Insurance Companies were in a race to launch new “ULIPs” for the last 10 years till IRDA came out with certain restrictions in this sector. Agents are still enjoying a decent commission in ULIPs, but from where did these companies offer such high commission to agents? Naturally,they are deducting various charges from the policyholder’s account and use it to give attractive commission and still make profits.
Do you know the different types of charges in ULIPs?
Premium Allocation Charges
This is the amount the company will deduct from your premium upfront which will reduce your investments considerably. These charges were very high when ULIPs were first introduced in India. Now, after several interventions by IRDA, ULIPs charges have come down drastically. But still these charges reduce the investment of the customers and bring down returns.
Let us analyse the impact by way of an example. Take the annual premium as Rs.30,000/- and term of the policy as 20 years. In one of the most common ULIP policy, now available in the market, these charges are given as below.
Year 1 – 9%, Years 2 & 3 -6.5%, Years 4 & 5 – 6%, Years 6 & 7 -3.5%, Years 8 to 10 – 3%,
Year 11 onwards-NIL.
You can see the charges works out to be 50% in the first 10 years. In our example, the company will deduct Rs.15,000/- as premium allocation charges in the first 10 years and only the balance will be invested.
Policy Administration Charges
Most of the companies charge between Rs.30- Rs.60 per month, by way of cancellation of units. But some companies charge this as a percentage of the premium. In this case, the cost will be very high. Some companies use this as a way to advertise as having no premium allocation charges, but charges heavily under this head.
In the above example, we discussed, the company charges Rs.60/- per month from the 6th Year by way of cancellation of units. This comes to yearly Rs.720/- or 2.4% of the annual premium. This cost from the 6th Year to the 20th Year comes to Rs.10,800/-(720 x 15).
The total of the above 2 charges comes to Rs.25,800/- (Rs.15,000 plus Rs.10,800). This is 86% of the annual premium or around 4.3% of the total premium paid in 20 years.
Fund Management Charges
This is the amount charged by the company to manage the fund. These charges are not on the premium paid but on the fund value and are the major source of revenue for the company. These charges are in the range of 0.75% per annum to 1.35% per annum depending on the nature of the fund. In NAV guaranteed plans, there can be an extra charge of 0.5%per annum.
These are reasonable charges because this is what the real charge for insurance is – what they take to give you the sum assured in case you die.
These are the 4 ways in which an insurance company charges the customer in ULIPs. The last 2 charges are reasonable and worth it from customers point of view. But the first 2 charges are on the higher side even after changes in ULIPs.
There are exit charges in ULIPs, if you want to close the policy earlier than the maturity date.
ULIPs have become very popular in the last 10 years. If you cannot manage insurance and investment separately, ULIPs are great for you else they are not. The free switches between different funds are the only attraction in ULIPs for those, who can manage it effectively. It is always better to invest in a long-running, diversified mutual fund because you will pay only the management fees in a mutual fund. For funds like HDFC Top 200 or HDFC Equity, the total recurring fees adds up to 1.8% per annum.
Also buy a Term Plan for insurance cover. Online Term Plans are available at low premiums.
Yes, fund performance matters. In equity mutual funds, you can come out of a mutual fund after 1 year, without any cost or tax implication if your fund is not performing well. But in ULIPs, you can not do that.
Imagine, you have selected a Jeans priced Rs.1,500 and a T-shirt priced for Rs.1,000 from a shop. Your total bill should be Rs.2,500/-. But if the shop charges you a total of Rs.3000/- and claims that the extra Rs.500 is for matching both and packing it, will you buy it? ULIPs are like this.
Please share how much charges have you paid while investing in ULIPs.