ULIP Charges that you should be aware of

Take a good old equity fund stripped of the 2.25 per cent charged to investors, add a insurance component and layer it with five or six charges with esoteric titles such as premium allocation charges, policy administration charges, mortality charge and you have the hybrid product that is called a Unit Linked Insurance Plan.

ULIPs marketed by insurance companies are quite a hit with investors planning for almost anything – ranging from their child's education to pensions. Yet in recent times the plans have been in the eye of a storm. One of accusations against ULIPs is the bevy of charges they levy on investors.

Here's a rundown of the charges you can expect if you buy an Unit Linked Insurance Plan. Understand them before you take the plunge.

Premium allocation charges – This is the biggest expense component for investors buying ULIPs. It tends to range between 10 per cent and 100 per cent of the premium amount invested for the first year.

Premium allocation charges may be spread out in differing proportions for different ULIPs.

Some insurers levy a high charge upfront and taper it down from the second year. Others have a uniform charge across several years. This charge usually ceases in the fifth year of holding with any premium top-up seeing a two per cent deduction.

The controversial and sizable agent commission, which the Insurance Regulatory and Development Authority (IRDA) has recently asked insurance companies to disclose, usually comes out of the Premium Allocation Charge.

PAC is deducted from the sum you invest before buying units in your account.

Policy administration charge – A sizable component of the fee paid by investors, this charge is levied throughout the tenure of holding the policy and in many cases begins to increase annually from the third or fifth year.

This charge occurs in a percentage of premium and fixed rate forms. The magnitude of the charge per annum ranges from 3 per cent to 8 per cent of the premium paid. This charge is usually deducted from your holdings, by reducing the unit balance to your credit.

The investor really needs to watch for this number, as it is often displayed on a monthly basis on brochures. When you annualise it, a small but sizable bite is taken out of your capital and returns.

Fund management charge – In addition to charging you for allocating and administering your funds, insurers charge between 0.95 per cent and 1.35 per cent of your fund value (the prevailing worth of your portfolio) for managing it.

Mortality charge – Mortality charge is what the insurer charges you for providing the insurance cover that is bundled into a ULIP. This amount is charged per thousand rupees of sum assured – what the insurance company pays your kin in the event of your death.

Mortality charges usually rise with age with additional amounts sometimes being charged for unhealthy lifestyle choices such as for smoking.

The amount could range from Rs 150 a year for a lakh of sum assured for a 20-year-old to Rs 700 a lakh for a 50-year-old. The charge varies between individuals and is determined by actuaries.

Surrender charges – Surrender charges are usually applied only if you choose to exit your ULIP prematurely, or discontinue premium payments ahead of term.

This component could potentially turn your Unit Linked Insurance Plan into an expensive, if not a loss-making, affair.

The magnitude varies from 10-40 per cent of first year policy premium for exiting within the initial two to five years.

This charge again varies with schemes and insurers.

Other possible charges – Switching between plans, partially withdrawing premiums, reinstating a lapsed policy are other investor actions that could entail charges. While they may pale in comparison to the aforementioned charges, being aware of such fees prepares the holder for an eventuality.

For example, a rider premium charge, which is an additional charge not found in all policies, could enable the holder to amend the terms of the policy in the event of serious illness or disability.

While the charges on ULIPs may appear daunting, remember that all charges have to fit into the cap imposed by the IRDA.

With effect from January, the Insurance Regulatory and Development Authority has moved to cap the expenses related to holding ULIPs for 10 years at 3 per cent per annum and beyond that at 2.25 per cent per annum.

The mortality premium and rider premium are excluded from this cap.

However, these caps apply only to investors who stay put with the fund for a decade. A shorter holding period may yield below-par returns, by virtue of the expenses loaded on the investors in Unit Linked Insurance Plans during the early years.

via BL