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What are mortality charges in ULIP?

dateKnowledge Centre Team dateApril 16, 2021 views121 Views
What are mortality charges in ULIP?

Radha, a thirty-seven-year-old marketing consultant, decides to buy a 10-year ULIP. The premium paid was 10,000 per month, and the ULIP returns capped at Rs.12,00,000, which is ten times her premium. The amount to be paid during the sudden death of Radha is higher than the assured sum and the value of the fund.

In case of Radha’s death during the policy term, the amount paid to the nominee is much higher than the amount paid for fund value. For instance, if the amount of fund value is around 5 lakhs, the nominee will get 12 lakhs.

This is how mortality charges work in ULIPs; they double as life coverage.

Every Unit-Linked Insurance Plan comes with a mortality charge. The majority of the premium amount is invested in one or more investment vehicles such as debt or equity. A small charge, however, is retained by the insurer. Mortality charges in ULIP refer to the charge paid to the insurer as a life cover. The funds retained by the insurer as life cover is the mortality charge incurred in ULIPs. The mortality charges in ULIPs are paid along with the same funds, so the individual does not have to pay later, as in the case of insurance products.

Precisely, mortality charge refers to the charge levied by the insurer that is deducted from the fund value of ULIPs. It is paid to the insurer in case of any mishap. The deciding factor of the mortality charge is the sum at risk. This is the amount that the insurer pays on their own to the nominee on the insured’s death. Since the insurer pays from their own pocket, the mortality charge is paid as compensation for the risk involved.

Calculating Mortality Charges

The ULIP mortality charge calculator uses the mortality rate of the customer to determine the mortality charges in ULIPs. Mortality charges depend upon a lot of factors such as sex, age, as well as medical history. The key takeaway here is that the younger the client, the lower is the mortality rate, provided that the individual has no lifestyle diseases.

The ULIP mortality charge calculator follows a stringent formula. The charge is calculated per 1000 of the cover, depending on the type of ULIPs, location, and financial conditions of the policyholder as risk factor.

As of now, the mortality rate is sourced from the revised Indian Assured Life Mortality Table 2012-14, published by the Institute of Actuaries of India. The mortality charges are calculated in accordance with the prescribed data recommended by IRDAI, according to this formula:

Mortality charge = [Mortality rate (for attained age) * Sum at Risk/1000] * 1/12

ULIPs for planning your retirement

Factors that Determine Mortality Charges

The mortality charges in ULIP depend on a number of factors, like age, gender, and health.

The mortality charges incurred by a young person are much lesser than those incurred by an older individual. However, the ULIP for adults cannot be confused with child ULIPs that usually have a higher mortality rate, particularly for children between 7 and 14 years.

Since mortality charge also depends on gender, it is lower for women. This charge in ULIPs for women is calculated during a gap of three years. This simply means that a 35-year-old woman will have to pay the same mortality charge in ULIPs as a 32-year-old man.

Does Invest 4G by Canara HSBC Oriental Bank of Commerce Life Insurance offers Return of Mortality Charges?

Yes, Invest 4G offers return of mortality charges. The main concern of ULIPs as an instrument for investment is the added charges. ULIPs acts as both investment and insurance, which can be a deterrent.

The bank will pay an amount that is equal to all the charges deducted during the term of the policy, added to the fund value upon the policy’s maturity (provided every premium payment has been paid without delay and subject to certain conditions. This makes Canara HSBC Oriental Bank of Commerce Life Insurance ULIPs like Invest 4G a more convenient investment option, provided you are not discontinuing the ULIP policy.

Apart from the return of mortality charges, Invest 4G Plan comes with additional perks like:

  • Guaranteed income, which is a huge relief for retirees.
  • Limited premium payment.
  • Multiple options for death benefits - nominees can receive it as a lump sum, as monthly income, or as a combination of both.
  • Maximum flexibility to help you manage your savings, using eight different unit-linked funds that include options like debt fund, liquid fund, growth plus fund, etc.
  • Loyalty additions at the end of specific policy years provided all the premiums have been paid on time.
  • Additional wealth boosters calculated as a percentage of the average fund value, provided sixty monthly policy premiums have been completed.
  • Options for partial withdrawal, systematic withdrawal, and milestone withdrawal to maximize liquidity and utility for the policyholder.
  • Tax benefits according to the prevailing income tax laws.
  • Reduction of premiums if payment has been consistent after the first five years of policy payment, provided the policyholder meets certain conditions.

