Understanding the ULIP Charge StructureJuly 28, 2021
Quite recently, the investment sector saw an interesting development. It was proposed that the long-term capital gains that come from transferring equity shares and mutual fundsshould be taxed. This could mean that the income that many get from these sources could be eligible for tax. To avoid that, the interest in ULIPs has risen significantly. This is because the maturity benefit or the death benefit of the policy is exempt from taxes.
Due to the potential of good returns, many investors think of ULIPas a combination of mutual fundsand life coverage. However, there are many differences between ULIPs and mutual funds. The biggest one is the charges associated with them. Mutual funds include all their charges consolidated intoone known as total expense ratio (TER). On the contrary, many ULIP charges are to be covered. Here are a few of them you should know about:
Policy administration charges
It is true that when you invest money into a good opportunity, your money does the work for you. But that doesn’t mean that ULIPs simply run by themselves. These policies require servicing and maintenance on a regular basis. For this, the insurance provider will charge you some money. These charges can include the cost of paperwork, workforce, and other expenses of a similar nature. These charges are levied every month.
Premium allocation charges
You may know that when you pay premiums for your ULIP, they are divided to pay for insurance coverage and to invest money into various funds. The act of deciding where exactly the money will go is called premium allocation. It is part of the processing when you initially buy the policy. Hence, these charges are levied right at the time of buying the policy. They essentially are a replacement for the money that the insurance company already spent on processing your policy. This includes expenses on the cost of underwriting, medical tests, and distributor fees related expenses among many others. After this amount is deducted from your initial premium payment, the money is allocated to the right places.
At its core, a ULIP is an insurance policy. This means it gives an equal amount of attention to life coverage as it does to the investment aspect of it. It may seem that the life cover in a ULIP is simple; you pay the premium and you receive the assurance of a death benefit. However, many other things are part of the process. Many of these things require the insurance provider to bear expenses. Hence, the insurance provider charges you for them as well in your premium. These charges are called mortality charges in ULIP. The amount you would have to spend on these charges depends on your age. Mortality expenses are charged every month.
Fund management charges
Investment is not something that comes naturally to everybody. Not everybody has enough knowledge and skill with investing to do it on their own. While you can always do some research to get a better idea of how to go about investing your money, there is only a limited amount of knowledge you can gain. Hence, the best option for you is to get professional guidance. ULIPs offer you access to fund management. In this service, you will be in touch with a fund manager that can guide you with your money. In addition to that, these managers work with a team of analysts and experts that always helps them understand the market condition. For this service, the insurance provider will charge you a fee.
Depending on the funds you choose, a part of your ULIP premium is invested in various equity or debt funds. However, the funds still need to be checked and managed. The fund managers do this job. The fund management charge you pay for the service can potentially offer you high returns.