ULIPs or Unit-Linked Insurance Plans are an ideal option for those who want life insurance beyond the conventional plans. ULIPs have an investment element attached to them. As a ULIP policyholder, you can instruct your insurer regarding your goals and how you wish to use your premium amount. You can choose between a variety of options within equity funds, debt funds, and even hybrid funds. Because of the functioning of the product and the complexity involved in handling it, the insurer levies certain charges. These charges ensure your ULIPs continue to work smoothly and keep providing good returns and insurance coverage. For your awareness, we list down 8 ULIP charges you should know about.
Charges in a ULIP policy
- Mortality charge
This is the most basic charge present in any life insurance policy. This charge refers to the amount that goes towards building the life insurance corpus. While other charges may be uniform for all policyholders, this one differs on the basis of age, health issues, kind of sum assured chosen, coverage, and so on.
- Premium allocation charge
This charge is deducted via a certain percentage from the premium for the first year. The insurer levies this charge to compensate for the initial expenses they incur. These may include the underwriting costs, medical tests expenses, agent’s commission, and so on. It is only after this charge is deducted from the ULIP policy premium does the insurer goes ahead with investing the remaining fund.
- Admin charges
Since ULIPs are comparatively harder to administer, a certain amount is charged by the insurer monthly. However, this charge is not deducted from the premium. Rather, the insurer deducts this charge by cancelling the equivalent number of units from the funds your money is invested in. This charge is usually levied at a pre-defined rate sometime, or it may change throughout the tenure of the ULIP policy.
- Surrender charges
If you are thinking of surrendering your policy before the mandatory lock-in period of five years is over, then you should know that you will be paying a charge for it. Surrendering the policy after the end of the lock-in period does not incur any ULIP charges. If the policy is surrendered in the first four years of the policy, the charges could be somewhere between Rs 1000-3000 approximately. The cost differs as per the fund value and premium of the ULIP.
- Fund switching charges
In a ULIP, the investor has the freedom to switch their money from one type of fund to another. If equity funds are not providing you the results as the ULIP plan calculator had estimated, then you can switch the money to debt funds. This seamless switching helps you prevent losses on your funds to a great extent.
However, some insurers might levy a charge if you have switched funds beyond an acceptable number of times in a year. Mostly, fund switching is free and can be availed as many times as one wants.
- Fund management charges
As per IRDA norms, insurers cannot charge fund management fees beyond 1.5% of the fund value. The insurer levies this charge as compensation for managing the investment portion of the plan and taking the right course of action for your funds. The insurer deducts these ULIP charges by cutting a certain percentage from the returns before the total fund value is calculated.
- Premium redirection charges
You can redirect your future premiums such that they meet your changing risk appetite. For instance, as a bachelor, you may be more interested in equity funds. However, as a householder, you may want stable returns and less risk, and so you may be looking to invest in debt funds. You can do so by instructing the insurer to redirect your premiums at a specified point without making any changes to the prevalent fund structure by incurring certain charges.
- Guarantee charges
These charges are usually applied on high-NAV ULIPs. If you are expecting a guaranteed high return, let’s say, 80% on your ULIP policy after 10 years, then you can pay a guarantee charge to the insurer for the assurance.
Depending on the kind of policy and the insurer, there might be more charges as well. It is best to have a detailed discussion about the charges as tools such as the ULIP plan calculator do not take such charges into account when estimating the figures.
