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ULIP is a combination of a life insurance product and an investment product, which provides risk cover for the policyholder along with investment options to invest in any number of qualified investments such as stocks, bonds or mutual funds. As a single integrated plan, the investment part and the protection part can be managed according to specific needs and choices.
ULIP is catering to the insurance and the investment needs of a person and thus, is not a cheap product. There are various costs associated for both these facilities which make ULIP a comparatively expensive product in case of short-term investments.
The list of charges that are levied in case of ULIP investments are as under:
- Premium Allocation Charge
Premium Allocation Charge is deducted as a fixed percentage from the premium paid in the initial years of the policy, it is charged at a higher rate. The charges include the initial and renewal expenses and intermediary commission expenses. It is a front load charge as it is deducted from your premium paid.
- Mortality Charges
This charge is to provide for the insurance coverage under the plan. Mortality charges depend on a number of factors like age, sum assured, etc and are deducted on a monthly basis. These are for the Insurance part of the product.
- Fund Management Charge
Fund Management Charge is charged by the company to manage various funds in the ULIP. It is levied for management of the funds and is deducted before arriving at the NAV. The maximum allowed is 1.35 percent per annum of the fund value and is charged daily. Generally, insurers levy the maximum allowed in equity funds, while the charge on non-equity funds is lower. These are for the Investment part of the product.
- Partial Withdrawal Charge
ULIPs have options for partial withdrawals of funds. Some plans offer unlimited withdrawals, but some restrict it to 2-4 withdrawals. These withdrawals can be for free up to a certain limit or can be charged based on your transactions.
- Switching your funds
Moving funds or investments between options is called switching. There are options to switch your funds for free up to a certain limit per year. Any further changes might incur a charge of INR. 100 -INR.250 per switch. This is to manage your investments.
- Policy administration charge
This charge is levied for the administration of the policy and it is deducted on a monthly basis by the cancellation of units from all funds chosen. This charge can be at a fixed rate or a percentage of your premium. These are for the insurance part of the ULIP.
The only free benefit of the ULIP is the tax benefit that you get when you invest in ULIP under section 80C. However, for that, you must stay invested for a period of 5 years. If you withdraw any time before that, the amount withdrawn would be taxable.
As an investor, it is very important that you know where your money is going. Many times you expect that after appointing an insurance agent for your investment needs all your investment worry is over, that may not be the case and the agent would continue selling you expensive investment products. You must learn and understand where your money should be invested to make the most of it. where you do not have the time to do so, appoint a financial advisor for yourself.