Before deciding which Ulip to buy, scan the charges that you will have to pay after you buy one
Usually, when unit-linked insurance plans (Ulips) are discussed, the talk veers more towards the higher upfront charge for premium allocation than other categories. The rest of the charges like policy administration, mortality and switching are often not seen as components that could significantly push up costs. Recently, insurers and policyholders expressed concerns when the Union Budget extended the service tax net to include components like premium allocation and policy administration charges in Ulips. However, existing charges seldom attract such attention. Many tend to assume that since all companies have to follow the cap on Ulip charges put in place by the Insurance Regulatory and Development Authority (Irda), these are uniform. So, they feel, there is very little to evaluate in terms of charges while comparing policies to identify the right one. But, this is not the correct approach. Understanding the intricacies of various categories of charges that you will pay over the entire term of the policy will help you make a better decision. Here are the major ones:
PREMIUM ALLOCATION CHARGE
This charge is the focus of attention of both policyholders and insurance agents. It often overshadows other charges built into the policy. Several life insurers promote some of their Ulips as the ones with the highest premium allocation – in other words, the lowest allocation charges in the initial years. While this may be true, it does not necessarily mean that the total charges under the product are low. In very simple terms, with the total charge being capped, a customer will, by and large, find that the total charges will be within the limit (and the year-wise sub-limits) set by Irda. However, high premium allocation initially does not necessarily mean the total charges are low. A customer should always calculate the composite charge over five years while making a comparison." The overall charges remain the same over a period of time, but in the initial years, some companies deduct lower premium allocation charges and make up for it by keeping the policy administration fee high.
POLICY ADMINISTRATION CHARGE
This lesser-talked about charge has seen a steady rise in some policies since the ceiling on Ulip charges was introduced in September 2010. "Nowadays, the premium allocation charge is low. Some policies state that no allocation fee will be levied after five years. The catch here is that the policy administration charge keeps going up by say 5% every year, which will compensate for the decreasing allocation charges," says a financial planner. The combination of total charges may vary, but they have to abide by the limit on Ulip charges. Hence, the need to closely study the entire charge structure and you should not ignore this seemingly-small element. Concentrating only on the charges during the first few years while comparing policies could lead you to assume that the one the levies a lower fee upfront presents a more cost-effective option.
MORTALITY CHARGE
This is the amount deducted from your premium to arrange for your life cover. Typically, it is arrived at by factoring in your age, mortality tables used by the industry and also the company's own claim experience for the category. Though the mortality charges for a simple term plan and a Ulip should be the same, some insurers levy differential rates. That is, the mortality charges in a Ulip are hiked as they need not conform to the charges cap imposed by Irda. Some insurers have increased mortality charges. This factor can be considered while choosing one insurer over the other. As the benefit illustration does not take the Insurance Charge into account, sometimes insurers increase the charges for such benefit. The client needs to be careful and may compare insurance charge levied by different insurers separately.
FUND MANAGEMENT CHARGE
As per Irda's cap on Ulip charges, life insurance companies cannot impose fund management fee of more than 1.35% per annum.
GUARANTEE CHARGE
Again a component that does not fall into the charge-ceiling ambit, it comes into play in case of Ulips of the highest-NAV guarantee variety. This also means that insurers are free to levy a guaranteeing fee they deem fit. It is usually in the range of 0.40%-0.75% per annum. Given that offering this kind of guarantee results in the fund being debt-heavy, it may not be a great proposition for a customer who is high on risk return expectation. However, it does offer comfort and protection to policyholders with nominal returns.
SURRENDER CHARGES
Irda has laid out guidelines on the maximum surrender charges that can be levied by life companies. For instance, if you surrender a Ulip in the first year, the charge will be 6% (of annualised premium or fund value), subject to a maximum of 6,000. Similarly, limits have been put in the place for the next four years too. No surrender charges will be applicable after five policy years.
SWITCHING CHARGES
All Ulips offer policyholders an option to switch – that is, shift their money – from one fund offered by the company to another. Majority of Ulips offer funds ranging from only equity to pure debt and combinations of these asset classes. Usually, a certain number of switches – ranging from four to 12 in a policy year, depending on the company and the product – are allowed free of cost. If you wish to exercise the option beyond this limit, you will have to shell out switching charges, which could go up to . 100-500 per switch, again subject to the company's charge structure.
MISCELLANEOUS CHARGES
This is a relatively smaller element in the charge structure. It gets activated if, for example, you decide to change the mode of premium payment from yearly to quarterly.
Finally, bear in mind that since all companies have to adhere to the cap on charges, the total charges over the policy tenure will be the same. Therefore, you would do well to focus on the sum total, rather than charges being imposed in the initial years. Charges can be levied in different combinations, but the customer should only be concerned with the overall costs. They simply need to look at the benefit illustration to ascertain the total charges payable over the life of the policy.
