Here's why ULIPs are Affordable Products
If you’re looking for an investment option that provides the opportunity to create market-linked wealth over the long-term and provides your family with adequate financial protection, then a ULIP is one of the preferred options that you have. However, one of the assumptions that individuals have against a ULIP is that it is not an affordable product, and it involves several exorbitant charges.
However, in the current scenario, it may be considered as a misconception. Before we get into the main part of the article, let’s take a look at the answer to What is a ULIP?
What is a ULIP?
The term ULIP stands for Unit-Linked Insurance Plan. It is an insurance plan that combines two aspects - insurance and market-linked investment. Wondering how? Here’s a quick look. Now, when you purchase a ULIP, you’re required to make regular payments in the form of premiums to the insurance service provider.
The premiums that you pay to the insurers would then be used by them to provide you with a life cover of a predetermined sum of money. That’s not all. In addition to the life cover, the premiums will also be invested by the insurer in market-linked funds of your choice.
And when the Unit-Linked Insurance Plan reaches the end of its policy term, your investment along with the generated ULIP market-linked returns will be paid out to you. On the other hand, if something untoward were to happen to you during the term of the ULIP, the life cover of a predetermined sum of money will be paid out to your nominees as death benefits . Your nominees may use the death benefits that they receive to take care of themselves and further their life goals.
Different Charges Involved in ULIP
With this, you must now have the question ‘what is a ULIP plan?’ answered as well as become aware of what ULIP stands for. Now, let’s take a look at the different charges that you need to know about in a ULIP.
1. Premium Allocation Charge
The premium allocation charge is an upfront fee that an insurance provider charges. The charge includes expenses incurred by the insurer such as distributor fees, agent commissions, cost of underwriting, and more and is expressed as a percentage of the premium that you’re required to pay.
As a general practice, the premium allocation charge is reduced from the premium that you pay and the remaining is invested in the market-linked funds of your choice. However, with the advent of online ULIPs, the premium allocation charge has gone down considerably due to the elimination of distribution fees and agent commissions. In many cases, insurance providers have completely stopped deducting premium allocation charges entirely as well.
2. Mortality Charge
The mortality charge is one of the reasons why investors tend to think that ULIPs are high-cost products. This charge is levied by insurance providers to cover the cost associated with providing the policyholder with a life cover. Many insurance providers also offer benefits such as Return of Mortality charge, that return the mortality charges back to the policyholder at maturity. Using the benefit of ROMC, also helps in bringing down the cost of ULIPs
3. Fund Management Charge (FMC)
A Unit-Linked Insurance Plan invests in market-linked funds, either equity or debt or mix of both. These funds are actively managed by fund managers, who levy a fee known as the fund management charge. This charge is adjusted from the Net Asset Value (NAV) of the fund daily.
While the fund management charge cannot be avoided under any means, it is however restricted to a maximum 1.35% of the total value of the fund according to the applicable IRDAI regulations. Insurance providers cannot levy a fund management charge that’s higher than the above specified limit under any circumstances. There are funds (e.g., debt funds) which can have a FMC of lower than 1.35% also.
To offset these costs, insurance companies also give loyalty additions and other benefits as per the policy terms & conditions, during the policy term to encourage customers to continue staying invested. So, these costs are offset by other benefits in most cases.
4. Policy Administration Charge
The policy administration charge is levied by the insurance provider to cover the costs associated with processing documentation, paperwork, communication, record keeping, and other expenses.
These are some of the major charges associated with a ULIP. However, keep in mind that depending on the product’s terms and conditions, there can be other charges also.
From this, it is now clear that ULIPs are no longer high-cost products that you should stay away from. So, what’re you waiting for, consider investing in a ULIP to enjoy the benefits that it offers
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