ULIPs are insurance products that offer both investment and insurance feature under a single integrated plan. In a ULIP plan, a small portion of your premium goes towards the insurance cover,and the rest, you invest in a fund of your choice (which is managed by a fund manager). Moreover, ULIPs allow you to make use of the top-up facilities like, switching between funds, reducing or increasing the level of protection, option to surrender and getting additional riders.
Mutual funds, on the other hand,are pure investment vehicles which pool savings of many investors and investing them in diversified instruments. As the investment risk spreads across the different holdings, you can diversify your holdings with a small amount of money.
However, there is this misconception that- ULIPs have many hidden charges which can eat up your returns as compared to mutual funds. People are often worried that their ULIP returns in 10 years or so will be affected by these charges. The truth is- ULIPs have no hidden charges, in fact, the best plans in the market today have become the true low-cost plans which cater to investor’s needs.
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To clarify this, lets first understand the charges associated with a ULIP plan.
Mortality Charge:
When you buy a ULIP plan, the insurance company levies a charge for the insurance protection upon death, which is commonly known as mortality charge. Mortality charge is thus the actual cost of insurance and is usually deducted from other charges in the ULIP plan, before investing your money. However, the good news is that some of the best ULIP plans, charge very low mortality charges and are striving it hard to keep it to a minimum.
Fund Management Charge:
These charges are levied for fund management, and deduction happens before arriving at the Net Asset Value (NAV). IRDA has capped these charges saying that insurance companies cannot charge fund management fees more than 1.35% per annum. You will find that some ULIP plans have fund management charge as low as 1.25%, thus making a huge difference in your returns.
Policy Administration Charge:
These are the charges relates to the cost of administration. Again, you will find that insurers are making efforts to make the ULIP journey as affordable for you. Yes, these charges are ‘NIL’ if you go for the best and affordableULIP plan available in the market.
Premium Allocation Charge:
These charges are levied to recover the initial expense incurred towards issuing the ULIP plan and includes the cost of underwriting and the distributor fee. However, considering the growing need for cost-friendly ULIP plans by investors, these charges are ‘NIL’ for some of the best plans available.
How Charges differ in ULIPS and Mutual Funds?
Although ULIPs and mutual funds may seem similar upfront, they invest in different assets and are structured differently, which is why their charges differ too. There are three types of charges in mutual funds- recurring charges, entry load, and exit load.
The recurring charges in mutual funds include fund management charges, cost of marketing and administration, and are around 2.5 percent where as the entry and exit load are onetime expenses ranging from 1 to 3 percent.
Although, ULIPs levy charges under more heads like premium allocation charge, administration charge and, charges for managing the fund, the best ULIP plans do not charge anything concerning policy administration and premium allocation charges (as we have mentioned above).
Not to forget, the fund management charges for ULIPs (1.35 percent), are lower than that of mutual funds (2.5 percent). Furthermore, IRDA mandates that the total valid charges on ULIPs should not exceed 2.25 percent. This means the total charges on ULIPs cannot exceed what a mutual fund charges.
You need to make an informed comparison and arrive at the ULIP plan that is cost-friendly and also caters to all your needs.
As you know, often high charges tend to eat into your returns. So, returns from a ULIP are likely to be equal or higher than in the case of mutual funds, in the long run.
Conclusion:
Overall,a ULIP plan can be an ideal investment option for your long-term financial goals.However, it is imperative that you check the performance of funds while investing in a ULIP plan.
To summarize, you should look up to investing in ULIPs if you belong to any of these categories:
- If you are looking for investments that have life cover linked to it
- If you have tax savings to do under 80C
- If you plan to invest longer than ten years, i.e. ULIP returns in 10 years or more
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