The new-age life insurance buyer is a different one than the traditional buyer. They want something else besides the security of a conventional life insurance policy. Insurance providers have been coming up with various approaches to meet this demand. These policies offer the policyholder a chance to gain benefits and returns and the life cover typical of a life insurance policy. ULIPs are one such product. A ULIP provides a solution to individuals looking to merge investment and insurance under one product. Since the insurer is taking care of the investment, there are several charges that a ULIP policyholder has to pay. We take a look at these charges below.
How does a ULIP work?
Let us understand the workings of a ULIP first. The premiums of a ULIP are used for two purposes – creating the life insurance cover and investing in the stock market. The insurance company handles both of these duties. You can choose between debt instruments and equity instruments in terms of investment. You gain returns on your ULIP plan depending on how these instruments perform. A ULIP return calculator can help you understand the estimated returns for a specific investment amount.
Choosing a good insurer is essential, as their fund managers and financial analysts determine the distribution of your investment to a large extent.
Charges of a ULIP plan
The mortality charge is the premium amount for building the life cover. In a standard policy, this charge takes up a significant chunk of the premium amount. However, in a ULIP plan, it is a relatively small portion of the entire premium. This amount is influenced by the sum assured and your chosen tenure.
Premium allocation charge
The premium allocation charge, or the PAC, is deducted by the insurer in the first few years of the policy. It includes underwriting fees, agent’s commission charges, renewal charges, etc. Once the PAC is deducted, the remaining amount is used for investment.
Policy administration charges
The insurance provider charges the policy administration charge monthly at the same rate or various pre-determined rates to administer the ULIP plan. Unlike the previous order, the insurer receives the administration charge on canceling the units equivalent to the amount from the funds you have invested.
Fund management charges
The insurance provider levies such as ULIP chacharges compensate for managing your funds and investing them in the right direction. This charge is deducted from the returns on your investment before the NAV (Net Asset Value) is calculated. This deduction happens daily. The IRDAI has regulated that this charge should be less than 1.5%. Equity fund management charges are usually higher than non-equity or debt management charges.
Fund switching charge
In a ULIP, you can switch your investments from one asset class to another, such as understanding debt, and vice versa. Some insurers limit the number of switches you can do in a year. Post the limit; you may be charged a small amount for every control, known as the fund switching charge. Many insurers may not authorize this charge.
A ULIP policy has a lock-in period of five years. The insurer imposes a surrender charge if you surrender the procedure before the lock-in period. This charge is meant to help the insurer recover the initial acquisition cost and depends on theyour premiumartial withdrawal charge
Once the lock-in period of the ULIP is over, the policyholder can withdraw partially from the policy. Some insurers may allow as many leaves as one wants. However, other insurers might limit the number of departures you can make and may levy this type of ULIP charge once the limit is crossed.
Note that if you use a ULIP return calculator, the return estimation does not consider all these charges.
Depending on the insurer, there might be several other ULIP plan charges. Remember that not all the orders are levied by all the insurers. Some companies have lesser amounts. Understanding these various ULIP charges is essential before going ahead with a ULIP purchase.