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Unit linked insurance plans (Ulips) can be safely termed as modern day 'best-sellers' among all life insurance products. However, while life insurance companies and agents aggressively promote this product, buyers need to be aware of some key elements.
Here's a short list:* Premium allocation charges:
This could be the main differentiator between an expensive and cheap Ulip product. These are basically the distribution charges, which go in the agent's kitty and consequently, the root cause that they are so aggressively marketed. The charges vary to a great extent between plans, with the bulk of the charges charged in the first year, declining in the subsequent years. They lie in awide range of 0 per cent 100 per cent of your first year's premium with the average being around 25 per cent for first year.
While comparing these charges, one should carefully read the documents provided by insurers. Some companies claim to allocate 100 per cent of first year's premium towards guaranteed maturity addition. This is sometimes incorrectly comprehended as 0 per cent allocation charges. Let's understand this with an example. First year's premium = Rs100,000 Tenure = 15 yrs First year's premium located towards 'guaranteed maturity addition' of 130 per cent - this means that at the end of 15 years, you will get a guaranteed addition of Rs 130,000 (130 per cent*100,000).
If you discount Rs 130,000 at a modest rate of 6 per cent, the present value of the amount is Rs 54,244. In other words, only Rs 54,244 will be invested, the rest Rs 45,756 goes to towards other costs.
* Fund management charges:At the end of every year, the fund value is subjected to a fund management charge which varies typically from 0.5 per cent to 2.25 per cent. Higher the equity component of the fund, higher is the probablity of growth. The charges could be higher as well.
* Minimum/maximum term:Ulips typically have a minimum term of 5 yrs with the upper end being 75 years. It, however, makes little sense to enter this product with a short-term horizon. The minimum time to be in the policy should ideally be15 yrs. This stems from the fact that Ulips have very high charges in the initial years declining to as low as 1 per cent - 2 per cent form the fourth year onwards. This helps the investor to make up for the costs in the earlier years.
* Death benefit:The death benefit is typically higher of sum assured and fund value Fund value + sum assured. However, plans with fund value+ sum assured are not necessarily the most beneficial, as there are premium allocation charges and policy administration charges that could be significantly higher.
* Maturity benefit:In majority of the plans, the maturity benefit is the fund value. In some cases, you get a guaranteed maturity benefit addition. As explained earlier, plans with such options are not necessarily the best buys as it involves high costs in the initial stages.
* Fund options:Insurance companies give options with different debt-equity combinations. A buyer needs to compare the options and choose the preferred debt-equity combination, based on his goals and age. There is also an option of free switching between funds for a specific number of times in a year.
Before buying an Ulip, question yourself about your needs, your age, your risk taking ability to venture out in equity funds and then get this dual product of insurance with investment.
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