The unseen charges of a ULIP
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Unit linked Insurance Plans (ULIP) provide the twin benefit of providing the benefits of investing in the stock market and covering your risks. It is important to understand that a Unit Linked Life Insurance product is different from the traditional insurance products and are subject to the risk factors.
The premium paid in Unit Linked Life Insurance policies are subject to investment risks associated with capital markets and the NAVs of the units may go up or down based on the performance of fund and factors influencing the capital market and the insured is responsible for his/her decisions.
Other than the fact that the investment risk in investment portfolio is borne by the policyholder, let us take a look at the different charges in a ULIP.
|
Particulars |
LIC |
ICICI Pru |
HDFC Standard |
Bajaj Allianz |
|
Plan name |
||||
|
Premium allocation charge |
24% |
20% |
70% |
25% |
|
Mortality Charges (/1000 ) |
1.80 for age 35 |
1.46 for age 30 |
NA |
1.74 for age 30 |
|
Fund Management Charges |
0.75% for Bond, 1.50% for growth |
0.75 % for preserver to 2.25% for multiplier |
0.80% |
0.95% for Bond, 1.75 % for growth |
|
Policy Charges |
Rs 60 per month in first year, Rs 20 after that. |
No other charges, but FMC can be raised to 3.5% |
Rs 20 per month for administration |
Rs 600 per annum inflating at 5% per annum |
|
Switching charges |
4 free, Rs 100 after four |
4 free, Rs 100 after four |
24 in a year free, Rs 100 after that. |
3 free, Rs 100 after that |
|
Miscellaneous charges |
Rs 50 for alteration |
Switching can increase to Rs 200 |
Charges for revival, withdrawal, etc at Rs 250 per request. |
Rs 100 per transaction for revival, etc |
There are a few parameters like the flexibility of premium paying term, the amount of cover available for disability, illness and accident which has a wider variation among the Insurers.
I dislike the heavy premium allocation being charged. Out of the Rs 100 you pay to your Insurer, only Rs 70 odd goes to your investments (Rs30 in case of HDFC!!)
Compared to 5-7% return on conventional products, ULIP looks attractive. But is it for real?
I did some number crunching assuming the stock market growing by 20% and found that in three years the return on principal fund is less than 5%. This is because huge part of the policyholder money is adjusted towards allocation charges.
Maybe with a longer run, the ULIPs will harvest a better return!
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