Unit-Linked Insurance plan (ULIP) offers dual benefits of insurance and investment. Unlike traditional insurance products, ULIPs are subject to various risk factors, where the return is directly proportionate to market conditions. ULIP offered by various insurance companies have varying charge structures. Before investing, understanding the intricacies of charges that you will have to pay over the entire tenure will help you buy the most suitable ULIP. Here are the major ULIP charges:-
- Premium Allocation Charges in ULIP:- It is a percentage of the first year premium charged by the insurer before allocating the policy. These are the initial expenses incurred by the insurance company at the time of policy issuance. It includes fees such as cost of underwriting, medical expenses, agent’s commission, etc. After deducting these charges, the remaining amount is invested in the chosen fund. Say, your premium allocation charge is 20 per cent and your total premium is Rs 50,000. Then Rs 10,000 will be deducted by the insurer as premium allocation charge and Rs 40,000 will be invested.
- Administration Charges in ULIP:- Every month, a fee is charged by the insurer for administration of your policy. These charges are deducted by cancelling the units proportionately from each of the funds you have selected. This will be either same throughout the tenure or varies at a predefined rate.
- Fund Management Charges in ULIP:- These charges are levied for managing your funds. This is charged by the insurer as a percentage of the fund’s value and is deduced before computing the net asset value of the fund. According to IRDAI regulations, it should not be more than 1.5%.
- Surrender or Discontinuance Charges in ULIP:- These are levied when the insurer surrenders ULIPs prematurely. As per IRDAI’s regulations, an insurer shall recover only the incurred acquisition cost in the event of discontinuance of the policy. They are charged as a percentage of the fund value and premium. The surrender charges in ULIP for the first four years will range from Rs 1000- Rs 3,000, depending upon the premium paid by the insured. After fifth year, no surrender charges are levied.
- Partial Withdrawal Charges in ULIP:- From third year onwards, investors are allowed to partially withdraw from ULIP, subject to pre-specified conditions. However, such withdrawals attract penalty charges.
- Mortality Charges in ULIP:- These are imposed by the insurer for providing death cover to the insured. It is calculated by the insurer after factoring in your age, health risk and mortality table used by the insurer.
- Switching Charges in ULIP:- An investor is allowed a fixed number of free switches between different fund options every year. Subsequently to this, each switching would attract charges, which could go up to Rs 100-500 per switch, subject to the insurer’s charge structure.
- Premium Redirection Charges in ULIP:- Insurers levy premium redirection charges if you redirect your future premiums to another less risky fund options, without changing the existing funds structure.
- Guarantee Charges in ULIP:- Insurer levies guarantee charges on ULIPs of the high-NAV guarantee variety. These are paid by the insured for getting a guaranteed return. For example, if a ULIP promises 120% after 10 years, you need to pay guarantee charges for the same.
- Rider Charges in ULIP:- These are levied on additional benefits bought over the base plan. For example, you need to pay extra charges if you opt for a critical illness rider.
- Miscellaneous Charges in ULIP:- It is relatively a smaller element in the charge structure. You need to shell out miscellaneous charges, for example, if you decide to change the premium payment mode from yearly to quarterly.
Note: IRDAI has capped annualized charges of ULIPs at 2.25% for the first 10 years of holding. Also ULIPs charges are mandated to be evenly distributed during the lock in period.
You may also like to read : Questions You Should Ask Before Investing In ULIP