Unit Linked Insurance Plans are a good investment option for those seeking a life insurance cover, and at the same time, want to reap the benefits of upward market movements. These plans are a highly suitable option for individuals as it channels one's savings into different market-linked assets for achieving long-term goals, in addition to providing a life insurance cover.
Before investing in ULIPs, one of the essential factors that needs to be noted is that the whole amount paid in the form of premiums does not get utilized to buy units. The insurance company will deduct certain charges and fees prior to the allotment of units. The premium amount that remains is invested among different asset classes like equity, debt or both, as per the policyholder's preference. Although the ULIP plans offered by different insurance companies have varying charge structures, these are some of the most commonly applied:
8 Charges in ULIP
- Fund management charge:
Fund management charge is a fee that is levied for management of the various funds by the insurance company, and is deducted prior to arriving at the Net Asset Value. While the charges differ from one fund to another, according to the IRDAI guidelines, the maximum charge per annum is 1.35%.
ULIP plans are quite similar to mutual funds with respect to the fund management charge. Mutual funds have an FMC built into the Net Asset Value that is declared.
- Premium allocation charge:
Premium allocation charges are deducted as a fixed percentage of the premium received and is usually charged at a higher rate during the policy’s initial years. This normally includes initial and renewal costs, as well as the commission expenses of the intermediary.
Premium allocation charge is a specific percentage that is deducted from the premium and the balance is used to acquire units at the prevailing net asset value.
- Policy administration charge:
Policy administration charge is deducted for the administrative expenses borne by the company towards the maintenance of the ULIP plan. The costs associated with premium intimation, paperwork, etc. are included under this head.
This expense could be flat throughout the policy period or could rise at a pre-agreed rate. It can also be a flat rate in the first 3 to 5 years and then rise by a certain percentage each year.
- Mortality charges:
Considering that ULIP investment plans come with an insurance cover, mortality charges will apply, just like it does for all life insurance products. Mortality charges are determined after factoring in a number of elements like age, sum assured, etc.
They are levied on a month-on-month basis. The policy documents usually tend to mention how the mortality charges are calculated on the investment plan.
- Surrender charge:
These charges are levied for the encashment of units of the investment plan, prior to the specified end date. Should the policy's annual premium be over Rs. 25,000, the maximum discontinuance charge can be Rs. 6,000 for the first policy year, Rs. 5,000 for the second policy year, Rs. 4,000 for the third policy year or Rs. 2,000 for the fourth policy year.
For a lower amount, it shall be Rs. 3,000 in the first policy year, Rs. 2,000 for the second policy year, Rs. 1,500 for the third policy year or Rs. 1,000 for the fourth policy year. There will be no surrender charges if the policy is discontinued from the fifth policy year. Surrender charges are similar to exit load of mutual funds.
- Switching charges:
Switches are options that allow policyholders to shift their investments from one investment fund to another, within the available options under the purchased ULIP plan. Units can be transferred fully or partially between fund options i.e. equity and debt.
Most of the best ULIP plans do not levy any charges for the initial five to eight switches. For switches more than this, charges of about Rs. 50-300 can apply.
- Premium redirection charge:
Generally, in case of such investment plans, one will be putting all their premiums in say Fund X of that ULIP. Now after a few years down the line investor wants to invest all future premiums to get redirected to another particular fund. Through premium redirection, policyholders of a ULIP plans can redirect future premiums payments into another fund option, like say, Fund Y. The premium redirection does not affect investments made in Fund X.
There is usually a cap on the number of times premium payments can be redirected for free. After the limit, charges will be levied per redirection.
- Partial withdrawal charge:
ULIP plans provide the facility of making partial withdrawal of funds. While some plans allow users to make unlimited number of partial withdrawals, others may limit it to two to four. Such withdrawals are usually free up to a certain limit and then may have a specific charge per withdrawal.
One important point to be noted is that partial withdrawals can only be made after 5 years, which is the lock-in period.
Impact of the charges
The overall impact of all the above expenses is capped by the insurance regulator. The net reduction in yield investment plans whose term is less than or equal to ten years shall not be greater than 3% at maturity. In case of policies with term of over ten years, the net reduction in yield at maturity shall not be greater than 2.25%. The yield is calculated without factoring in the mortality charges.
Choosing Best ULIP Plan
Besides the charges mentioned above, some of the other factors to be considered while looking for the best ULIP plan are returns & variety of investment funds available, premium payment options and limitations & exclusions. Shortlist the investment plans on the basis of these factors (also keeping the charges in mind) to find the best ULIP plan that fulfils the various financial needs.
Recommended Read: All You Need to Know About Switch Funds Option in ULIPs