One should make staying prepared for the future a certainty! People have been saving their money and taking care of their assets in many different ways for a long time. Making smart investments is the need of the hour and must be continued.
One such investment that seems to have garnered a lot of attention these days are the new-age ULIPs. The reason behind it - ULIP plans in India provide the dual benefits of insurance and investment. So, a simple ULIP plan not only provides insurance, but also allows you to venture into equity and debt funds, thereby creating an avenue for high returns depending on one's risk appetite.
Basically, a Unit Linked Insurance Plan (ULIP) is a life insurance product that offers risk cover along with investment options. Once the plan matures, the policyholders reap the benefits of the investment they have made.
Having understood that, it is also important to know the charges that come with a ULIP in order to select the most suitable policy -
Premium Allocation Charge: It is the deduction of the policyholder's premium for the recovery of their initial expense, incurred while issuing the ULIP plan, such as underwriting cost or distributor fee etc. This charge is imposed as a percentage of premium while the remaining premium gets invested in the fund you choose. However, many insurers these days impose minimum to zero allocation charges which in turn helps you grow your wealth a lot faster.
Policy Administration Charge: As the name suggests, it is the charge deducted by the company for administrative expenses, incurred due to the maintenance of your plan. It could be the costs incurred towards premium intimation, paperwork etc. and everything else under this umbrella.
The policy administration charge is imposed on a monthly basis, it can be flat throughout the term or may vary at a pre-determined rate. However, if you save on this charge, this ULIP plan can help you save a good amount of money.
Fund Management Charge: A combined charge for the management of your ULIP fund, this charge is adjusted from NAV on an everyday basis before arriving at the NAV. As per the guidelines by the IRDAI, the maximum cap on this charge is 1.35% per year of the fund value.
Mortality Charge: The basic structure of a ULIP plan is to provide an opportunity to invest in markets and generate market-linked returns whilst pocketing a good life cover. This thereby means that the responsibility to provide financial compensation in case of your untimely demise falls on the insurance company. Understandably, the insurers impose a mortality charge for providing you with the insurance protection. This charge is calculated keeping in mind the coverage amount, age and health of the life assured.
Fund Switching Charge: Another facet of the ULIP plan is that it allows you not only to invest in multiple funds, but also to move your money between various funds. This practice is called 'Fund switching'. For example, if you invest all your money in equity funds, you can still easily switch your funds to debt funds in your ULIP.
While insurers usually allow a specific number of free switches in a year, additional switches will require a minimum charge of Rs. 100 or more for each switch.
Surrender or Discontinuation Charge: ULIP policies in India has a lock-in period of 5 years that lets policyholders reap long-term investment benefits. However, if you plan to tank or surrender your ULIP plan before the lock-in period ends, a surrender charge or policy discontinuance is thereby imposed on the same.
The charge varies depending on the year in which you surrender the policy which is then calculated using the percentage of the annual premium. However, the maximum that any insurance company can charge are decided by the guidelines shared by the IRDAI.
Bottomline:Equipped with the knowledge about the charges that are involved with a ULIP policy, you must choose the insurer that imposes the minimum charges whilst providing you with the best services. However, use the past performance of the funds to understand and decide the funds you want to invest in. Lastly, be a smart investor and invest keeping in mind the long-term plan of getting maximum returns from your ULIP plan.
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