Most investments charge the consumer fees for various services. These services include withdrawing funds, managing the account or providing analytical services to the consumer. The consumer should carefully look into the complete list of these fees so that he/she should not feel cheated in the midway of the program.
Similarly Unit Linked Insurance Plan also has many charges which one should be aware about. Some ULIP-schemes may look highly attracted but you may get bogged down by the high processing fees involved later. So, a decent awareness of various service and other operational charges of these plans can avoid later problems. It will also help in taking an informed decision while choosing a good ULIP-fund.
Various charges involved:
- Premium Allocation Charge
This is the initial portion of funds that are separated out for charges before units are allocated. It generally includes initial and renewal expenses. In certain cases, it can be as high as 60%.
- Mortality Charges ( cost of pure life insurance)
This charge is levied to meet the cost of insurance or life cover. This charge varies depending on the amount one allocated for the life coverage in the entire plan. It also depends on age and health of the policy holder. The amount of this charge can be deducted from the entire sum assured in initial stages or it can be charged on the difference between sum assured and the fund value at later stages. But this scheme is not same to all ULIP-policies.
- Fund Management Fee
This fee is levied for the expenses occurred in management of funds and it is deductible before arriving at the net asset value (NAV) of funds which is updated on the fund’s website. This fee generally hovers in the range of 1-1.5%.
- Policy Administration Charges
These charges are levied on a monthly or yearly basis and are generally flat or vary according to the pre-determined values. These are deducted for the miscellaneous expenses like stamp duty and unit cancellations.
Other Charges (or Hidden Charges)
The above four charges are ubiquitous and can be found in every offered ULIP. But there are additional charges or hidden charges which are there for few plans and are generally overlooked by the consumer. These are:
- Surrender Charges
A surrender charge is deducted when someone liquidates a partial or full amount of the units at a premature date. These charges are often high and not highlighted in the user agreement. Those who can have an erratic or unseen expenditure like marriage of a child or higher education expenses in between the policy should give significance to this charge.
- Fund Switching Charge
Investors have a lot of options to choose from regarding where they want their money to be invested. These are equity, debt, bonds or bank deposits. There is an option of switching from one investment to another but the number of times one can do this switch is limited. In certain cases, the number of switches is free up to certain limit and then chargeable but in some cases they are chargeable throughout.
If you are a layman, then details of these charges will not affect but for religious market followers who tries to allocate the investment in best place according to the changing condition, the significance of these charges drastically increases.
- Service Tax
Service tax is the most popular hidden charge that often goes unnoticed and later jeopardizes the whole portfolio. These are deducted only from the funds that are actually allocated for investment from the premium.
Ask for a Benefit Illustration
While purchasing a Unit linked Insurance Policy, one should always ask for the Benefit Illustration which gives a detailed working of the insurance plan along with the information about the different charges noted to the last bit. Generally, the brochures of many insurance companies highlights the one part of the plan which is attractive (like high return, one fee which is less) leaving the other heart breakers in the background.
Having an extensive knowledge and understanding of these costs is very important for the perfect selection of a ULIP-scheme. Comments and suggestions for the article are welcomed. In case of a further queries or doubt, do leave us a comment.
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