Financial planners don’t recommend mixing your insurance and investment needs because of the lack of transparency and the various charges that you may end up bearing.
The covid-19 pandemic has played a big role in helping people realize the importance of insurance, especially term and health insurance. Ever since the nationwide lockdown was announced in March, most insurers saw a spike in demand for pure protection policies while the sale of investment-linked products remained stagnant or saw a drop. However, with the economy gradually opening up, some insurers are seeing a revival in demand for unit-linked insurance plans (Ulips). "We are observing that the product mix, which was skewed towards non-par, including protection, is now settling down. Beginning Q2, we are experiencing the trend move towards pre-covid times wherein the mix was equally spread between Ulips, non-par products and participating products," said Rushabh Gandhi, deputy CEO, IndiaFirst Life Insurance Co Ltd.
Financial planners don’t recommend mixing your insurance and investment needs because of the lack of transparency and the various charges that you may end up bearing. “We are usually lured by the guarantee aspect and the idea that we will get something back while our life also is covered. Some people also fall for the fact that the maturity amount will be tax-free. These biases are what hamper our investment portfolios. However, if you separate the two needs (insurance and investment), you will end up getting a better return on our money. You will also be able to manage your goals better because you will be able to understand what is performing and what isn’t," said Shweta Jain, CEO and founder, Investography, a financial planning firm. But if you do plan to invest in Ulips, here are some charges you must know before taking the plunge. Read on.
Premium allocation charges (PAC): This amount is a fixed percentage of the premium charged by the insurance company before buying units under the name of the policyholder. It pays for expenses such as agent commission, medical tests (if any) and other underwriting processes. The PAC may vary from company to company. For example, if the PAC on your policy is 15% and your premium is ₹60,000, then ₹9,000 will be deducted from the investment towards PAC and the remaining ₹51,000 will be used to invest.
Fund management charges (FMC): This amount is charged for managing the fund and is levied as a percentage of the fund value. “Though the charges differ from fund to fund, 1.35% is the maximum charge per annum according to Irdai guidelines," said Naval Goel, founder and CEO, PolicyX. These charges are usually drawn before calculating the net asset value of the fund.
Mortality charges: This fee is charged towards providing you with the life cover. The insurer typically takes your age and health conditions into account while calculating these charges. Goel said these expenses are deducted on a monthly basis from the fund value. Insurers use their mortality table to levy these charges.
Administration charges: The insurer deduces these charges every month for the administration and maintenance of your policy. “The charges might change at a pre-defined rate or remain constant throughout the policy tenure. The deduction is done by cancelling the units proportionately from the selected funds," said Rakesh Goyal, director, Probus Insurance, an insurtech broking company.
Fund switching and partial withdrawal charges: An investor is allowed a fixed number of free switches between different fund options every year. Switching charges are the charges an insured has to bear if she has exceeded the fixed number of free switches between different fund options. These charges range from ₹100-500 per switch and differ from insurer to insurer, said Goyal. Note that partial withdrawal is allowed only after completion of five policy years and if all due premiums are paid on time and the policy is still in force. “Insured is allowed to withdraw three times from the fund value with a cap of 25% of the fund value. This is subject to some pre-specified conditions," said Goyal.
Discontinuance of premium charges: You will have to bear these charges if you discontinue the policy before maturity. On discontinuation, your money will get locked in a discontinuance policy fund after deducting these charges and will be paid only after you complete five years. This is charged as a percentage of the fund value or as a percentage of the premium. The insurance regulator has laid down guidelines on how much can be charged as discontinuance charges. For a policy with an annual premium more than ₹25,000, the maximum discontinuance charge cannot exceed ₹6,000 in the first year. Other than the charges mentioned above, depending on the insurance company and the product, you may also have to bear a few other charges, especially if you opt for riders. “Returns from Ulips are linked to the capital markets, be it equity or debt. The life cover in most of these policies is too less and hence defeats the purpose of pure life insurance," said Goel. For a popular Ulip product in the market, the premium allocation charge is 8% in the first year, 5.5% in the next two years, 3.5% in the next five years and thereafter 3%. "If you are paying an annual premium of ₹1 lakh in this policy, you are losing ₹8000 in the first year itself. In a 25 years policy, you will lose ₹92,500 towards premium allocation charges. From the sixth year, there is a policy administration charge of ₹150 per month. In this policy, you will lose ₹36,000 towards policy administration charges. Then there’s mortality charges, which is decided according to your age. While premium allocation charge is deducted upfront from your premium, other charges are deducted by way of cancellation of units from your account. Considering all these charges, your actual return from this policy can be lower than the fund performance," said Melvin Joseph, founder, Finvin Financial Planners.
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