A Unit linked insurance plan is a mutual fund where the insurer deducts life insurance premium from the available units in the fund.
ULIP's have been a popularly termed as an investment product in India, marketed as a perfect blend of insurance and investment. However, beneath their shiny exterior lies a web of hidden charges that can significantly erode your returns. Let's dive into how ULIPs charge investors and why agents/bank agents are so keen to sell them.
WARNING- ULIPS ARE NOT INVESTMENT PRODUCTS
LINK- IRDAI Bans Ads That Promote ULIPs As Investment Products. We Had Warned You Before (businessworld.in)
The Charge Sheet
ULIPs come with a laundry list of charges that are often glossed over during sales pitches:
Premium Allocation Charge | Up to 5% of your premium may never even make it to your investment. |
Policy Administration Charge | A monthly fee that eats into your returns. |
Mortality Charge | The actual cost of insurance, which increases as you age. |
Fund Management Charge | An annual fee of up to 1.35% of your fund value. |
Surrender Charge | A hefty penalty if you want to exit early. |
GST | An often-overlooked factor. |
The GST Factor
One charge that investors often overlook is the Goods and Services Tax (GST). As of 2024, a GST of 18% is applicable on most charges associated with ULIPs. This includes:
Premium Allocation Charges
Policy Administration Charges
Fund Management Charges
Mortality Charges
These charges compound over time, significantly reducing your overall returns. The GST is applied on top of these charges, further eating into your investment. For example, if your fund management charge is 1.35%, you're actually paying 1.593% (1.35% + 18% of 1.35%) when GST is factored in.
The Agent's Perspective
Why are agent's so eager to sell ULIPs? The answer is simple: incentives. ULIPs often come with high commissions, sometimes up to 10% of the first-year premium. This creates a conflict of interest where the agent's financial gain is prioritized over the customer's best interests.
The Bottom Line
While ULIPs can be suitable for some investors, it's crucial to understand all the charges involved. Always read the fine print, ask questions, and consider seeking advice from an independent financial advisor before investing. Remember, what's best for your agents bottom line may not be best for your financial future.
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