There is no dearth of investment options in India. Investors have a variety of options ranging from term plans and unit-linked insurance plans to equity funds. Even though ULIPs are insurance products, most people consider it to be an investment product. However, many people do not take into account the impact of various charges and fees on the return from an investment product. Even a small charge over a long period can have a substantial impact on the overall returns. Here are 10 charges every person planning to invest in ULIPs should know about:
Premium Allocation charge: It is one of the first charges levied on the policyholder. The insurance company deducts a fixed percentage of the premiums in the initial years to cover the cost of underwriting, medical expenses, and the intermediary's fees. The premium allocation charges are frontloaded and seem high in the initial years but taper off later. After deducting the premium allocation charge, the remaining amount is invested in an investment fund.
- Administration charges: The insurance company levies a certain charge every month for the administration of your policy. Unlike the premium allocation charge, administration charges are not deducted by reducing the premium, but by canceling the units from your investment funds proportionately. The best ULIP plans have administration charges that remain fixed throughout the policy tenure, while some have charges that change at a predefined rate.
- Fund Management charges: The best ULIP plans offer a variety of fund options to the investors, but charge a fee for the management of the funds. The fund management charges are calculated as a percentage of the fund value and deducted before computing the net asset value of the fund. As per the rules set by IRDAI, the fund management charge cannot be more than 1.5%.
- Discontinuance charges: As the name suggests, the discontinuance charge is levied by the insurance company if the policyholder decided to surrender the policy prematurely. The insurance regulator has mandated only the recovery of the acquisition cost in the event of discontinuance of the policy.
- Partial withdrawal charges: Investors are allowed to withdraw from ULIPs after remaining invested for a minimum of five years. In the event of a withdrawal, the insurance company levies a partial withdrawal charge.
- Mortality charges: Getting a life cover along with market-linked returns is one of the biggest benefits of ULIP. The insurer levies a mortality charge to provide the insurance cover. The mortality cover is calculated after taking into account factors such as age and health risk of the insured
- Switching charge: One of the benefits of ULIP is the host of investment funds that it offers ranging from debt funds to equity funds. The policyholder also has an option to switch between funds depending on his/her risk profile. Insurance companies offer a fixed number of free switches but start imposing a nominal switching charge after the exhaustion of free switches.
- Premium redirection charges: If you redirect future premiums into a different fund without altering the original fund structure, the insurance companies levy a premium redirection charge.
- Guarantee charges: The best ULIP plans provide market-linked returns, but some investors seek surety in the rate of return. Some insurers impose a guarantee charge and ensure a minimum rate of return for the insured.
- Rider charges: ULIPs essentially are insurance products. Besides providing a life cover, life insurance policies provide several riders, which are optional on the insured. Similarly, in the case of ULIPs, you can opt for riders like accidental death rider or critical illness rider. To enhance the life cover through riders, insurers levy rider charges.
Even after multiple charges, ULIPs are one of the best insurance-cum-investment options in the market. Some of the charges are dependent on the action of the policyholder and may not be levied. To maintain transparency, the insurance regulator has capped the annualised charges of ULIPs at 2.25%. The Invest 4G unit-linked plan offered by Canara HSBC Oriental Bank of Commerce can help you fulfill your financial goals with ease and at a nominal price. With the Invest 4G plan, you can live a stress-free life without worrying about excessive fees and charges. Lower fees automatically boost the overall returns for the investors