Before understanding the hidden and untold charges, one must know what ULIP stands for?
Well ‘ULIP’ stands for Unit Linked Insurance Plans. It provides insurance solutions and value of policies varies according to the value of underlying assets possessed by the policy taker at that time. Investment in ULIP provides for greater degree of flexibility as well as protection to the holder as these are denoted in units and is represented by net valuation on the basis of Net Asset Value (NAV). Unit Linked Insurance Plan is a hybrid-investment plan where the client is given the benefit of Life Insurance as well as the opportunity to invest in a mutual fund. Here, a portion of the premium is kept separate as a contribution towards the policy taken and then the leftover is invested as per the will of the client in form of investments in equity funds, debt funds or a combination of both. But still the risk of investment lies in the hands of the investors. You must see the recent changes in ULIP after SEBI and IRDA debate.
Making an investment in ULIP provides the investor with the flexibility of determining his policy value according to his needs and currently available funds. Along with it he has the autonomy in selecting the mode of payment towards his premiums, which can be in a lump sum amount (singe premium) or he can opt for paying premiums at regular intervals which may be monthly, quarterly, half-yearly or annually. For example- Mr. X opts for ULIP plan and is interested in a plan of say Rs 200,000. Here he can either opt for a payment in a single premium by way of lump sum payment or he can choose to pay it in installments. Added to that the investor can even opt for a change in plan depending upon in resources in midst of a continuing scheme. The return on investment in ULIP largely depends upon capital market and its flowing trend.
But just like good things don’t come for free, this plan also has sum charges involved in it which denies the investors to get the maximum return out of their investment. Some of the well known costs include:
a) Premium allocation charge (PAC) which is a straight forward deduction from the premium cheque of the client. This leads to serious losses of the clients as a significant amount in the first year.
b) Mortality Charge-cost of pure life insurance
c) Fund Management Charge(FMC) @ 1.35% needs to be paid to the fund manager in order to persuade him to invest the funds well
d) Policy Administration Charge is charged as Rs 50 per month or Rs 600 yearly as a fixed charge for carrying out the work miscellaneous expenses involved such as stamp duty, etc.
Apart from these there are some hidden costs involved in ULIPs. Few of them are listed below:
a) Surrender charges: These charges are not disclosed expressly by the agent to his client at the time of selling the policy as this would create an additional burden on the shoulder of the investor and he might not get attracted by the plan.
b) Fund switching charges: As said earlier, in ULIP, the investor has an option to switch between plans, but most of the times the agent discloses the various charges that are to be in connection to bring in a change in plan.
c) Commission: Sometimes a spate commission needs to be paid to the agent separately in order to persuade him to get our funds realized quickly.
Conclusively, all that can be said is that a investor should stand in a fiduciary relationship with his Agent. Suspicion should be cut down to the maximum level and he should ask his agent to have a clear and transparent relationship with him, which will provide a better environment for both the investor as well as the Agent. You can get more valuable advise on personal finance at jagoinvestor.com.