A top-up premium is an investment that you make in your ULIP (Unit Linked Insurance Plan) in addition to your contract premium. There is no need to make such an investment. When you pay a top-up premium, you pay it of your own free will.
In this post, we’ll look at why you should avoid topping up your Unit-Linked Insurance Plan (ULIPs).
What are the problems with the top-up bonus?
# 1 Your top-up bonus isn’t just an investment.
And many of us have the wrong impression.
You have to consider Top-up bonus as the purchase of a one-time ULIP bonus. This corresponds to the IRDA guidelines for unit-linked insurance products, 2013.
Therefore, an additional sum insured is acquired, ie You need to purchase additional life insurance. The minimum sum insured is 125% of the single premium (top-up premium) if you are younger than 45 and 110% of the top-up premium if you are 45 years of age or older.
We discussed in a previous post that purchasing life insurance comes with additional costs in the form of additional death benefits.
When you don’t need additional life insurance, why will you lower your returns through mortality fees? Wouldn’t a pure investment be a better choice?
# 2 Additional fees
Not just mortality, there may be other incidental costs as well. These fees will eat up your returns.
For example, under ICICI Pru Elite Life II, all top-up awards are subject to a one-time award allocation fee of 2%. This means that 2% of your premium is paid in advance.
You don’t have to be so cruel with your money.
# 3 Tax advantages of the top-up premium
Your top-up premium gives you the same tax advantage as a regular premium.
Please understand that I am not entirely sure of the following statements about the taxation / tax advantages of the top-up premium. For more clarity, you need to consult an auditor.
Since the top-up premium is a single premium, there may be restrictions on the amount of tax breaks. The proceeds from the maturity may also be subject to taxation.
Read: The problem with single premium life insurance
If, on the other hand, the top-up premium is considered part of the base ULIPs, the premium for the year in which you paid the top-up premium may exceed 10% of the sum insured. As a result, the maturity proceeds (from the entire plan) are again not tax-exempt.
I haven’t been able to come up with a definitive answer on taxing such premiums, but I can foresee some problems. For you, this confusion is another reason to avoid charging your ULIP.
Points to note
- You cannot top up your policy (pay top-up premium) in the last 5 years of the ULIP (except for pension plans).
- After the top-up premium has been paid, you cannot make any partial withdrawals (from the value of the top-up bonus fund) for 5 years from the day of the top-up premium.
- If you hand in the ULIP, the 5-year limit does not apply.
- The total of the top-up premiums paid may not exceed the total of the regular premiums paid up to this point in time.
- The insurers are obliged to keep the fund values for the top-up and the regular (basic) premium separately.
- The top premium option is not available in conventional life insurance.
- The top-up facility may not be available in all ULIPs.
If you have a surplus to invest, It is best to avoid charging your ULIP. Mortality and other management fees will add to your expenses unnecessarily. Taxation can also be a problem.
In my opinion, a combination of a term plan and mutual fund is a better option than buying a ULIP.
Therefore, if you need additional life insurance, buy a term plan.
If, on the other hand, you want to invest, you are making a pure investment. Don’t buy a bundled product like a ULIP.
Source / credit
LiveMint: There are top-up rewards for ULIPS
IRDA guidelines for unit-linked products, 2013