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But if you still want to buy a Ulip, go for the one that is the least expensive

Insurance sales people are trying to push unit linked insurance plans (Ulips) to unsuspecting individuals who are in a rush to invest in tax savings instruments as another financial year nears the end. According to investment experts, even financially savvy individuals, in a hurry to meet the March 31 deadline, don't make an effort to understand all the charges that apply to this new breed of Ulips.

Though commissions have dropped from over 20-30% before September 2010 to 8-10% now, Ulips are still an expensive affair. Many insurance-seekers do not realise this.

Insurance Regulatory and Development Authority (IRDA) had capped charges on Ulips in September 2010 following widespread criticism about mis-selling of these products. Also, most people tend to focus on premium allocation alone. But, there are several other charges, like policy administration and mortality charges, which affect your total corpus. For instance, policy administration charges in some Ulips increase every year after the fifth year.

If you have decided to buy Ulips — which experts don't think is the ideal way to save tax or buy insurance cover — try to identify the least expensive one, say investment experts. Simply jot down the premium and charges you would pay in, say, 10 years. Consider buying a Ulip which allocated the maximum portion of your premium towards investment. Another point to note is that you shouldn't get swayed by assurances or claims by your financial advisor about returns, as these products are market-linked.

Premium Allocation Charge

Independent financial planners used to frown upon Ulips because of their higher premium allocation charges. Before Irda clamped down on charges more than two years ago, insurance companies used to deduct over 20% of the first year's premium as allocation charges. Following Irda's new regulations, the figure has come down to 7.5% in most Ulips. Commissions, too, have come down to 8-10%. However, financial planners continue to consider Ulips as relatively expensive products. So, study the product brochure and benefit illustration closely to understand the charge structure.

Policy Administration Charge

When you analyse the benefit illustration, you will realise that in addition to premium allocation charges, a seemingly small, ad-hoc sum is deducted from your premiums every month. Known as policy administration charge, it used to form a minor component of the Ulip charge structure before the new guidelines came into effect. Typically, the charges are in the region of Rs 70-100 per month during the initial three to five years. In case of many Ulips, the policy administration charge goes up by, say, 3-6% every year after the initial period. They have a bigger impact on those paying lower premiums since these are ad-hoc, and not percentage-based, fees. They can reduce the premium directed towards investment significantly, in percentage terms, for smaller ticket-size policies.

Fund Management Charge

The fund management charge (FMC) is capped at 1.35% now. For debt-oriented Ulips, most insurers levy a much lower charge.

However, what many do not realise is that FMC is levied on the accumulated amount, and not just the premium paid. Therefore, in real terms, as your corpus grows, the actual amount deducted as FMC every year goes up.

Mortality Charge

When insurance-buyers purchase an insurancecum-investment product, their primary objective is investment. However, they still have to pay a fee for the insurance cover (known as mortality charge) that comes with the plan. Many people put money into Ulips solely from an investment perspective. In such cases, funds directed towards mortality charges is simply money down the drain. For example, someone who already has a large term cover may not need further insurance cover, but the person will still have to pay for the insurance cover if he buys a Ulip.

Surrender Charge

Ulips come with a mandatory lock-in period of five years. If you surrender the policy earlier, you will have to pay the surrender charges. The charge is generally higher in the initial years. For example, 15% in the first year and 5% in the third. Therefore, if you a buy a Ulip in a hurry just to meet the deadline and realise its unsuitability next year, you will stand to lose a substantial amount in the form of these charges. Not to mention the other charges deducted, which are higher in the first five years.

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