Targeting a 25 year old an ad says. “Have a dream retirement .Invest as little as 4000 pm for 30 years in our ULIP scheme and retire with a corpus of 10000000.” Who does not want a dream retirement? But do ULIPS really give such fantastic returns? May be yes .May be no but what is important is to know how much you will be really paying to achieve your financial goal?
Is the company transparent or does it have some hidden charges? Before signing your cheque for the premium amount due diligence is needed to avoid shocks later. Please find some time to read the sales brochure of about at least 15-20 different companies before taking a final decision on your preferred company
Compare the premium allocation charges(PAC), monthly policy administration charges(PAD), Fund management charges(FMC), mortality charges, surrender charges not just for the initial years(3-5) but throughout the term as this will not only give a fair idea of what your total deductions will be but also your service tax(ST) liability as all the mentioned charges are taxable.
(deducted by canceling your allotted units).
Let us take a few examples
(Annual premium=100000, term=20 years, no life cover and ST is 10.3% in all cases)
Example No 1
Charges.Year1.year2.Year3.Year4+
PAC.100%.0.0.0
PAD.0.40.40.40
PAC is 100% in the first year so all your money is deducted towards various expenses. And virtually nothing is invested. Kiss your money goodbye for the first year. So the net investment at the end of each year looks as
.Gross.Net
Year1.100000-100000.0
Year2.100000-480.99520
Year3.100000-480.99520
Year4+.100000-480.99520
Example no 2
Charges.Year1.Year2.Year3.Year4+
PAC.25%.10%.5%.2%
PAD.60.60.60.60
The net investment at the end of each year looks as
Year.Gross.Netamt
Year1.100000-25720.74280
Year2.100000-10720.89280
Year3.100000-5720.94280
Year4+.100000-2720.97280
Example No 3
Charges.Year1.Year2.Year3.Year4
PAC.20%.20%.0.0
PAD.40.40.40.40
- Rs 40 pm or 0.3% of annual premium whichever is greater
The net investment at the end of each year looks as
Year.Grossamt.Netamt
Year1.100000-23600.76400
Year2.100000-23600.76400
Year3.100000-3600.96400
Year4.100000-3600.96400
Example no 4
Charges.Year1.Year2.Year3.Year4+
PAC.0.0.0.0
PAD .1.5%.1.5%.1.25%*.Rs 900 pa@
- as a percent of annual premium deducted monthly
@- increasing by 5% annually
In this case PAC is zero! Isn’t that great?
The answer is No . Why so?
Look at the PAD.It is reflected as percent of annual premium for the first 3 years
So 1.5% pm means 18% p.a!
So the net investment at the end of each year looks as follows
Year.Grossamt.Netamt
Year1.100000-18000.82000
Year2.100000-18000.82000
Year3.100000-15000.85000
Year4.100000-900.99100
Year5.100000-945.99055 and so on
Continued in part 2