ULIP: A Good Product Unfairly Judged for Its Charges

Demystifying ULIP charges

 

Here is a list of the common ULIP charges² -

 

Reasons why ULIPs are unfairly judged:

 

Given the different charges under ULIPs, many individuals might feel that a large part of their premium or fund value is being used up for charges. This might affect and reduce potential returns. Perhaps this is why ULIPs are unfairly judged for having high charges that erode possible returns.

This is why demystifying ULIP charges comes in handy so that you, as the investor, are entirely aware of the potential risks, charges, etc., before investing. This would also help you align the same with your long-term financial goals.

 

Busting ULIP charges myths:

 

While it is true that ULIPs have different types of charges, it is wrong to judge them as being high-charge products. Here are some reasons why –

1. There’s a cap on the charges:

   
   

   ULIPs if invested for longer period that is for 10-15 years will yield lower charges. The Insurance Regulatory and Development Authority of India (IRDAI) has placed restrictions on the maximum charge a ULIP can levy. According to IRDAI’s guidelines, on maturity, the difference between the gross and net yield of a ULIP cannot be more than 4% at 5^th policy year and it reduces to 2.25% at 15^th policy year. Hence, saying that ULIPs have high charges will be unfair.Gross yield is the total return earned from a ULIP, and net yield is the return adjusted for ULIP charges.

2. Some plans refund some of the charges:

   
   

   New-age ULIPs or 4G ULIPs represent an advanced version of traditional ULIPs, offering enhanced benefits and additional features. These modern policies signify a significant progression in the life insurance industry. Building on the strengths of previous plans, fourth-generation ULIPs introduce innovative features that transform how policyholders perceive both investments and insurance. The impact of ULIPs on the evolution of life insurance can be attributed to their cost-effectiveness and the inclusion of the latest features.

3. Some plans have a minimal charge structure:

   
   

   Many online ULIPs levy minimal or no premium allocation charge. Moreover, under some plans, there’s no policy administration charges which further reduces the charge structure and makes the plan cost-effective.

4. You can minimise some of the charges:

   
   

   In some cases, you can control the charges applicable under the ULIP plan. Here are some tips on how –

   • Look for ULIPs with minimum premium allocation and administration charges¹.
   • Choose ULIPs that refund the mortality charges on maturity.
   • Avoid surrendering the policy within the lock-in period of 5 years to avoid incurring the discontinuance charge.
   • Compare the available ULIPs basis their charge structure and choose a plan with the lowest charges.
   • Keep your fund switching  and partial withdrawals within the free limit to avoid additional charges.

 

Demystifying ULIP charges and enjoying the benefits:

 

Don’t judge ULIPs unfairly for the charges involved. The charges are predefined, and once you are aware of them, you can choose the right plan according to your needs and enjoy the benefits.

So, understand the different types of charges associated with ULIPs and why they are charged. Assess the charge structure of any ULIP that you want to buy and see how it can potentially affect your returns. A low-charge structure is a better alternative to saving on expenses without compromising on benefits.

So, choose ULIPs for the different types of financial goals that you might have and create the desired corpus. The tax efficiency of the ULIP can far outweigh the low charges that the plan levies, which give you good tax and inflation-adjusted returns.

 

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