Insurance Basics Part IV - Unit Linked Insurance Plan ? ULIP
Posted by animeshp398 on April 27th, 2017
Understanding the cost structure of Unit Linked Insurance Plan is necessary before taking the leap
A person, 40-year-old investor, was disgruntled with his investments in Unit-Linked Insurance Plan (ULIP). While the equity markets have been rolling, he realized after some research that he was yet to recover the money he had invested three years ago. This, he realized, was not on account of poor fund performance but because of higher initial fund costs. While the people crib is about the non intimation of such expenses by his/her broker, insurance regulator IRDA has come to his rescue, making it mandatory to disclose all charges upfront to the buyers.
Basic rules have to understand the cost structure of a fund before buying into ULIPs. And a basic understanding would save them from heartburn. So how are the cost structured for an ULIP?
COSTS OF OWNING A ULIP:
1) Premium Allocation Charge
The cost structure of ULIPs is such that it starts working to your benefit only after 5-8 years of investing. A part of your premium payment goes into Premium Allocation Charge, which is calculated as a percentage of the premium. This percentage is generally higher in the first few years-the main reason: it takes years to break even on investments. It could be as high as 40% of each year's premium.
2) Policy Administration Charge
A monthly fixed amount that usually rises every year with inflation or as a percentage of the sum assured.
3) Mortality/Rider Charges
Ulip Insurance India also have mortality/rider charges, which depends on age, sex and the level of risk cover in a particular year. If you don't avail risk cover, mortality charges can be zero. The mortality charge per Rs 1,000 of the sum assured varies from 1.3 for a 30-year-old to 6.4 for a fifty-year-old.
4) Fund Management Charge (FMC)
Then you have the fund management charge, an adjustment to net asset value (NAV) on a daily basis. Usually, insurers charge it as a percentage of funds under management. ULIPs could have a fund management charge between 0.5%-2.0% per annum.
So with so many chargers around what should be the strategy to get good retuns from ULIPs
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