Putting your money into the right financial instruments requires a lot of research and planning. The right financial planning ensures that you have secured your loved ones while investing for your long-term goals. Usually, to do both these things, there are at least two different products that you need to purchase and pay for accordingly. However, there is one product that is available in the market that offers insurance along with investing your money, a Unit Linked Insurance Plan (ULIP).
The meaning of ULIP is quite simple to understand. A ULIP is a type of life insurance with an investment component. This means that when you pay a premium for your ULIP, your money is partly used towards providing you with a life cover and partly invested in the funds of your choice. This ensures that in case of an unforeseen event where you lose your life, your loved ones are financially protected with a life cover. It also offers survival benefits where the policyholder receives a maturity amount that includes your investment amount, along with the returns you have earned on it. They are meant for the long haul, where investors have earned huge ULIP returns in 10 years and above with the help of compounding. ULIPs comprise two important financial components: investment and insurance. Hence, there are several charges that come into the picture when one invests in them.
When ULIPs were launched, initially, people hesitated to invest in them because of their high charges. They were considered a high-cost product until the last decade when they were changed to make them more accessible to the public. It saw a gradual shift from being a high-cost product to a low-cost product that offers high returns. This compelled several individuals to buy a ULIP, leading to an increase in its popularity. ULIP returns in 10 years or above beat most traditional investments like Fixed Deposits or pension plans. This makes ULIP a substantial investment for the long term.
Here are the common charges of most ULIPs and how they have evolved over the years:
- Premium allocation charges
The fees that the distributors get for selling a ULIP plan to you are known as premium allocation charges. These charges reduce overtime as the tenure of your ULIP increases. These charges vary from 0% to 9% depending on your insurance provider. With online ULIPs, most companies have completely eliminated this charge.
- Fund management charges
The insurance company charges a certain percentage as fees for managing your portfolio. These charges are balanced in the Net Asset Value (NAV) of the company, and it cannot be over 1.35% of your fund value. These charges represent the work that goes in providing you with good returns on your ULIP. Allocate your funds using a ULIP return calculator to ensure that you invest according to the returns you want. Insurance companies have tried to minimize these charges and keep them nominal. - Policy administration charges
When you buy a ULIP, the insurance company has to do a lot of operational and administrative work. The cost of paperwork, communication, distribution charges, and several other overheads eventually adds up. With ULIPs being available online, for most companies, these charges have been erased completely. Many providers have also eliminated the administrative charges for their offline process to make ULIPs cost-effective. - Mortality charges
ULIP also provides life cover and the cost that an insurance company incurs for providing a policyholder with life cover is known as mortality charges. Most ULIP providers have significantly reduced these charges and even boiled them down to zero.
The charges that are mentioned above were once soaring high and were the reason behind why people avoided investing in a ULIP. Most insurance companies realized it and changed the charges in order to make them minimal and even eliminate some of them. This is the reason why earlier, the ULIP that was costing high is now considered a cost-effective investment. From an investment point of view, a ULIP offers high returns, along with the flexibility to choose your fund allocation. You can also switch your fund allocation anytime you want and even partially withdraw money after the lock-in period, which is usually 5 years. With a ULIP return calculator, you can get an estimate of the returns of the ULIP that you are planning to buy. Along with this, a ULIP has several tax benefits. The nominal charges, high returns, flexibility, tax savings, and life cover have made ULIP a popular investment amongst the population.
