The various costs involved in your ULIP

Our expert highlights the various charges included in a ULIP policy. Understand these charges and their impact, before you opt for a ULIP policy.

I AM 38 years old. I would like to take a ULIP with a life cover/sum assured of Rs 1 crore. Which policy/scheme/insurance company has the lowest premium for a ULIP with Rs 1 crore as sum assured?

There is no fixed premium for a given sum assured in a ULIP. Mortality charges get deducted according to the sum assured of your choice. You will also have to pay fund management charge, administrative costs etc. These charges can be as steep as 40-65 per cent of your premium payments in the initial year and it will even out to around 5 to 15 per cent after the first year. This remainder amount will be the investible surplus that is utilised for investment in funds.

For instance, say you invest Rs 2 lakh a year in a ULIP for 15 years. At an annual rate of return of 10 per cent, you earn around Rs 54 lakh after 15 years. With zero costs, you would receive Rs 70 lakh. That is, upfront costs were actually to the tune of Rs 16 lakh.

Verdict: ULIPs yield good returns if held for a long-term.

Ask for the benefit illustration
Each insurance company will have a detailed benefit illustration that shows clearly how the costs are allotted and what is the actual amount invested. The benefit illustrations will help you compare the upfront costs of all the short listed insurance plans and help you arrive at the most attractive low cost option. So, before you choose your ULIP policy, understand the costs and charges involved in a ULIP policy.

Tip: Don't exit the policy in the first few years as it would be a loss for you.

Here is a preview of the type of costs usually involved.
1. Premium Allocation Charge
This is the initial percentage of funds that are separated for charges before units are allocated according to the guidelines of the policy. This can be as high as 60 per cent in some ULIPS but in some others it could zilch.

2. Mortality Charges
This involves the cost of insurance or life cover that is allocated for the plan. Age, health of the policy holder, and the amount specified for coverage determines this charge. The basis of this charge depends on the type of ULIP. That is, this charge is initially deducted from the entire sum assured. At the final stage, it is charged on the difference between the sum assured and the fund value. In some ULIPS the mortality charge is levied on the sum assured for the whole term.

3. Fund Management Fees
This is charged towards managing your funds and deductible before arriving at the net asset value of your funds. This could be in the range of 1- 1.5 per cent of the assets that are managed.

4. Administration Charges
This can be a flat charge deducted on a monthly basis throughout the plan or may increase over time at a particular percentage.

5. Surrender Charges
A surrender charge is levied when you encash the fund units partially or in full at a premature date.

6. Fund Switching Charge
You are given the choice to switch your funds to different equity or debt options as applicable in your policy. However, the number of times you can make this switch is restricted to a certain number exceeding which you will be levied a charge. This is generally quoted at Rs 100 to 150 per switch after you have exhausted your share of free switches.

7. Service Tax
Service tax is deducted from the funds that are actually used for investment from the premium.

Now, let's look at an example to understand how exactly are these charges deducted from the premium amount you have paid.

Mahesh invests an annual premium of 70,000 for a sum assured of Rs 7 lakh. He pays a premium allocation charge of 65 per cent in his first year, which works out to Rs 45,000. This will be to the tune of 7.5 per cent to 5 per cent in second and third year.

He also shells out Rs 500 per lakh as administration charge, which works out to Rs 3,500 per year. He pays Rs 1,000 as service tax and a morality charge of Rs 800. That is, the actual funds or the investible surplus works out to Rs 22,200 out of the premium of Rs 70,000.

This figure varies from year to year due to changes in the various charges like the admin charges, the morality charges which increases with age etc.

So when you opt for a ULIP you will need to account for all the expenses in totality before understanding the true value of your investible surplus. Also, as it is clear from above ULIP investments are ill suited for short term investments like a period of 3 years or so, as the policy holder does not stand to reap any suitable benefits for the premium paid.

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