We had received lots of queries, now and then on the mis-sold ULIPs. We all have bought ULIP policies on the inflated return figure and mis-information given to us by the insurance agent. Now that insurance agent is enjoying with the big 35-40% commission, which he would have had received on our ULIP plan. We all wanted to increase our investment multi-fold in the short span, so always try to find out, which ULIP is the best to buy. But we always forgot that insurance is not for investment, it’s an expense to cover up ourselves for any future mishap.
Do you know?
Agents are mis-sell ULIPs by saying that you would have to pay only for the first three years or five years, after that you won’t need pay anything and also show you 15-20% return (not the 6-10% return as stipulated by IRDA). It is because they get the high commission on first three years/five years.
The wrong reasons that the agents tell you to sell ULIPs –
1. You can stop your premium payments just after 3 years.
2. You can withdraw most part of your premiums soon after 3 years without any charge and without discontinuing the life cover.
3. You will get better returns in ULIPs than MFs – they will show you the returns at various periods (less that 3 years only of course).
[This is because the expenses are taken by cutting down your units not your NAVs, so your NAVs will grow higher whereas your portfolio value would have actually came down.]
4. ULIPs will get more returns without any risk because ULIPs will invest in very large company stocks only (which has declared dividends continuously in the past five years.)
What are the charges on ULIP policy?
Most of the ULIP policies charges more fees for the first three years/five years. ULIPs offered by different insurers have varying charge structures broadly, important charges that you should know are
1. Policy Administration Charges
These charges are deducted on a monthly basis to recover the expenses incurred by the insurer on servicing and maintaining the life insurance policy like paperwork , work force etc.
2. Premium Allocation Charges
These charges are deducted upfront from the premium paid by the client. These charges account for the initial expenses incurred by the company in issuing the policy- eg. Cost of underwriting, medicals & expenses related to distributor fees. After these charges are deducted the money gets invested in the chosen fund.
3. Mortality Charges
Mortality expenses are charged by life insurance companies for providing a life cover to the individual. The expenses vary with the age and either the sum assured or the sum-at-risk which is the difference between sum assured and fund value of the insurance policy of an individual. Mortality charges are deducted on a monthly basis.
4. Fund Management Charges
A portion of the ULIP premium, depending on the fund chosen, is invested either in equities, bonds, govt-securities or money market instruments. Sometimes it is a combination of these. Managing these investments incurs a fund management charge (FMC). The FMC varies from fund to fund even within the same insurance company depending on the underlying assets in the fund. Usually a fund with higher equity component will have a higher FMC
The important thing to note about ULIPs is that the overall charge structure for the plan comes down substantially over a long term. However it may be noted that insurers have the right to revise fees and charges over a period of time
Apart from all these charges, there are some more 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
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. Rider Charges
Riders are add-on policies that give additional insurance benefits apart from the base plan. The charges are generally low compared to the benefits added. Some of the popular riders are related to accident cover, disability cover, waiver of premium, and critical illness cover.
D. Partial Withdrawal charges
ULIPs generally allow withdrawal from our funds after the stipulated 3 years. However there may be charges if there is request for more than one withdrawal in a year. Some plans may restrict the amount of withdrawal to a percentage of the available fund.
E. Initial administration charge
Most of this charges are goes to the agents who is selling the policy to you. Agents are getting up to 40% commission from the ULIP policies. Worst fact is that this commission is paid from your premium amount. As we know that ULIP premiums are invested in the market, the final amount invested is reduced because of the charges.
F. Regular administration charge
This is as like the Initial administration charge, goes to paying the agents commission.
G. Policy administration fee
This fees levied for sending you the periodic updated on the policy status. It occurs every month.
H. Investment management charge
This fees levies for managing your fund. Normally this type of charges are levied some percentage on the total fund value.
* The above charges are different for each insurance company. Few companies charge the whole amount in the first three years/five years, but some of the companies to charge little on entire tenure of the policy.
Should I close the policy?
The cost-structure in ULIPs varies significantly, not only across different insurance companies, but also across different ULIP products from the same insurance company. Normally ULIP are beneficial only in long term e.g. 10-15 years. But some time, we want to exit before that time because the ULIP mis sold to us by giving us mis information about the product. We have to analyse various pros and cons, when we think to exit from the ULIP.
When and how to make exit strategy?
Look at the total premiums paid and the total fund value. You may have even lost money in the bargain. Generally, one needs to stay invested for at least 6-7 years to get back the original investment, or 10 years to get convincing returns. That’s because in the initial years, a large part of the premium paid goes towards agents’ commissions and other fees. This could go as high as 40 per cent in the first year, in some cases even higher. It starts to fall from the very next year to around 5 per cent and then drops to 3 per cent and 2 per cent in the subsequent years. Due to high upfront charges, the policy holder needs to hang on for a longer time since most of the investment growth takes place only after the first few years.
So, each policyholder will have to work out the final exit/retain strategy based on his/her specific policy terms. However, there are some factors needs to be considered –
1- Money Crunch
You may need to surrender a ULIP if you are in serious money crunch. You need money for any liability or can’t afford to pay the premium. In this case you should preferably stop paying ULIP premium instead of surrendering the policy.
2- Poor Performance
You may like to exit a ULIP if it is consistently not performing as compare to its competitors in the market.
3- High Annual Costs
You may like to exit a ULIP, if your ULIP policy has high annual changes than its competitors.
4- Tax treatment
Tax part plays important part in the decision of surrendering any insurance plan.
5- Surrender Charges
Check surrender charges before you make decision of surrendering the ULIP. Also note that surrender value received is taxable in the year of receipt in the hands of the assessee or nominee.
6- Alternate Insurance Cover
You might be underinsured after surrendering the ULIP plan, so buy term insurance first before surrendering any ULIP plan.