ULIPs are often sold as investments for the long run. While that is true, what is also true is that ULIPs are expensive, what with allocations charges ranging from 15-40 per cent in the first year. So here's a little trick to make ULIPs work in the long term, while beating costs at the same time. Top-ups!
What is a top-up premium?
A top up premium is something that a policy holder can invest in his ULIP on top of his existing premium payment. For example, if your existing annual premium is Rs 7,000 and you choose to invest an extra Rs 7,000 over and above this premium, then it becomes a top up premium.
Will it benefit the policy holder?
The premium allocation charge (PAC) on a regular ULIP premium can be around 25 per cent in the first year, dropping down to less around 5 per cent in the third year. On the other hand the premium allocation charge for a top up premium is only around 1 per cent, irrespective of the year when you top up.
Must read: A conversation with ULIPs
Number crunching
Let us compare two scenarios.
Scenario ONE: You pay an annual premium of Rs 20,000 for a 15 year term.
Assumptions: Charges and returns
First year allocation charge: 20 per cent
Second year allocation charge: 15 per cent
Third year allocation charge: 5 per cent
Fourth year onwards: 3 per cent
Administration charges: Rs 30 per month
Fund management charge: 1.5 per cent per annum
Rate of return: 10 per cent per annum
Outcome: At the end of 15 years, you would have a fund balance of Rs 5.6 lakh.
Scenario TWO: You pay an annual premium of Rs 10,000 and top up with Rs 10,000 every year for a 15 year term.
Assumptions: Charges and returns
Top up allocation charge: 1 per cent
Fund management charge on top up: 1.5 per cent per annum
Rate of return: 10 per cent per annum
Outcome: At the end of 15 years, you would have a fund balance of Rs 5.8 lakh.
Clearly, topping up is a beneficial option. While the benefit in this case is only Rs 20,000, the benefits are much higher for policies with larger premiums.
Next page: Points to remember while topping up
Also read: Top ups give more
Photograph: Vipurva Parekh
Abitha Deepak is Head of Content & Research at BankBazaar.com - An online marketplace where you can instantly get loan rate quotes, compare and apply online for all your personal loan, home loan and credit card needs from India's leading banks and NBFCs.
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