- Date : 07/06/2020
- Read: 3 mins
ULIPs are an excellent investment choice and it’s important to thoroughly understand ULIP charges before making any investment in ULIPs
As opposed to traditional insurance plans, ULIPs (Unit Linked Insurance Plan) offer investors an opportunity to invest in equity and/or debt funds, thus creating the possibility of high returns alongside the protection of insurance benefits. While this may sound a lot like mutual funds, if you’re wondering what the difference between ULIP and mutual funds is, your question is valid.
ULIPs vs mutual funds
The key difference is that unlike ULIPs, mutual funds don’t offer a life cover. In addition to this, there are a few differences in the tax benefits and charges like fund management charges.
Related: ULIPs vs Mutual Funds- Where to invest?
ULIPs are an attractive investment option and before you invest in them, here are the common ULIP charges you should know.
Premium allocation: These charges are deducted straightaway from the premium. The remaining amount is used for investing in the funds selected by the policyholder. According to insurance companies, these costs take care of their distributor fees and the charges associated with underwriting.
Let’s take an example where the premium allocation cost is 4%. If your monthly premium is Rs. 50,000, the insurance company will deduct 2,000 upfront and invest 48,000 in the funds of your choice.
Premium allocation charges are usually high only during the first few years of the investment.
Related: How ULIPs Can Help In Meeting Long-Term Goals
Fund management charges: These charges are levied towards managing the funds, and are charged as a percentage of the assets’ value. Fund management charges are higher for equity-oriented funds as compared to debt-oriented funds. In any case, the IRDAI has set a cap of 1.35% per annum on fund management charges. Note that as the value of the asset grows over time, fund management charges may increase.
For example, if your fund value is Rs. 1,00,000, you will end up paying Rs. 1350 as fund management charges for the year. As the value of the ULIP asset appreciates, your fund management charges will also increase,
Policy administration charges: These charges are deducted towards administrative expenses, which are incurred by the insurance company to maintain the policy. Examples of administrative expenses are the cost of the paperwork or the cost of sending timely reminders to the policyholder about the premium due date. Typically, these charges are deducted every month. Depending on the policy, these charges may remain the same throughout the term of the policy or may wary at rates agreed at the initial stage.
Related: How And Why To Monitor Your ULIPs After Purchase
Mortality charges: These are charges related to the insurance component of the ULIP. Mortality charges are usually levied once a month. Mortality charges are based on various factors like the age of the policyholder, their health status, the total amount of coverage, etc. Typically, the policy document includes the methodology for calculating mortality charges.
Surrender charges: These charges are for encashment of units, either partial or full, before their specified end date. The IRDAI has laid down a cap on the maximum surrender charges to be charged by the insurance companies. The surrender or discontinuance charges that are levied vary according to when you surrender the policy and how much premium you were paying, though it cannot exceed Rs. 6000. If you surrender ULIP after 5 years, once the lock-in period is over, there are no surrender charges.
Related: Switch Options In ULIPs
As mentioned earlier, ULIPs are an excellent investment choice. However, it’s important to thoroughly understand these ULIP charges before making any investment in ULIPs. To help you decide between different ULIPs available, here are five essential things to consider when choosing a ULIP.
As opposed to traditional insurance plans, ULIPs (Unit Linked Insurance Plan) offer investors an opportunity to invest in equity and/or debt funds, thus creating the possibility of high returns alongside the protection of insurance benefits. While this may sound a lot like mutual funds, if you’re wondering what the difference between ULIP and mutual funds is, your question is valid.
ULIPs vs mutual funds
The key difference is that unlike ULIPs, mutual funds don’t offer a life cover. In addition to this, there are a few differences in the tax benefits and charges like fund management charges.
Related: ULIPs vs Mutual Funds- Where to invest?
ULIPs are an attractive investment option and before you invest in them, here are the common ULIP charges you should know.
Premium allocation: These charges are deducted straightaway from the premium. The remaining amount is used for investing in the funds selected by the policyholder. According to insurance companies, these costs take care of their distributor fees and the charges associated with underwriting.
Let’s take an example where the premium allocation cost is 4%. If your monthly premium is Rs. 50,000, the insurance company will deduct 2,000 upfront and invest 48,000 in the funds of your choice.
Premium allocation charges are usually high only during the first few years of the investment.
Related: How ULIPs Can Help In Meeting Long-Term Goals
Fund management charges: These charges are levied towards managing the funds, and are charged as a percentage of the assets’ value. Fund management charges are higher for equity-oriented funds as compared to debt-oriented funds. In any case, the IRDAI has set a cap of 1.35% per annum on fund management charges. Note that as the value of the asset grows over time, fund management charges may increase.
For example, if your fund value is Rs. 1,00,000, you will end up paying Rs. 1350 as fund management charges for the year. As the value of the ULIP asset appreciates, your fund management charges will also increase,
Policy administration charges: These charges are deducted towards administrative expenses, which are incurred by the insurance company to maintain the policy. Examples of administrative expenses are the cost of the paperwork or the cost of sending timely reminders to the policyholder about the premium due date. Typically, these charges are deducted every month. Depending on the policy, these charges may remain the same throughout the term of the policy or may wary at rates agreed at the initial stage.
Related: How And Why To Monitor Your ULIPs After Purchase
Mortality charges: These are charges related to the insurance component of the ULIP. Mortality charges are usually levied once a month. Mortality charges are based on various factors like the age of the policyholder, their health status, the total amount of coverage, etc. Typically, the policy document includes the methodology for calculating mortality charges.
Surrender charges: These charges are for encashment of units, either partial or full, before their specified end date. The IRDAI has laid down a cap on the maximum surrender charges to be charged by the insurance companies. The surrender or discontinuance charges that are levied vary according to when you surrender the policy and how much premium you were paying, though it cannot exceed Rs. 6000. If you surrender ULIP after 5 years, once the lock-in period is over, there are no surrender charges.
Related: Switch Options In ULIPs
As mentioned earlier, ULIPs are an excellent investment choice. However, it’s important to thoroughly understand these ULIP charges before making any investment in ULIPs. To help you decide between different ULIPs available, here are five essential things to consider when choosing a ULIP.
