An organisation has several responsibilities towards its employees, some of which are mandated by the law. Paying gratuity to employees that have completed 5 years of employment in the company is one such legal responsibility as per prevalent laws. To ease the process of accumulating and paying the gratuity amount, organisations can opt for unit-linked group gratuity plans. These are essentially life insurance policies with an investment component attached to them. You should be aware of what a group life insurance is and besides helping in the gratuity process, these plans are also an employee retention tool. As with other unit-linked plans, there are several charges associated with group gratuity plans as well. Let’s take a look at those in this article.
What is a group unit-linked life insurance and gratuity plan?
The aim of any gratuity plan is to provide the employee with a lump sum amount when they retire/ resign from the company after providing service for at least five years. By adding a unit-linked insurance plan to the mix, an organisation provides life coverage to the employees. If the employee were to pass away (even before the completion of five years’ service), the beneficiaries of the employee receive financial compensation from the company.
In return, the premium amount is deducted from the employee’s salary. This amount is pooled together with other premiums and is distributed amongst the relevant funds. One portion goes towards the employee’s life insurance coverage, while the other portion is invested in the portfolio chosen by the employer. The returns accumulated on this investment are provided to the employee as their gratuity benefit according to the policy’s wordings and legal sanctions.
Charges in unit-linked group gratuity plans
- Fund management charges
As the name suggests, the group life insurance company levies the fund management charges to compensate for handling, managing, and distributing the funds effectively. It is calculated as a percentage of the total value of the assets. This charge is applied for a duration of one year. The Insurance Regulatory and Development Authority of India (IRDAI) has laid down some guidelines regarding this charge. Accordingly, the fund management charges should not be more than 1.5% of the total annual value of the fund.
- Mortality charges
These charges are the basic component of any life insurance policy. When the insurer and the insured agree on a life insurance contract, the insurer is liable to pay a lump sum amount to the insured if the latter passes away under conditions mentioned in the policy. To compensate for this expense (if it does arise), the insurer levies a mortality charge. This charge essentially takes care of the life insurance element of the plan.
- Policy administration charges
The insurance company takes care of several aspects of the plan and bears costs for the same, such as paperwork, premium calculation, and so on. In a group policy, a larger amount of work may be included due to the number of people involved. To compensate for the same, policy administration charges are levied. Usually, these charges are levied on a monthly basis. This charge remains the same throughout the tenure or may increase/ reduce at a pre-determined rate.
- Surrender charges
If the policy is terminated or surrendered before the completion of the term, the total fund value is provided to the insured members. However, they might have to contend with a surrender charge on their fund value as well. This charge is calculated as a percentage of the fund or as a portion of the annual premiums.
In a group policy, the terms and conditions of the policy determine whether the insured member can opt out of group unit-linked plans at a particular stage. It is better to discuss with the HR department of the organisation and know what the surrender charge on group life insurance and unit-linked plans is.
Are the charges for the group life insurance worth it?
The main reason that unit-linked plans have so many charges is because they offer multiple benefits. Along with life coverage, the insured member also has the assurance of receiving the accumulated returns from their investment. This can be a great tool of investment, as unit-linked plans offer a variety of portfolios to choose from. Funds can be distributed in equity funds, debt funds, hybrid funds, and bonds as well. These various benefits are possible due to the various charges involved in the process.
Do read the wordings of the group life insurance and unit-linked plan before you sign up for it.