May 4, 2018

Buying ULIP Policy, beware of charges and fees.

Unit Linked Insurance Plans

Stay Alert -  Series 14 

Unit Linked Insurance Plans (ULIP) offers dual benefits of insurance and investment in one product. 

ULIP allow investors to chip in the equity and debt funds along with the protection of insurance benefits; thus, creating the opportunity of high returns with protection benefit. 

Despite these positives, ULIPS also have some negatives like high charges which differ from fund to fund. Therefore, before investing, understanding the structure of these charges that you will have to pay over the entire tenure will help you buy the most suitable ULIP. 

Here are the major ULIP charges commonly charged by the fund houses:

1. Allocation charges.
Allocation charges are deducted from the premium amount upfront which is always on a higher side. These charges are levied during the start to recover the initial expense incurred towards issuing the policy such as the distributor fee. The balance is the investible amount used to purchase units of the funds chosen by the policyholder. These charges are regulated by the Insurance and Regulatory and Development Authority (IRDA), which has set guidelines that ensure a cap on these charges. Despite all the checks put up by IRDA these charges remain significantly high and unnoticed.

2. Administration charges.
Administration charges are the charge deducted towards the maintenance of the policy. Maintenance includes the costs towards the hoping, the premium intimation, paperwork, etc. These charges could either be flat throughout the policy term or could increase at a pre-determined rate. These charges are generally not taken in lump sum, but are levied on a periodic basis on premium paid.

3. Funds switching Fee.
Switches are options given to policyholders of ULIPS to move their investments from one fund to another. One can transfer units fully or partially between fund options. Moving funds or investments between options is called switching. Generally a limited number of fund switches may be allowed each year without charges, with subsequent switches, subject to a charge of say Rs 100 or Rs 250 per switch.

4. Monitoring charges.
Monitoring charges are the charges for managing the fund of the investor. This fee is deducted before arriving at the net asset value. These charges may differ from management to management. Though each fund may have different charges, but the IRDA has set down a cap on the maximum charges levied as management charges, which is not more than 1.35% per annum.

5. Exit load or Redemption penalty.
Exit load or redemption penalty is levied on withdrawal of funds. A penalty may be deducted for premature encashment of units, if the policy is still under the lock-in period. The Insurance and Regulatory and Development Authority have laid down guidelines on the maximum surrender charges that can be levied by life insurance companies. The surrender charges or the discontinuance charges shall not exceed 50 basis points per annum on the unit fund value and no other charges apart from this shall be levied by the insurer on surrender of the policy.

Stay Alert, Stay Safe. 

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