A query from a reader the other day set me thinking. He wrote, “I have an ICICI pension plan which I wanted to top up. When I approached my agent, he told me that I could do so at just 1% charge. Finding it difficult to believe, I rang up the call center of the company and was really surprised when they confirmed it. What the heck is it? Suppose, I want to invest Rs. 100000 every year. At the usual rate of 30%, I will incur a charge Rs. 30000 in the first year. But if instead of that, I take a policy with the minimum possible investment, that is Rs.10000 a year, and top it up with Rs. 90000 every year, I can save a whopping 90% on it! Is that right?”
It really gave me some food for thought. On considering everything, I too found top-ups a really great tool to manage ULIPs.However, not to the extent suggested by the above said reader. For example, if you take a policy with a premium of Rs. 10000 a year, you cannot top it up with Rs. 90000 in the first year. You can top it up only by a maximum of of Rs. 2500. I decided to write an article on these aspects for the benefit of all those having an interest in ULIPs. But first, let me clarify what ULIPs and top-ups are, for those who still do not know much about these.
What are ULIPs?
ULIPs, or Unit Linked Investment Plans, are similar to traditional life insurance policies. They too have similar components like endowment, money back, and life cover, and they also have a similar mix of investment. However, there is one significant difference – unlike traditional life insurance policies, ULIPs place the investment risks on the insured, or the policy holder. Thus, while in normal circumstances they offer better returns than traditional policies, in adverse market conditions they can even result in loss for the policy holder.
What is Top-up Facility in ULIPs?
ULIPs allow the policy holder to make additional investment over the existing premium payment. In other words, you can top up your premium payment in your ULIP, if you want to. This is known as top-up facility. You can avail of the top-up facility at any time while the policy is in force. However, the amount of top-up cannot be more than 25% of the amount of regular premiums you have paid till then. The great thing about these top-up premiums, as already observed, is that the charges on them are very low, generally in the range of 1-3%.
How You Can You Use the Top-up Facility to Your Advantage
Top-up facility is available on every ULIP, there is no need to buy a special insurance cover to avail of it. So, if the performance of your ULIP is good, you can top it up with additional premiums and take the advantage of the low charges.
To make the most of it, buy a ULIP with the minimum premium allowed and keep a watch over its performance. If it performs well, top it up with extra premium to the extent possible. This way, you can reap the following benefits:
- You pay low charges during the initial years because of low premium
- You also pay less charges on the top-up amount thus saving considerably
- You invest additional amount only if the ULIP is performing well and thus minimize losses in case it does not perform well
The Word of Conclusion
Though ULIPs generally give good returns, they are still tricky because the risk is borne by you. However, by taking advantage of the top-up facility they give, you can minimize the risks and maximize the gains. So, if your are going for a ULIP, do use the leverage of top-up to your advantage.