As the advertising onslaught grows in the tax season it is important to understand what
Charges and fees*
ULIPs offered by different insurers have varying charge structures. Broadly, the different types of fees and charges are given below. As per IRDA (Insurance Regulatory Development Authority) norms, insurers have the right to revise fees and charges over a period of time.
1. Premium Allocation Charge - This is a percentage of the premium appropriated towards charges before allocating the units under the policy. This charge normally includes initial and renewal expenses apart from commission expenses.
2. Mortality Charges - These are charges to provide for the cost of insurance coverage under the plan. Mortality charges depend on number of factors such as age, amount of coverage, state of health etc
3. Fund Management Fees - These are fees levied for management of the fund(s) and are deducted before arriving at the Net Asset Value (NAV).
4. Policy/ Administration Charges - These are the fees for administration of the plan and levied by cancellation of units. This could be flat throughout the policy term or vary at a pre-determined rate.
5. Surrender Charges - A surrender charge may be deducted for premature partial or full encashment of units wherever applicable, as mentioned in the policy conditions.
6. Fund Switching Charge - Generally a limited number of fund switches may be allowed each year without charge, with subsequent switches, subject to a charge.
7. Service Tax Deductions - Before allotment of the units the applicable service tax is deducted from the risk portion of the premium.
It should be noted that the portion of the premium after deducting for all charges and premium for risk cover is utilized for purchasing units. However, the quantum of premium used to purchase units varies from product to product.
What it means as an investment option?
The charges and various other expenses are front loaded i.e. high in initial years. Over a long period of time they even out. Thus ULIPs make sense only if you plan to stay invested for 10-15 years or more. Marketing agents often try to sell ULIPs as three-year products for tax saving purpose and suggest you withdraw the proceeds at the end of three years. That is a sure shot way to lose money as you will end up paying all the charges but not reap the benefits of appreciation.
Free Look Period
As per IRDA, the policyholder can seek refund of premiums if he disagrees with the terms and conditions of the policy, within 15 days of receipt of the policy document (Free Look period). The policyholder shall be refunded the fund value including charges levied through cancellation of units subject to deduction of expenses towards medical examination, stamp duty and proportionate risk premium for the period of cover.
“SWITCH" option provides for shifting the investments in a policy from one fund to another provided the feature is available in the product. Many policies give you multiple fund options and you can decide your allocation according to the market conditions. Switch should be used intelligently to protect your investments during turbulent times by making a switch to safer debt funds and during boom time you should switch to more of equity funds. You need to be aware of the fund options provided by the policy before you sign up.
If all the premiums have not been paid for at least 3 years continuously, the insurance cover ceases to exist. You will be paid the surrender value in that case. The tax benefits cease to exist when an individual wants to get out of a ULIP before three years i.e. any contribution made towards the policy during the financial year is not eligible for a deduction under section 80C; On top of this deductions that have already been taken in the previous years would be added back as the income of the individual in that particular year of policy termination.
Under the 'premium holiday" feature, most ULIPs continue running if premium payment is stopped after the first three years, with the charges being deducted from the fund value through the term. While you may stop premium payments after three years and keep a ULIP going, the contract between you and the insurer will be terminated when, after deduction of charges, the fund value becomes equal to or less than one year"s premium. So, you need to keep an eye on the fund value if you exercise the option of stopping premiums after three years.
So to sum up:
-ULIP is a hybrid plan, provides the qualities of both insurance and mutual funds
-Gives you tax benefits under section 80C
-Gives you the flexibility to chose your premium as well as risk cover
-Gives you the flexibility to stop premium payments if so desired or needed
-Is not a pure investment tool, as pitched by most of the sellers
-Should not be taken if insurance need is not there, in which case you should go for only mutual funds
-Is expensive as compared to a combination of term insurance and mutual funds, which can serve your purpose better
-Should be taken for a long term only
-Should be taken with a high sum assured.