The purpose of a Unit Linked Group Gratuity Plans is to provide the employees with a lump sum benefit on their exit. This benefit is called gratuity. A Unit Linked Group Gratuity Plan is a retirement benefit plan that combines a gratuity benefit with investment options in the stock market. The payouts are based on the market performance. When a policy holder goes for a group gratuity plan from an insurance provider, he is levied with the following charges:
Fund Management Charge:
It is the charge applicable as a percentage of the value of assets. Fund Management Charge is calculated as a percent per annum of the Fund Value. This charge is appropriated by adjusting the Net Assets Value.
As per the clearance from the Insurance Regulatory and Development Authority (IRDA), the rate of this fund management charge may increase but usually stays below 1.5% of the total fund per annum. Fund Management Charge is subjected to taxes and cess as per laws applicable. Fund Management charges for different funds are guaranteed for the entire policy term of one year.
Premium Allocation Charge
Insurance companies spends some amount of money on distributor fee, underwriting expenses of the policy as well as medical expenses. Premium allocation charges are levied to offset for all such expenses.
Premium allocation charges are deducted upfront and the remaining money gets invested
in the chosen policy. Insurance and Regulatory and Development Authority has set guidelines to ensure a cap on Premium allocation charges from the fifth year onward. But the matter of fact is that, the premium allocation charges in the first few years are significantly high.
Policy administration Charge
Policy administration charge is deducted as the administrative expenses incurred by the Insurance company for maintaining the policy. Costs for paperwork, premium intimation are included under this charge. Policy administration Charge is usually levied monthly. It can be either same throughout the policy year or it can increase at the pre-determined rate.
Mortality charge is levied as a charge for the insurance protection upon death of the insured. It also covers certain other expenses. When a policy is brought by an insured, the insurance company assumes his life expectancy based on his age, gender and health conditions. In case the insured person doesn’t live to the assumed age, the mortality charge compensates the insurance company.
A surrender charge is deducted for premature encashment of units, either partial or full. In unit linked gratuity plans, this charge is calculated as percentage of the fund or as percentage of the annualized premiums. There are guidelines set up by IRDA for maximum surrender/termination charge that can be levied by the insurance companies. IRDA has also stated that no other charge apart from the surrender charge can be levied by the insurance company in case the insured surrenders the policy.
Mr. Shah had purchased a Unit linked group gratuity plan from a well-known Insurance company in India. At the 10th anniversary of the policy Mr. Shah decided to encash his units. A surrender/termination charge was levied upon him by the insurance company.
Mr. Shah’s investment in the policy’s stock bucket had reaped 15% returns in the 10th year. Since Mr. Shah decided to encash his units early, he got 12.5% returns after 2.5 % deduction of the surrender charge.
According to the insurance company, the maximum deduction for 10th year policy anniversary was 2.5%. Mr. Shah had a deduction of 2.5% based on the following table as per his Unit linked Group Gratuity plan:
Number of years since policy inception
|Maximum Surrender Charge %
|11 to 13
14 to 15