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ULIP is an excellent investment product available in the market that gives dual benefit of insurance and investment. A part of premium paid by you is allocated for giving life cover and the remaining part of premium money will be invested in funds (money market, debt or equity-oriented) chosen by you. ULIPs are also know be highly tax-efficient investment products that offer various tax advantages along with flexibility and other benefits. Considering the complex structure of ULIP products, there are multiple types of charges associated with this product. Hence, while buying ULIP, it is important to know and consider various charges involved in ULIP investment.
Charge structure associated with ULIP may vary among insurance companies. Also, the amount of charges may also vary from plan to plan and among insurers. Some of the major ULIP charges are:
Fund management charges
Being an investment product, ULIP allows you to invest in various funds such as income funds, balanced funds and growth funds etc. There are fees levied to professionally manage those funds where FMC is adjusted from the NAV on a daily basis. As per the Insurance Regulator, IRDAI, fund management charges cannot be more than 1.35% in a financial year. It is charged as a percentage of fund value which is deducted before arriving at the NAV. The charges are deducted before arriving at the fund’s net asset value.
Surrender or discontinuance charges
ULIPs are long-term investment products that come with lock-in period of five years. If you wish to surrender or discontinue the policy within the lock-in period, you need to pay the required surrender or discontinuance charges. The charges may vary depending on when you are surrendering and how much premium you are paying. IRDAI has restricted the maximum limit of charges to INR.6000. However, there will not be any charges after completion of lock-in period.
Policy Administration charges
You are required to pay a certain amount of fees towards the administration of the policy. These fees are charged on a monthly basis by cancellation of units from all the funds chosen.
Premium allocation charges
These are the upfront charges levied as a percentage on every premium paid. Unlike traditional ULIPs, new ULIPs are not charging high on premium allocation front. Some of the online ULIPs are not even charging premium allocation charges.
ULIPs allow you a limited number of free fund switches in a year. With switch option, you can shift from one fund option to another. If the number of switches are more than the free switches allowed, then you will be charged for switching.
Partial withdrawal charges
ULIPs come with five year lock-in period. Even though ULIPs are meant for long-term, the plan allows you to make partial withdrawals after completing the lock-in period of five years. Charges levied on such withdrawals are called partial withdrawal charges in ULIP.
Mortality charges in ULIP
When you buy an insurance product, based on your information like age, health history and gender etc., insurance companies assess the life risk and assumes your age of survival. Insurance companies charge these mortality charges on the insurance component of ULIP. Basically, mortality charges are levied on a monthly basis through deduction of units proportionately from each of the fund(s) you have chosen.
Premium redirection charges
ULIP gives you various investment fund options to invest in. When you choose a particular fund, let’s say fund A initially, the first premium paid will be allocated to that particular fund. And subsequent premiums will also be allocated to the same funds chosen initially. However, ULIP gives you the flexibility to redirect your future premiums to different fund options, let’s say fund B. This will not have any impact on the previous premiums allocated to fund A. For this redirection of premium, you will be charged. There are certain number of free premium redirections allowed in a year in many ULIPs.
ULIP plan offers various additional optional benefits like critical illness, accidental disability etc., over and above the basic plan. When you opt for such riders, you need to pay extra amount which is called rider charges.
These charges are levied for expenses incurred for alteration of contracts in ULIP. This may include enhancing sum assured, change in policy term, change of premium payment mode, duplicate policy document, etc.
ULIPs that come with high-NAV guarantee variety, are subjected to guarantee charges. To get the guaranteed return, investors need to incur these charges.
A ULIP plan offers various investment option that can suit high, moderate and conservative risk profiles. You can choose the appropriate option depending on your goal and risk appetite. It also gives you the flexibility to switch from one fund option to another anytime, depending on the market conditions and change in your need.
ULIP plans are designed as a long-term investment products that come with five year lock-in period.
ULIP can suit any investor- be it aggressive, conservative or an investor with moderate risk appetite. However, returns may vary according to your choice of funds.
ULIP has both insurance and investment component, it’s not treated as capital asset. Hence, it’s not subjected to capital gain tax. ULIP can give various tax benefits under Section 80C, 80D and 10 (10D) of the Income Tax Act, 1961.
Along with the benefit of investment for long-term, ULIP also allocates part of your premium money to provide life protection.
Revamped ULIP products come with much lower charges and makes it a great investment choice for long-term. With the introduction of ULIP on digital platform, it has become one of the low-cost financial product with nominal charges involved.
What are the major ULIP Charges?
ULIP being a hybrid product, has a complex structure. It gives you the advantage of both investing and protection. Hence, it also involves various types of charges. Some of the major ULIP charges are premium allocation charges, mortality charges, surrender or discontinuance charges, partial withdrawal charges, fund management charges, switching charges, premium redirection charges, rider charges and other miscellaneous charges. Percentage and amount of charges may vary from policy to policy, depending on the terms and conditions.
What is premium allocation charge?
Premium allocation charges are levied upfront even before allotting the premium into the chosen fund. All the relevant costs are deducted before investing the money in your chosen funds.
What is fund management charge?
It is a fees levied to manage the investment fund chosen by you in your ULIP plan. It is charged as a percentage of value of your fund which is adjusted from the NAV on a daily basis. Hence, when ULIP fund value appreciates, fund management charges also increase. Percentage may vary depending on the funds chosen. Equity-oriented funds will have more fund management charges when compared to debt-oriented funds.
What is policy administration charge?
It is a fee charged for policy administration that includes paperwork, sending of notices and reminders for premium payment and so on. These charges may remain same throughout the policy term or may increase at a pre-agreed rate.
What is mortality charge?
It is a charge levied by the insurance company to provide the life cover in ULIP plan. Lesser your age, lower will be the mortality charges. Mortality charges are calculated with reference to a table of standard annual mortality charges. Average human mortality rates data is also considered by the insurance companies to levy these charges.
What is switching charge?
ULIPs give you an option to switch your money from one fund to another. This switching process is chargeable and varies from INR. 100 to INR.500.
What is discontinuance charge or surrender charge?
It is a charge levied on your ULIP upon cancellation or discontinuation of the policy. When you discontinue the policy in the very first year of the policy, charges may be levied up to maximum of INR.6000, depending on the amount of premium. Upper limit on charges gets reduced to INR.2000 when you discontinue in the fourth year. And there will not be any charges when you discontinue or surrender after completion of fifth year (lock-in period).
What is partial withdrawal charge?
ULIPs allow you to partially withdraw from the fund value after completion of five years lock-in period. The charges may vary from INR.100 to INR.2000. Maximum limit for partial withdrawals is specified in each ULIP plan in its terms and conditions.
What is a rider charge?
Opting for additional benefits along with the basic ULIP plan can cost you more than the regular basic premium. These additional charges to avail the extra benefits from enhanced optional features are called rider charges or premium.
What is premium redirection charge?
In ULIP, you have got an option to redirect your future premium to different fund than the previously invested one. Charges levied for this change is called premium redirection charges. The charge may vary from INR.100 to INR.200, depending on the terms of the policy. With the digital availability of policy, the charge can get even lower.
What are miscellaneous charges?
It is a smaller amount of charges incurred for miscellaneous expenses in the ULIP such as change of policy terms, increasing sum assured and change of premium payment mode etc.