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What
are the charges in a unit linked insurance plan?
All products have charges. A
ulip is no different and has charges associated with it. For many years Ulips
were an insurance product not understood by those who purchased them.
This meant Ulips were mis-sold by life insurance agents who pocketed huge amounts in commissions by selling you a Ulip.In order to save the Ulip and the insurance sector in India IRDA introduced reforms in Ulips in September 2010.
Ulips as a product were modified and their charges were no longer hidden. This meant you knew exactly where you were being charged in your Ulip.
Charges
in a Ulip:
Premium
allocation charges:
When you pay your premium and
invest in a Ulip the premium allocation charges are deducted from the premiums
you pay. This may be around 7-8% of the premiums you pay.
This charge goes towards
paying the agents and the distributors who sell you the Ulip their fees and
commissions.
The
mortality charges:
Insurance + Investment
You have to be provided life insurance
in a Ulip and the Ulip charges you for it. This is the mortality charge. The
mortality charge depends on your age , Your health condition and the amount of
life insurance you avail in a Ulip.
If you are older in age, greater is the amount charged as a mortality charge. It is assumed that as you grow older you need a higher insurance.
Fund
management charges:
The Ulip charges you for
managing the money you invest in it. The charges are called fund management charges.
The charges depend on the type of Ulip.If the Ulip invests in equity,
the fund management charges are 1.35% of the assets under management.(Pool of
money invested by you and all other investors).
The fund manager needs to
actively manage the Ulip and charges for his services. The charges are lower if
it is a debt Ulip as the Ulip is passively managed.
Policy
administration charges:
The Insurer incurs expenses
to manage the Ulip. The expenses could be for administration expenses like
paperwork, salaries of the work force and the reminders sent to collect your
premiums.
This is usually charged each month and is around INR 60-100 each month for the first 3 years of the Ulip.
Surrender
charges:
Ulips have a compulsory lock
in of 5 years. If you surrender the Ulip before this period you have to pay surrender
charges on the Ulip.These charges can be 12-15% of the premium if you surrender
the Ulip in the first year and move down to 4-5% if you surrender the Ulip
after 3 years.
The maximum surrender charge is INR 6000 if you surrender the Ulip in the first year.It is very essential for you to know what you are getting into before purchasing a Ulip. A study of the charges in a Ulip definitely helps you to understand a Ulip better.
There is no greater dampener for an insurance agent who is trying to mis sell you a Ulip than to show him you know your Ulip.
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