ULIP or Unit Linked Insurance Plans offer the dual benefit of insurance cover and wealth creation through investment in different types of instruments, like equity and debt. These plans are a good way to secure the financial future of the loved ones besides building a corpus to meet the long-term goals. But all this comes at a cost- charges incurred to manage the plan. Let us find out about the various charges that come with a ULIP Policy.
A clear understanding of the ULIP charges is a must for choosing the best plan that can help investors achieve their goals. Insurance companies must provide the exact details of the charges in their product brochure. Investors can also enquire with their advisors or the sales representatives of the insurance companies about the various charges applicable during the policy term. These charges include:
- Policy Administration Charges-These charges are deducted by the insurance companies for the servicing and maintenance of a policy on a monthly basis.
- Premium Allocation Charges- A ULIP involves the segregation of the premium payments into two parts, with one going for the insurance coverage and the other used for investment purposes. Now, insurance companies deduct a fee from the premium received and use the amount for meeting expenses incurred to process a policy. The common expenses incurred by a company are the cost of underwriting, medical examination, and expenses related to distributor fees.
- Mortality Charges- These expenses are charged for providing the investor with a life cover and vary with the age of the applicant. These charges are deducted on a monthly basis.
- Fund Management Charges- These charges are used to fund the expenses incurred to manage the investments according to the allocation made by the policyholder.
- Rider Charges- Insurance companies offer additional features or covers like disability cover, accidental insurance, or critical illness cover. The expenses incurred to provide the additional cover are deducted from the premium paid by the policyholder.
- Switching charges- These charges relate to the option available to the policyholders to switch their investments from equity to debt or vice versa, or any other option. Most insurance companies offer a limited number of switches for free while charging a fee for the changes made after that.
- Top-Up Charge- ULIPs come with a unique feature of allowing investors to increase their coverage amount by using their surplus money. Investors can use their surplus funds either once or many times during the policy tenure to enhance their coverage by paying an additional premium called the Top-up premium. Investors can use the top-up premium option to enhance their investments. A portion of the top-up premium may be deducted by the insurance provider as fees.
- Premium Discontinuance Charge- This charge becomes applicable when a policyholder stops paying the premium before the end of the lock-in period. Such an action attracts a premium discontinuance charge, which is a percentage of the premium or the fund.
- Partial Withdrawal Charges-This refers to the penalty fee charged by an insurance company when a policyholder decides to make a partial withdrawal of the fund value.
- Guarantee Charges- These charges are applicable when the insurance company offers guaranteed returns on investments.
The charges on ULIP investments may vary from one insurance company to another, but as per IRDAI rules, the annualised charges for a ULIP cannot exceed 2.25% for the first ten years of holding the policy. Also, these charges have to be distributed evenly during the lock-in period of a ULIP. Investors can compare different plans and their charges to find out the returns expected before taking an investment decision. A ULIP plan calculator can also be used to find out how much to invest and for what duration.