A life insurance policy is a fantastic investment product that offers life cover as well as an investment-cum-savings plan with healthy returns. An investor can plan for family safety during times of distress as well as some major life events around the policy maturity. While the standard insurance products are good, they get even sweeter if the returns are capital market linked. This is precisely what Unit-Linked Investment Plans (ULIPs) are; they offer the best of both worlds and in addition help investors reduce tax* liability.
What is a ULIP policy?
A ULIP plan is a life insurance policy offering life cover with returns linked to markets. When you choose a ULIP plan in India, you develop a good habit of saving and investing in a regular and disciplined manner. This is crucial for good long-term investment planning and meeting life goals. As the main feature of the ULIP plans is market-linked returns, there are some risks associated and an investor needs to know these risks before investing in a ULIP policy.
There are several types of small charges that are levied by the insurer depending on the actions taken by policyholders. If the investor plans this investment properly, then they won’t incur most of the charges. IRDAI, the insurance regulator in India, limits the annualized ULIP plan charges at 2.25% for the initial 10 years of the policy term. The charges are to be evenly distributed through the lock-in term. Let's go through the different types of ULIP charges:
Premium Allocation Charges
When the ULIP policy is issued there are various tasks the insurer undertakes, such as underwriting the policy, medical tests, commission charges, etc. All these payments are one-time and need to be made in the first year. The insurer deducts them from the first year premium. For example, if the ULIP plan premium allocation charges are at 15% and the premium is ₹ 40,000, then ₹ 6,000 will be deducted as ULIP charges and ₹ 34,000 will be invested.
The administration of the policy attracts a fee. This fee is charged every month; it is usually the same throughout the term or changes at a predefined rate. The charges are levied by canceling the units from the funds in proportion to the rate.
Fund Management Charges
Capped by IRDAI at 1.5% annually and charged as a portion of the fund value, these charges go towards managing your funds. It is computed before calculating the NAV and hence will not reflect in the net-asset value.
Discontinuance or Surrender Charges
If the ULIP plan is surrendered prematurely within 4 years then a discontinuance charge is levied. After the 5th year, no surrender charges are imposed. The charges can be between ₹ 1,000-4,000 depending on the premium, as a percentage of the funds’ value and premium. IRDAI gives the basis for these charges, which cannot be more than the cost insurer incurred on the acquisition.
Partial Withdrawal Charges
In times of need, investors have an option to prematurely withdraw from the ULIP plan after the first 3 years. However, early withdrawal attracts some penalties as per the policy terms.
Computed post factoring in age, health conditions, and insurer mortality table, these charges are levied by the insurer to provide death cover to the insured.
Investors are allowed to change the fund where their premium is invested a couple of times every year without a charge. Post the free-limit exhausts, every switch attracts ₹ 100-500 charges as per the insurer’s terms.
Premium Redirection Charges
You may redirect your future premiums to a lower risk fund without actually changing the fund and without making a tweak in the existing fund structure. While you do so, you will attract some additional charges.
If an investor adds a rider to the ULIP plan to get extra benefits, the additional charges are applied. For example, for a critical illness rider on ULIP policy, an investor needs to pay extra charges.
If an investor opts for guaranteed1 returns in the policy, then there are certain charges imposed by the insurer to ensure the payout. They are applied because the ULIPs typically offer market-linked returns instead of guaranteed1 returns. These are applied on high NAV guarantee1 type ULIPs.
Some small charges are levied by the insurer on a couple of things under the category of the miscellaneous charge, such as if a policyholder wishes to change the premium frequency from half-yearly to annually, they have to pay a small fee, etc.
The Wealth Maxima (UIN- 110L114V03) ULIP policy from Tata AIA Life Insurance offers a good investment option for wealth creation. The features of a ULIP plan are as follows:
Life-long cover (up to 100 years of age)
Choose from 11 funds. You can switch between funds if the fund is not performing as per your expectation.
Get income tax* benefits.
Requirement based additional riders# are available.
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