A top-up premium is an investment that you make in your ULIP (Unit Linked Insurance Plan) over and above your contracted premium. There is no compulsion to make such an investment. If you are paying top-up premium, you are paying it of your own free will.
In this post, let’s look at why you should avoid topping up your Unit-Linked Insurance Plan (ULIPs).
What are the problems with top-up premium?
#1 Your top-up premium is not a pure investment.
And many of us are under a wrong impression.
You must consider top-up premium as the purchase of a single premium ULIPs. This is as per IRDA Unit Linked Insurance Product Regulations, 2013.
Therefore, there will be a purchase of an additional Sum Assured i.e. you have to purchase additional life cover. The minimum Sum Assured is 125% of the single premium (top-up premium) if your age is less than 45 and 110% of the top-up premium if your age is 45 years and above.
We have discussed in an earlier post that purchase of life cover comes at a cost in the form of additional mortality charges.
If you do not need additional life cover, why will you lower your returns by incurring mortality charges? Wouldn’t a pure investment be a better choice?
#2 Additional Charges
Not just mortality, there may be other ancillary charges too. These charges will again eat into your returns.
For instance, under ICICI Pru Elite Life II, all top-up premiums are subject to one-time premium allocation charge of 2%. This means 2% of your premium gone up front.
There is no need to be so cruel with your money.
#3 Tax benefits of Top-up premium
Your top-up premium will fetch you same tax benefit as a regular premium would.
Please understand I am not too sure of the following statements about taxation/tax benefits of Top-up premium. You must consult a Chartered Accountant for better clarity.
Since the top-up premium is considered a single premium plan, there may be restrictions on how much tax benefits you can get. Even the maturity proceeds can be subject to taxation.
On the other hand, if the top-up premium is considered part of base ULIPs, the premium for the year in which you paid the top-up premium may exceed 10% of the Sum Assured. This will again make maturity proceeds (from the entire plan) not exempt from tax.
I could not find a definitive answer about taxation of such premiums but I can foresee some problems. As far as you are concerned, this confusion is another reason why you should avoid topping up your ULIP.
Points to Note
- You cannot top-up your policy (pay top-up premium) in the last 5 years of ULIP (except for pension plans).
- Once you pay the top-up premium, you cannot make partial withdrawals (from the top-up premium fund value) for 5 years from the date of payment of top-up premium.
- In case you are surrendering the ULIP, the restriction of 5 years does not apply.
- The total top-up premiums paid shall not exceed the total of regular premiums paid till that point of time.
- Insurers are required to maintain an account of fund values for top-up and regular (base) premium separately.
- Top-premium option is not available in traditional life insurance plans.
- Top-up facility may not be available in all ULIPs.
If you have a surplus to invest, it is best to avoid topping up your ULIP. Mortality and other administrative charges will unnecessarily eat into your costs. Taxation can be a problem too.
In my opinion, a combination of a term plan and mutual funds is a better option than purchasing a ULIP.
Therefore, if you need extra life cover, go ahead and purchase a term plan.
On the other hand, if you want to invest, make a pure investment. Do not purchase a bundled product such as a ULIP.