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Understanding the cost structure of Unit Linked Insurance Plan is necessary before taking the leap

A person, 40-year-old investor, was disgruntled with his investments in Unit-Linked Insurance Plan (ULIP). While the equity markets have been rolling, he realized after some research that he was yet to recover the money he had invested three years ago. This, he realized, was not on account of poor fund performance but because of higher initial fund costs. While the people crib is about the non intimation of such expenses by his/her broker, insurance regulator IRDA has come to his rescue, making it mandatory to disclose all charges upfront to the buyers.

Basic rules have to understand the cost structure of a fund before buying into ULIPs. And a basic understanding would save them from heartburn. So how are the cost structured for an ULIP?

COSTS OF OWNING A ULIP:

1) Premium Allocation Charge

The cost structure of ULIPs is such that it starts working to your benefit only after 5-8 years of investing. A part of your premium payment goes into Premium Allocation Charge, which is calculated as a percentage of the premium. This percentage is generally higher in the first few years-the main reason: it takes years to break even on investments. It could be as high as 40% of each year's premium.

2) Policy Administration Charge

A monthly fixed amount that usually rises every year with inflation or as a percentage of the sum assured.

3) Mortality/Rider Charges

ULIPs also have mortality/rider charges, which depends on age, sex and the level of risk cover in a particular year. If you don't avail risk cover, mortality charges can be zero. The mortality charge per Rs 1,000 of the sum assured varies from 1.3 for a 30-year-old to 6.4 for a fifty-year-old.

4) Fund Management Charge (FMC)

Then you have the fund management charge, an adjustment to net asset value (NAV) on a daily basis. Usually, insurers charge it as a percentage of funds under management. ULIPs could have a fund management charge between 0.5%-2.0% per annum.

So with so many chargers around what should be the strategy to get good retuns from ULIPs

STAY LONG TO REAP THE BENEFITS:

If you are ready to cool your heels for 10 years, ULIPs will be a viable financial option. If you anticipate some liquidity need in one to three years from now, ULIPs are not for you. You should look at this investment product only if you leave your money untouched for beyond five years. A good time horizon would be around five years to 30 years. ULIPs are meant for disciplined, regular and systematic investment towards a goal.

The reason is that if you invest the same amount in a mutual fund as well as a ULIP, the former gives better returns than the latter because of the cost structure. There is a point of inflexion at six years, then on the ULIPs begin to give better returns than mutual funds.

THUMB RULES FIR ULIPS:

Start Early: If you start at the age of 30-35, you can create a 20-year long-term investment by investing in SIP route.

Invest Regularly: Do not get deterred by market swings. A systematic long-term periodic investment will help you go a long way.

Choose your fund:

Depending upon your age and risk profile. Use the switches effectively.

You may have opted for a mix of 75% equity and 25% debt on your ULIP. But when you inch closer towards maturity, minimize your exposure to equity as low as 20%. If the market turns bearish, it may slash your assets at the time of maturity. It's better to bet safe as you are close to retirement, Also have a rein on the number of switches though they come free of cost. Frequent change in asset allocation might not be a wise move after all.

You should always have a balanced approach to your investments in your middle age. It protects you better from risks. Now, even if you go for a long-term ULIP, it works to your advantage as it isn't adversely affected by the vagaries of the equity market.

KEEP YOUR LOSSES DOWN!

MAKE YOUR PREMISES SAFE FOR YOUR CLIENTS: The most common Commercial Liability claim is the basic "Slip & Fall". Restaurants see these more often than most other type of businesses, but, if you have clients coming to your place of business, it can happen in your business too,

MAKE YOUR WORKPLACE SAFE FOR EMPLOYEES: Worker's Compensation cost is sky-rocketing! Be aware of the work environment to which you subject your employees. The more claims you have, the higher your premiums will be -- whether we're talking Liability, Property, or Worker's Compensation.

MAKE SURE YOUR PROPERTY HAS HAD RECENT UPDATES: Property policy premiums are typically based on the type of construction and condition of the premises. Make sure you do your best to keep everything up to code, and keep in mind that you will most likely be visited by an Insurance Inspector.

KNOW YOUR PREMIUM RATE BASIS!

Look over your policies and pay special attention to your "Declaration" pages. If you don't know which pages these are, ask your Insurance Agent flag your "dec" pages for you. These pages spell out exactly how your premiums are calculated. For instance, on General Liability policies, it can be based on one or more factors: Cost (of goods sold or Cost of Subcontractors), Number of Employees, Payroll, Square Footage (of leased premises), Gross Receipts, etc.. Worker's Compensation, on the other hand is based solely on "Payroll". (See my website for an article defining the difference between and "Employee" and a "Independent Contractor"). Make sure you know what you are paying for, and when it is time to adjust the figures.

HAVE INFORMED KEY EMPLOYEES!

YOUR BOOKKEEPER must have a basic understanding of how your policies are rated, and when, or if, Certificates of Insurance should be obtained from any Sub-contractors. Worker's Compensation policies are ALWAYS audited, and General Liability policies are now being audited more frequently than ever. Unless you have an informed Accounting staff, get help in this area! QuickBooks is an excellent software program for both small and large size businesses.

YOUR SUPERVISORS should be your eyes and ears. They should make sure your work areas are always ready for an inspection by your Insurance Company and/or OSHA (Occupational Safety and Health Administration).

SHOP AROUND!

Most Commercial Insurance is sold by Independent Insurance Agents, who represent several Insurance Companies. Many times your current agent will simply offer the renewal offer they receive from your current carrier, without shopping for better rates. It pays to shop around with other Independent Agents and get at least three quotes before binding coverage on your policies. When shopping for different quotes, make sure you are comparing "apples to apples" on the rating factors, such as Gross Receipts, # of Employees, Payroll, etc.. Keep in mind that if you wait until after your policies are bound, you will pay a Cancellation Penalty if you want to re-write them.

DON'T HAVE A LAPSE IN COVERAGE!

Many Commercial Insurance policies are financed, or on a payment plan. If you don't make payments in a timely fashion, your policies will be cancelled! Any lapse in coverage will be looked at closely by company underwriters, when determining your premiums. All Commercial Insurance Applications ask if there has been a lapse in coverage, and you must sign the application indicating that all the information contained on it is correct. It is a reflection, in the Insurance Company's eyes, of being a responsible business owner.

In summary, the longer you are in business, the better chance you have of getting preferred rates IF you stay on top of things. Do everything you can to avoid claim situations. Keeping a safe work environment makes for happy employees, and therefore, happy clients. Pay your bills on time, and always feel free to pick up the phone and call your agent with any questions or concerns you may have. Running a tight ship really does pay off!

This author has been a Commercial Insurance Agent for the past fifteen years, and currently holds a Resident Agent License in SC, and a Non-Resident Agent License in NC. For more information on Commercial Insurance, please visit my web site: http://www.insurancesmartone.com

I offer Policy Review and Audit Services for a small fee, but all other information on the site is yours to view at will. My goal is to educate you in Business Insurance, so that you can be more comfortable in this area, therefore more pro-active -- which ultimately will affect your bottom line!

Jaye Thurston
http://www.insurancesmartone.com

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