Understand How ULIP Is Structured
Let us start with the Unit-Linked Insurance Plan meaning first, before understanding the basic features, benefits, and structure of the policy.
ULIP is an immensely popular market-linked product that offers dual advantages of life insurance and investment. A portion of the premium is invested in equity, debt, or a combination of both.
Additionally, investing in ULIP helps you to avail of tax benefits under section 80C of the Income Tax Act, 1961. The premium that you pay is eligible for a deduction of up to INR 1.5 lakh per annum.
At the maturity of the policy, you receive the net asset value (ULIP NAV) of all funds. In the case of an untoward incident, your nominee will receive the death benefit, which can be in the form of sum assured, fund value, a combination of both, or 105% of the total premium paid.
ULIPs are one of the best investment products available in the market today. When you compare the ULIP returns in 10 years with other investment instruments, they provide better returns. However, before investing in any ULIP, it is advisable to understand the basic structure. The premium that you pay goes through various deductions before being diverted towards investments and life insurance.
Charges associated with a ULIP
Here is a list of the most common charges that you should know:
1. Premium allocation charge (PAC)
PAC is deducted as a fixed percentage from the total premium paid towards the policy. During the initial years of the policy, the PAC is set at a higher rate. Factors like the premium, payment frequency and premium payment mode for the ULIP policy greatly influence the PAC.
2. Mortality charge
You have to pay a mortality fee every month to recover the ULIPs life insurance cover. Factors like age, medical history, type of policy, and the sum assured play a crucial role in ascertaining this fee.
3. Fund management charge
The purpose of investing in a ULIP is to diversify the money into various funds based on your risk-bearing capacity. Insurance companies charge a maximum of 1.35% per annum for managing a fund. When compared to debt or hybrid funds, equity funds attract higher charges. Such fees are directly adjusted from your fund’s NAV.
4. Policy administration charge
This fee is levied towards the maintenance of your policy. The administrative process includes documentation work and sending notice of policy renewal or intimation for premium payment.
5. Fund switching charges
One of the best advantages of investing in a ULIP is that it allows you to switch from one plan to another to avert the market’s volatility and meet your long-term financial goals. Some insurance companies provide free unlimited switches, whereas others levy a charge on fund switching once your specified limit is over.
6. Premium redirection charges
During the policy’s initial years, you may have invested in an equity fund.However, when you are near to achieve long-term financial goals; you might shift to a debt fund to avoid any undue risk. The insurer charges you a premium redirection fee to shift your premium from one fund to another.
7. Partial withdrawal charges
You can withdraw a part of your corpus once the lock-in period of five years is over. Some insurance companies allow such withdrawal free of any charges for a limited amount of transactions. Insurance companies levy an upfront fee for making a partial withdrawal once you surpass the maximum limit.
8. Charges on discontinuation of the plan
ULIPs have a lock-in period of five years. If you want to cease your ULIP policy or are unable to pay the premium during this tenure, you need to pay a discontinuation fee. Such charges are more or less the same across all insurance providers as the Insurance Regulatory and Development Authority of India prescribes them.
Despite all these charges, ULIPs are still considered one of the best investment options. According to financial experts, you must stay invested for a long duration, as ULIP returns in 10 years or a higher period can be around 10-12%.
