Every Insurance Policy is of two types -
- Traditional Participatory plans
With the guidelines of the IRDA, the money is invested and managed by the insurance provider. This allows your insurer to inform you about the amount and bonuses that you will receive on maturity.
In participating plans, the sum assured is guaranteed on death and survival during maturity.
For the money invested, you will receive bonuses that will increase with the payment of your premiums.
For instance, you purchase a 10 lakh policy for 20 yrs. Hence in 20 years, you will get a sum assured + bonus
10 + !0 = Rs 20 lakhs on maturity or death
- Non-participatory traditional plans
Non-participating traditional products imply that all the investments with your money will be at your own risk. Although, insurers would provide professional advice and fund management, which would be according to your risk profile/appetite (More risk gives more return)
The Sum assured is guaranteed at death but the investment will be put into different markets.
Mutual funds vs Unit-linked Plans
Mutual funds give good returns if you think long term basis whereas insurance by nature is also a long term contract, although ULIPs are more economical.
Expenses of ULIP
- Fund management charge
The Fund Management Charge is for managing your investment to offer you potentially higher returns.
Approximate charges -
MF - 2.5% expense
ULIP - 1.35% expenses
Other service charges like -
Switching from one fund to another
(Sometimes the 3 to 4 switches are free in a year)
- Premium Allocation charge
For ULIPs, when you pay a premium, you pay a premium allocation charge of 3 or 4%, (this is not a fund allocation money)
Example - Premium Rs 1 lakh, premium allocation charge - Rs 3000.
Although, IRDA is trying its best to decrease the allocation rate, in today’s time some companies have 0 to 3% premium charges.
- Policy administration charge
These charges are for the administration of policies. They are deducted every month, Approximately 50 Rs per month, 600 pa.
- Mortality charge
Mortality expenses are charged towards providing you a Life Cover. These expenses increase with age and are deducted monthly.
Can you pay these expenses upfront or insurers charge it from the investments?
The biggest drawback is that you cannot pay these charges upfront.
And why is that a drawback?
For instance, you have a 1000 mortality rate and the NAV of 20
Now, 1000/20 = 50 units
These 50 units will be deducted from your total units.
In times of corona when the market is at its low, the NAV is somewhere around 16, and because of that15 units, extra will be deducted.
So if the market comes down, more units will be deducted
Pro Tip- Since ULIPs are less expensive, they are a good option to invest in
Insurance by nature is a long term contract so if you are prepared to not receive your money and consider it as an investment, it gives a good return.
In times of COVID19, people will get scared to settle their claims/money, but insurance companies offer a settlement option to postpone the settlement where they keep the mortality 0 although the fund will still be managed by them. So even at crisis times like this pandemic, ULIPs are quite flexible.
Benefits of ULIP Tax
Compared to other instruments, ULIP is a superior tax saving instrument.
There is an Exemption under 80C (only if your SA is 10 times your premium)
And at death or maturity, the claim is tax-free.
FYI - In MF, around 10% tax is deducted
Liquidity of ULIP is possible after 5 years where the Surrender cost is 0 and the Risk cover is 7 to 10 times
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