Unit Linked Insurance Plans (ULIP) is a unique instrument, in the sense, it combines investment in equities, debt and gives you an insurance product as well.
It is also one instrument, where the amount invested is very low, given the fact that there are many charges associated with it.
Mortality charges in ULIPs
When you take an ULIP plan, you get an insurance cover. As in all insurance products you pay the insurance premium. This is called mortality charge on the ULIP.
Lesser your age, lower is the insurance or the mortality charge. Now, let us understand this with an example. Say, you invest Rs 1 lakh in ULIP, chances are bright that only about Rs 90,000-94,000 maybe invested according to your age.
The biggest amount would go towards mortality charge, which is also the insurance premium.
How are mortality charges calculated?
Mortality charges are calculated based on the following formula:
Charge amount = Attained age x sum at risk/1000 x 1/12
The attained age is the age on the date of calculation of the ULIP, while the sum at risk, will be the amount that the insurance company would pay your nominee in the unfortunate event of death.
These charges are allocated every month and deducted from your fund value. What this means is that greater your age, greater would he mortality charges on the ULIP policy.
Other charges on ULIPs
a) Fund management charges
There is a fund management charge, which could vary. If you choose a money market fund, the charges are less, while in an equity fund the charges are more, because it is a more dynamic fund to manage. Some funds charge 0.75 per cent for money managing market funds and 1.5 per cent for equity funds.
b) Fund switching charges
There is also a fund switching charges on the units. Some funds allow you to switch a certain number of times. For example, at the moment ULIPs from ICICI Prudential Life allows you to switch up to 4 times in a year, free of cost. Beyond that you need to pay.
c) Surrender charges
There are also surrender charges, that would be applicable, but, here again it really depends on the insurance company. The norms would differ from isnurance companies to insurance companies.
d) Premium allocation charge
This charge is levied at the outset and would include all expenses, including commission that is payable.
e) Service tax
You cannot escape service tax and this would be levied at the start.
Should you ultimately buy ULIPs then?
Unit Linked Insurance Plans are good for saving tax. They offer tax benefits under Sec 80C of the Income Tax Act.
The insurance amount is 10 times the yearly premium paid and is not really great. A host of charges on this policy makes it not a great investment tool.
The returns can be good depending on the investment option you have chosen. If you have chosen to invest in equity related schemes, you could get superior returns, your risk too would be high in this case.