In a unit-linked insurance plan (ULIP), the money paid as premium gets split into non-investible and investible amounts. Here are the various charges that are levied on the policyholder:
(Read: The Complete Guide to ULIPs)
Premium allocation charge: This is the non-investible portion of the premium. It is deducted from the premium upfront. This charge is levied to recover the initial expense incurred towards issuing the policy for e.g. distributor fee, cost of underwriting, medical expense etc.
The balance is thus the investible amount used to purchase units of the funds as chosen by the policyholder.
Policy administration charge: This charge is deducted towards the administrative expenses incurred by the company towards maintenance of the policy like paperwork, workforce, premium intimation etc. This is usually charged on a monthly basis. It may be flat throughout the term of the policy or may vary as years, as is defined in the product brochure. It is recovered by selling the required number of units at the prevailing unit price.
Mortality Charge:-This is charged towards providing you the insurance cover, which at present is a minimum of 5 times the annual premium, most of the plans give individuals choice of opting for a higher cover. The total amount under this heading depends on the amount of Life cover sought, age of the policyholder and other details. This again is recovered by selling the required number of units at the prevailing unit price.
Fund Management Charges:- This charge is adjusted in the daily unit price (Net Asset Value) of the fund. This charge is levied towards managing the fund. Investing in assets like Private Company bonds, Government Bonds, FD’s, Equity stocks, money market instruments etc., deciding When to buy, when to sell taking into consideration the performance of the security, the overall outlook of the industry, local as well as global economy etc. This charge differs as per the fund. Generally the Equity oriented funds have a higher fund management charges.
Most plans allow the facility of paying a top-up premium. A certain amount of fee is deducted before this top-up amount is used to buy units. It generally Is between 1%-2% of the amount.
This plan has a lock-in period of 5 years. Anyways in order to make good returns on the investment it makes sense to stay invested between 5-8 years. Thus it is highly imperative that you choose the right fund to invest into, keeping in mind your risk appetite and the past performance of the fund. Though past performance does not guarantee similar future performance it would at least give an indication of how the fund has been managed so far.
Thus a Unit Linked Insurance Plan has the potential of giving the policyholder a rate of return higher than the traditional Endowment Plans.
Durgesh Savkur is Data Analyst for Morningstar India.