Now that we have explained how mortality charges worked, it is obvious that ULIPs, where mortality charges are returned, is an ideal investment option that allows you to save a considerable amount of money while enjoying perks like tax deductions and fund management.

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FAQs

In order to understand ULIP NAV, you first need to understand how ULIPs work. In ULIPs, a portion of premium from different investors is accumulated to create one investment corpus. This money is invested in several different market instruments. So to divide the returns properly among all the investors, the fund manager divides the net asset value in to small units with a specific face value. NAV is the per market share value of a fund. To better understand the definition of NAV, take a look at the formula below -

Net Asset Value = [Assets-(Liabilities + Expenses)] / Outstanding Units

It's not risky to invest in ULIP if you chose a safer path. Risk factor in ULIPs depends on the investment option you choose. If you are not okay with sharp movements, then choosing a low risk investment is a better idea. For people with high risk appetite, it's good to choose equity funds while risk-averse investors can go for debt funds.

You can opt for settlement option if you want to take your fund value in periodic installments. With the settlement option, you can get your maturity amount in installment as per the frequency chosen by you over a maximum period of 5 years. You can choose complete withdrawal of fund value at any point of time. Although, you will not get any life cover during this period.

ULIPs are life insurance products that provide paths to invest. And just like other investment option, there's no guaranteed investment return in a ULIP. Although, if you like taking risks and want to earn more returns on your investment, then opt for equity funds.

At the time of maturity of ULIP policy, you will get the fund value on your prevailing NAV. Fund value is the number of units of policy multiplied by NAV (net asset value).

Value of the fund = Total units of policy x NAV (Net Asset Value)

Well, discontinuing your premium payment will disrupt your savings as well as financial goals. In such case, you can approach your insurance company and ask for the revival of discontinued policy within the stipulated timelines. Also, you will have to pay all the unpaid premiums.

ULIP plan is a combination of investment and insurance. Thus, one must hold this plan for a duration of at least 10 years so as to get investment benefits out of it. As an early exit will have its own consequences. ULIPs have a lock-in-period of 5 years. Thus, you may surrender your policy before the completion of 5 years, but you will be paid only after the end of 5 years.

Generally, minimum lock-in period for ULIP is 5 consecutive policy years. During this time period, if the policyholder discontinues or surrenders the policy, then he/she will not able to receive any payouts. Withdrawals are only allowed at the end of the lock-in period. In addition to this, if you surrender your policy before the lock-in period ends, then you will have to pay surrender charges as well. Also, it is advisable not to exit your plan after the completion of 5 years of lock-in period, because if you stay invested for a longer duration it will help you reap better benefits.

The amount that you pay towards the Unit Linked Insurance Policy is eligible for tax deduction as per Section 80C of the Income Tax Act, 1961. This means that the premium amount paid will be deducted under section 80C from your taxable income up to a maximum limit, which is currently ₹1.5 Lakhs. However, the aggregate amount of deductions under section 80C, section 80CCC and 80CCD (1) shall not, in any case, exceed ₹1.5 Lakhs. Also, upon the maturity of the policy, the payout amount you receive will be exempt from income tax, subject to the applicable provisions of Section 10(10D) of the Income Tax Act, 1961.

Here’re the following major benefits of buying ULIP

1. Tax Benefits – It helps you to reduce tax liabilities. This means you are liable to enjoy tax benefits on the premiums paid towards the policy as per Section 80C of the Income Tax Act.

2. Long-term growth– One of the major benefits of buying a ULIP plan is that it offers long-term benefits. ULIPs come with a lock-in period of 5 years which will keep you invested for a longer period.

3. Dual benefits – ULIPs not only offer life coverage but also come with a wide range of investment funds that will help you earn great returns. This includes balanced funds, debt funds or equity funds. You can invest in any of them depending on your need and risk appetite.

4. Flexibility – It gives you the flexibility to switch between funds basis your risk appetite. You could select multiple funds and different investment strategies.

5. Partial withdrawal option – It allows you to make partial withdrawal in case of any uncalled medical emergency or contingency after completion of lock-in period.

ULIP is a perfect investment option if you are looking for long term wealth creation. It could be buying your own house, a new car, going on a long vacation, or your child’s higher education or marriage, ULIP helps you to meet all your long-term financial goals. Moreover, it comes with a lock-in period of 5 years which keep you invested for a longer period and helps you earn better returns. The lock-in period is calculated from the date when the policy is issued.

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