), you should be aware of these eight charges
With long-term capital gains (LTCG) arising from a transfer of equity and mutual funds being taxed, investors are once again looking at unit-linked insurance plans (ULIPs). This is because of the relative tax advantage ULIPs now enjoy. ULIPs are mutual fund investments wrapped in an insurance cover, and as such can give you all the benefits a mutual fund would.
But investing in ULIPs attracts some additional charges as well. It is important that you know of these before you decide. These are:
Premium allocation charge
This is a charge deducted from every premium paid for the ULIP. Typically, it is charged as a percentage of the premium and goes down as the policy gets older. This charge pays for initial and renewal expenses and the commission fee of the intermediary involved. For example, if you pay Rs 1,00,000 as premium and a 12% premium allocation charge (PAC) applies, Rs 12,000 would be deducted and only Rs 88,000 will be allotted to the chosen funds.
PAC is typically front-loaded to avoid losses if the policy is discontinued early. Therefore, it tapers off in later years and many policies only charge it for the first 5-7 years.
Mortality charge is the cost of insurance coverage provided. This does not differ from the insurance premium paid for regular insurance cover. The charge depends on your age, the total sum assured, and your medical history. This is typically charged on a monthly basis, though you could choose a lower frequency like quarterly, half-yearly, or annually.
Fund management charge
As your funds are actively managed under ULIPs, the insurer charges a fund management fee. This is charged as a percentage of the fund’s value and is deducted before arriving at the NAV for the ULIP. IRDAI has mandated that the fund management charge cannot be higher than 1.5% per annum.
Policy administration charge
This is a charge levied by your insurer towards the administration of your policy. This is typically a flat fee irrespective of the fund value. This could either be fixed for the tenure of the policy or vary at a predefined rate. Policy administration charges are deducted monthly by cancelling units proportionately from all the funds selected.
Partial withdrawal charge
ULIPs are designed to be long-term investments. That said, most of them allow for partial withdrawal if you so desire. The permitted number of withdrawal and associated partial withdrawal fee varies from insurer to insurer. For example, some insurers allow a limited number (2-4) of free withdrawals, followed by a flat fee of Rs 100 per withdrawal. Others may not permit free withdrawals at all. A few insurers charge no partial withdrawal fee.
Related: ULIPs demystified
Fund switching charge
As part of ULIP, you have the freedom to choose the funds to invest in. That said; you can switch between different options only a set number of times in a year. Most insurers allow for three free switches within a year. Any subsequent switches attract a flat fee of Rs 100 to Rs 250 per switch. Most insurers collect this fee by cancelling a proportionate number of units in all funds allocated. A few insurers charge a lower fee when switching is requested online rather than through offline channels.
Premium redirection charge
Fund switching is not the only way to re-balance your ULIP investments. You can also retain the current investments while investing the future premiums in a different fund. This is called premium redirection. If, say, you invested in Fund A so far, and want to hold this investment but invest future premiums into Fund B, you can achieve this through premium redirection. Typically, insurers cap free premium redirections and charge for any requested after those. The charges are typically Rs 100 to Rs 250 per redirection. A few insurers charge a lower fee when the redirection is requested online rather than through offline channels.
Premium discontinuance/ policy surrender charge
These charges are levied if you choose to surrender ULIPs prematurely or decide to discontinue paying premiums. IRDAI mandates that only the incurred acquisition costs can be recovered by the insurer in case of surrender or discontinuance. These charges range from Rs 1000 to 6000 in the first four years of the policy, depending upon the premium. No charges are levied from the fifth year onwards.
Summing up the ULIP charges:
- Premium allocation charge: A fixed percentage of the premium charged whenever premium is paid
- Mortality charge: Charged on a periodic basis, based on the total sum assured and the age of the insured
- Fund management charge: A maximum of 1.35% per annum deducted daily
- Policy administration charge: Charged on a periodic basis; could be fixed or percentage of fund value
- Partial withdrawal charge: A flat fee charged on a relevant transaction
- Fund switching charge: A flat fee charged on a relevant transaction
- Premium redirection charge: A flat fee charged on a relevant transaction
- Premium discontinuance/ policy surrender charge: A flat fee charged on a relevant transaction
Consider these charges when evaluating your investment options. These charges bring down the effective yield of your ULIP. IRDAI mandates that the net reduction in yield cannot be more than 3% for policies with a term of up to ten years. For longer-term policies, the reduction in yield is capped at 2.25%. On the other side, if you carefully calculate and monitor ULIPs after purchase, it can yield high returns, down the line.