Are ULIPs still High-Cost Products in 2022?
Unit Linked Insurance Plan (ULIP) is a popular life insurance product. It is a product that has the dual-financial benefit of insurance and investment. When you purchase a ULIP, the insurance company partly uses the premiums you pay towards providing you with a life cover and partly towards providing insurance. When ULIP was launched in the country, it was considered a high-cost product. Since it has the components of both insurance and investment, they levied charges on both the components.
The high charges of ULIP were the primary reason people used to avoid purchasing a ULIP policy. Today, the charges still exist, but not like the way they used to. In the last decade, ULIP has gone through several changes. Instead of a high-cost investment, it has become a cost-effective one. This has made ULIP a popular insurance choice amongst several individuals. People now know it for its high returns and wealth creation in the long run. Also, ULIP benefits include tax-free premiums and tax-free maturity amounts.
Here are the different charges of ULIPs that were changed to make them cost-effective-
Fund management charges
When you buy a ULIP from an insurance company, the company charges a percentage of fees for managing the funds. These charges are known as fund management charges. The company adjusts these charges in the Net Asset Value (NAV) every day and it cannot be over 1.35% of the fund value. Usually, debt funds have low fund management charges as compared to equity-linked ULIPs. These charges are levied, as managing funds and generating returns on investments requires work. To ensure that you get enough returns, use a ULIP return calculator. The insurance company has established nominal charges or no premium allocation charges and policy administration charges for a ULIP plan.
Premium allocation charges
Premium allocation charges (PACs) are charges given to the distributors for selling your policy. These charges are high in the initial years and reduce overtime as the tenure of the policy increases. PACs depend on premium payment mode, amount, and frequency of payments. Allocation charges vary from insurer to insurer and can range from anywhere between 0% to 9%. When individuals buy their policy online, some insurers waive premium allocation charges completely. This is because there are no distribution charges involved when a policy is bought online.
Insurance companies levied mortality charges in many types of life insurance. Mortality charges are the cost that the insurance company incurs for providing life cover to a policyholder. In ULIPs, mortality rates have significantly reduced, and some companies provide returns on mortality rates too.
Low costs for online purchases
Insurance is a competitive business and almost all insurance companies offer online channels for getting customers. This has led to a reduction in charges and costs of a ULIP. Insurance companies can also afford online plans better, as intermediaries and distribution charges are eliminated from the process. Also, selling online automatically leads to a reduction in operational costs.
Policy administration charges
When an insurance company is operating your ULIP, there is some administrative cost involved. The administrative cost usually comprises paperwork, communication, and other such overheads. These charges are usually predetermined or could remain flat throughout the tenure of your policy. There are some insurance companies that have eliminated policy administration charges, while other companies have significantly reduced these charges.
The above charges were once soaring high in the initial years of ULIP, making it an expensive purchase. Over the years, as mentioned above, several charges have been reduced or have even been completed eliminated. The reduction in charges has led to a ULIP becoming a cost-effective instrument. Depending upon the risk appetite, people invest in equity, debt, or balanced funds. Use a ULIP return calculator to know the returns of different asset allocations. Along with investment and life cover, ULIP benefits include tax exemption. The premiums that you pay on your ULIP are exempt from taxes under section 80C of the Income Tax Act. Also, the sum assured that you receive when your policy matures and the death benefit that your nominee receives after your demise are both exempt from any taxes.