11 ULIP Charges You Should Know About

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 proportional to market conditions. ULIP offered by various insurance companies have varying charge structures.

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In this article we will be talking about the various charges associated with your ULIP plans. 

What is a ULIP Plan?

A Unit Linked Insurance Plan (ULIP) is a financial product that combines the benefits of life insurance and investment. It is a type of insurance plan offered by insurance companies in which a portion of the premium paid by the policyholder is allocated towards providing life insurance coverage, while the remaining amount is invested in various investment options such as stocks, bonds, or mutual funds.

ULIP Charges 

When considering the best ULIP Plans, it is essential to understand the associated charges. ULIP charges refer to the fees and expenses levied by insurance companies for administering the policy, managing the investments, and providing life insurance coverage.

To ensure transparency and protect the interests of policyholders, IRDAI has set limits on the charges that insurance companies can impose on ULIP plans. According to IRDAI regulations, the annualized charges for ULIP plans are capped at 2.25% of the fund value for the first 10 years of the policy term. This limit applies to both regular premium ULIPs and single premium ULIPs.

Let's explore the different types of 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% 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.

    **By utilizing a SIP calculator, investors can accurately estimate the returns from their ULIP investments and make informed decisions.

  • 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.

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  • 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.

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  • 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

*All savings are provided by the insurer as per the IRDAI approved insurance plan.
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
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^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

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