Five things to know before buying a ULIP

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Before investing in Unit Linked Insurance Plans or ULIPs, you must be aware of its features and charges involved. The deeper dive can give you a better understanding helping you make an informed decision and accomplishing your financial goals.

ULIPs are a type of life insurance plans that offer a combination of both investment and insurance. The insurance premium paid is divided into two parts. The first part of the premium goes into buying insurance cover while the other part gets invested depending on your risk profile.

Before you sign on the dotted lines here are 5 facts you should know about ULIPs:

1) Cost Structure

Earlier various kinds of charges were levied on ULIPs. But now these expenses have been standardised by the Insurance Regulator and Development Authority of India (IRDAI).

Premium allocation charge: This charge is deducted from the premium to recover expenses such as commission and underwriting expenses. Your premium money gets invested after the deduction of allocation charges. Initially, premium allocation charges were as high as 80-90% due to which ULIPs received a lot of flak. But after the intervention of IRDAI in 2010 these costs have come down significantly. According to the last IRDAI guidelines in 2010 ULIP charges are capped at 3% of gross yield for policies with a term of up to 10 years and 2.25% for those with a term of more than 10 years. Here are some important type of charges.

Fund management charges: The percentage of the cost goes to fund managers for managing funds. This charge is deducted at the time of calculating the net asset value or NAV.

Policy administration charges: Under this head, the cost of administration and maintenance of a policy is deducted by a company.

Mortality Charges: These charges are levied for offering death cover and are calculated after factoring in age, health risk, among other factors.

2) Surrender Charges

Surrender charges are charged on the discontinuance of the policy. It is charged as a percentage of the fund value and ranges as low as Rs 1,000-6,000 depending on the premium amount, fund value and the year of surrender. There are now no surrender charges after five years.

3) Withdrawal

The policyholder can partially withdraw after the fifth year provided all due premiums have been paid. For example, LIC’s SIIP policy allows up to 20% withdrawal between the 6th and 10th year and 35% between the 21st to 25th year.

4) Investment Options

Ulips are not about investing your money in the stock markets. ULIPs offer you a wide range of choices such as equity, bonds and balanced funds. You can choose the type of fund according to your risk profile.

5) Switching option

A policyholder is allowed 2 to 3 free switches every year, after that Rs100-Rs500 is charged per switching. One of the best parts is there is no tax liability when you switch money from one fund to another under the same ULIP plan.

Life insurance policies are meant to accomplish long term goals. Early exit can cost you dearly, as costs are front-loaded. Invest in ULIP with a long term horizon.