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Worried Indian couple with financial bills at home (Photo: istock)
Worried Indian couple with financial bills at home (Photo: istock)

Six charges that may eat into your returns from a unit-linked insurance policy

Financial planners don’t recommend mixing insurance and investment needs because of the lack of transparency and the various charges

With the economy gradually opening up, some insurers are seeing a revival in demand for unit-linked insurance plans (Ulips) which had taken a hit ever since the lockdown was announced in March .

“The trend is moving towards pre-covid-19 times, wherein the product mix was spread between Ulips, non-participating and participating products," said Rushabh Gandhi, deputy CEO, IndiaFirst Life Insurance Co. Ltd.

Financial planners don’t recommend mixing insurance and investment needs because of the lack of transparency and the various charges. “We are usually lured by the guarantee aspect and the idea that we will get something back while our life is also covered. Some people also fall for the fact that the maturity amount will be tax-free," said Shweta Jain, CEO and founder, Investography, a financial planning firm.

If you do plan to invest in Ulips, here are some charges you must know about.

Premium allocation charge (PAC): This is a fixed percentage of the premium before the money is invested. 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 rest will be invested. It pays for expenses such as agent commission, medical tests (if any) and other underwriting processes. PAC varies from company to company.

For instance, for a popular Ulip, PAC is 8% in the first year, 5.5% in the next two years, 3.5% in the next five years and 3% thereafter.

Fund management charge (FMC): This goes towards managing the fund and is levied as a percentage of the fund value. “Though the charges can differ, 1.35% is the maximum charge per annum, according to Irdai guidelines," said Naval Goel, founder and CEO, PolicyX. These charges are drawn before calculating the net asset value of the fund.

Mortality charge: This is the cost of providing the life cover. The insurer takes your age and health conditions into account to calculate it. Goel said these expenses are deducted on a monthly basis from the fund value.

Administration charge: The insurer deducts them every month for the administration and maintenance of the policy. “These might change at a pre-defined rate or remain constant throughout the tenure. The deduction is done by cancelling the units proportionately from the selected funds," said Rakesh Goyal, director, Probus Insurance, an insurtech broking company.

Switching and partial withdrawal charges: You can switch between different fund options every year for a fixed number of times. If you exceed the limit, you will be charged, which ranges from 100-500 per switch, said Goyal. The partial withdrawal is allowed only after completion of five years and if all due premiums are paid on time and the policy is still in force.

Some companies may levy charges on partial withdrawal.

Discontinuance of premium charge: Ulips have a five-year lock-in and this charge applies if you discontinue in the first four years. There is no such charge from the fifth year. You will get the money only after five years after the deduction of the discontinuance charge. It is charged as a percentage of the fund value or as a percentage of the premium. For a policy with a premium of over 25,000, the maximum discontinuance charge cannot exceed 6,000 in the first year.

Depending on the insurer and the product, you may also have to bear a few other charges, especially if you opt for riders. “Considering these charges, your actual return from a policy can be lower than the fund performance," said Melvin Joseph, founder, Finvin Financial Planners. So always factor in the charges.

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