Dear Readers, this article will help you in choosing the best of the best ULIP Regular premium plans available in the industry as of now. The parameters needs to be considered while choosing a ULIP are explained below so that you should not be miss-leaded or cheated by any insurance agent or sales person. Also, I advise all my readers to have an eye on all these parameters based on the information provided on the company printed brochure only, as the chances of agents or sales people printing their own sales support promotional materials which normally talks only about the benefits but not the demerits of the product.
Basic Parameters to Compare:
1. Premium Allocation Charges:
This is the very basic thing to be considered as the premium allocation charges in different plans vary from 2% to 100% of the first premium. There are plans of few companies where they project that the premium allocation charge is nil, but the fact is they would be charging equal amount or more than that through policy administration charges or initial management charges or surrender charges. Therefore you should be more cautious about such products where sales people claim that the premium allocation charges are nil.
Premium allocation charges are levied on an insurance product primarily to cover the cost involved in paying the commission to agents or sales people and the huge marketing expenses involved in acquiring every insurance policy. Normally an Insurance agent or a broker or a sales person earn between 2% to 80% of the first year premium as his/her part of commission apart from the regular renewal commission he receives thereafter.
The reason for any insurance company to take out so much of money from the hard-earned investment of an innocent customer is "Competition". Yes the competition in Insurance industry is completely pushing away the ethical side of the insurance business and today almost 60-80% of the insurance business is been done in unethical way. Indian Insurance market is completely driven by sales people as buying insurance still remain as a luxury than a very basic need for Indians. Even after 10 years of privatization of insurance industry there is very little effort been put forth to promote term insurance plans as the profit to a insurance company by selling term insurance plans is very less more than that selling a term insurance plan is certainly an uncertain commitment for the insurance companies.
Therefore, I advise all my readers to be very cautious while comparing the premium allocation charges levied on different products of different companies and As I mentioned earlier the premium allocation of ULIPs starts from as low as 2%.
2. Policy administration charges:
Policy administration charges are those charges that the company takes out from the fund value available in customers account to meet various administrative expenses incurred while managing the policy during the whole tenure of the policy. This charge is been deducted normally on a monthly basis. This charge is not covered under premium allocation charges or the fund management expenses. Most of the time this charge is been deducted as a percentage of the fund value or a fixed amount or a percentage of the premium or a percentage of sum-assured.
Policy administration charges in most of the products ranges from Rs 30/month to Rs 200/month. But in few plans it goes up to 40-50% of the first year premium, up to 35% of the second and third premium and up to 10% of the premium paid thereafter.
Normally this charge is levied at the beginning of each policy month from the policy fund by canceling units for equivalent amount. This could be flat throughout the term of the policy or vary at a pre-determined rate. Normally these charges are higher during the first few years and can come down to zero latter.
3. Fund Management Charges (FMC)
Fund Management Charge is levied as a percentage of the value of assets and shall be appropriated by adjusting the Net Asset Value. This is a charge levied at the time of computation of NAV, which is usually done on daily basis.
If the fund management charge in a particular fund is 2% pa then the average fund management charge per day would be 2/total number trading days in a year. Fund management charges vary from 0.25% to 2.5% as it depends on different companies, depend on different products, and depend on different funds.
Normally fund management charges in ULIPs are comparatively lesser than the fund management charges levied by mutual funds.
4. Surrender Charges
Surrender Charges are levied on the total fund value available at the time of surrender of insurance contract or at the time of partial withdrawal before the planned maturity date. This charge is usually expressed either as a percentage of the fund or as a percentage of the annualized premiums. Some companies do not charge anything after first three years but some companies charge till the end of 10th year or before till the date which is any time before the maturity. Now, IRDA has made it compulsory for every ULIP plan to have 5 year minimum lock in and a customer can take out money from his ULIP account only after completion of the 5th policy year. The surrender charges levied on a ULIP plan normally varies from 0% to 70% depends on the product and the tenure chosen by the customer. But few insurance companies have designed such plans where the premium allocation and policy administration charges are very nominal as they take a bigger chunk of the fund value during the time of surrender. In this case, insurance companies normally makes money from the fund management charges if a customer stays with the fund for long time and from the surrender charges if he withdraw from the fund before the maturity date.
5. Switching Charges
These charges are levied when you shift your investment from one fund to another during the time of market crash or economic imbalance to protect your fund value. The charge will be usually a flat amount per each switch and it is always nominal in almost all the companies.
6. Mortality charges
Mortality charge is the cost of life insurance cover. This will be levied either by cancellation of units or by debiting the premium but not both. Mortality charge may be levied at the beginning of every policy month. The method of computation will be explicitly specified in the policy document.
I am sure that all of you will be able to choose the best ULIP Plans for yourself if you cautiously compare all the above mentioned parameters.