Before you make the leap, it is important to understand the cost structure for Unit Linked Insurance Plans.
40-year-old investor was unhappy with his investments in UnitLinked Insurance Plan ( ULIP). After some research, he discovered that the equity markets were moving well but that he still had to pay back the money he invested three years ago. He realized that this was not due to poor fund performance, but rather higher initial fund costs. The people are blaming the broker for not informing them of these expenses. However, the insurance regulator, IRDA has come to his aid and made it mandatory that all charges be disclosed to buyers.
Before buying into ULIPs, it is important to have a basic understanding of the cost structure of a fund. They will be able to avoid heartburn by having a basic understanding. How is the cost structure for an ULIP calculated?
COSTS OF OWNING AN ULIP
1) Premium Allocation Charge
The cost structure of ULIPs means that they only start to work for you after 5-8 years. Your premium payment is split into a premium allocation charge, which is a percentage of your premium. The percentage is usually higher in the first few year because it takes many years to break even on investments. This could reach up to 40% for each year’s premium.
2 Policy Administration Charge
An amount fixed monthly that increases each year in line with inflation or as a percentage the sum assured.
3 ) Mortality/Rider Fees
Mortality/Rider Charges are also available in ULIPs. This is dependent on your age, sex, and the amount of risk coverage you have. Death charges may be zero if you do not have risk coverage. The death charge per Rs 1000 of the sum assured is 1.3 for a 30 year-old and 6.4 for a 50-year-old.
4) Fund Management Charge (FMC)
You also have the fund management fee, which is an adjustment to net assets value (NAV), on a daily basis. Insurers usually charge this as a percentage from funds under management. ULIPs may have a fund management fee between 0.5% and 2.0% per year.
With so many chargers available, what strategy should you use to get great retuns for ULIPs?
STAY LONG FOR THE BENEFITS
ULIPs are a viable option if you’re ready to take a step back for ten years. ULIPs may not be right for you if you expect to have some liquidity in the next one to three years. This investment product should not be considered if your money isn’t used for more than five years. The ideal time horizon is between five and 30 years. ULIPs can be used to make a systematic, disciplined and regular investment in order to reach a goal.
Because of their cost structure, if you have the same amount invested in a mutual fund and a ULIP, both will give better returns. inflexion occurs at six year. After that, ULIPs start to return better than mutual funds.
THUMB RULES FIR ULP:
Start early: You can make a long-term 20-year investment in SIPs if you start before you turn 35.
Invest regularly: Don’t be discouraged by market swings. You will be able to make a significant difference by investing regularly and long-term.
Select your fund:
Your risk profile and age will determine your eligibility. The switches can be used effectively.
Your ULIP may include 75% equity and 25% of debt. As you get closer to maturity, reduce your equity exposure as much as 20%. Your assets may be reduced if the market turns bearish. As you get closer to retirement, it is better to be safe than sorry. Also, limit the number of switches that you make even though they are free. Frequent changes in asset allocation may not be wise.
Your investments in middle age should be balanced. This protects you from potential risks. Even if you choose a long-term ULI, it will work to your advantage because it isn’t affected by the volatility of the equity markets.
