Know the Charges of ULIP Policy

Investment is the key to turn your life goals into reality. Being a responsible person, it is necessary to keep invested a part of your income every month for fulfilling your future goals. One of the preferred ways of investment is Unit Linked Insurance Plans or ULIPs.

ULIP policy has emerged as one of the best investment options in India. The main reason for the same is their nature to provide dual benefits. The premium you pay is divided into two parts, wherein one part goes to provide life insurance coverage, the other part is added in the investment. In addition to this, the ULIP investment is flexible in nature while we talk about fund options to choose from. Apart from this, for your investment in ULIPs, you also get tax exemption under section 80C of the Income Tax Act, 1961. In this way, the ULIP policy serves as an ideal investment plan for long term investments. 

However, before investing in Unit Linked Insurance Plan, it is essential to note that the entire amount invested in the ULIPs policy do not get utilized to purchase the units. The insurance provider deducts some fees or charges for allotting the units. The remaining premium amount is invested among various asset classes such as debt or equity or both as per the preference of the policyholder. Even though different insurance companies have different charging structure, but mentioned below are some of the commonly applied charges:

• Charges of Premium Allocation: These charges are deducted upfront as a fixed percentage of the received premium and are most of the times charged at a higher rate in the initial years of the policy. This charge is basically imposed to recover the initial cost incurred in issuing the ULIP policy like the commission of the intermediary, underwriting cost, renewal fee, etc. The balance amount is used to buy the funds’ units selected by the policyholder.
• Charges of Fund Management: This is the fee that is deducted to manage various funds of the insurance company. These funds are deducted before the Net Asset Value. While the fund management charges differ from fund to fund, but according to the guidelines of IRDAI, the maximum per annum rate for the same of 1.35%.
• Charges of Policy Administration: As the name of these charges suggest, they are deducted to recover the policy maintenance expenses such as paperwork, services, record keeping, etc. These charges are deducted every month as the redemption of units according to the price of the unit from the unit account of the policyholder.
• Mortality Charges: With investment in market-linked funds, ULIPs offer the life insurance cover to you as well. This means, the insurance company not only builds the corpus of an investor but also provides financial help to the family of insured in case of his/her sudden demise. However, most of the new-aged ULIP policies return the charges of mortality that it has deducted over years. This is one of the best enhancements that have been integrated into ULIPs because it builds your corpus on maturity and makes it more customers friendly.
• Switching Charges: The ULIP policy enables its users to switch among various fund options provided by the insurance provider. However, most of the insurance providers offer only a fixed number of free switches. On exhaustion of these free switches, you have to pay charges for every switch you make among the funds. So, these charges are called switching charges.
• Discontinuation or Surrender Charges: ULIP is a long term investment plan that has a mandatory lock-in period of five years. However, due to any reason, if the policyholder chooses to abort the plan early or stops paying the premiums before completion of the lock-in period, then surrender or discontinuation charges are levied. The discontinuation or surrender charges vary and depend on the year of policy surrender.

Final Words: It is always best to have the complete knowledge of any investment plan in which you are planning to invest and this is the reason we are providing you the charges that are levied on ULIP policy. With the above-mentioned charges, there are some other factors as well that should be considered such as the exclusions and limitations of ULIP. The best is to compare various plans on the above-mentioned factors that affect their charges and then select the most suitable one.