What Are the Different Charges of A ULIP?

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The new-age life insurance buyer is a different one than the traditional buyer. Besides the security of a traditional life insurance policy, they want something else as well. To meet this demand, insurance providers have been coming up with various types of policies. These policies offer the policyholder a chance to gain benefits and returns along with the life cover typical of a life insurance policy. ULIPs are one such product. A ULIP offers a solution to the individual looking to merge investment and insurance under one product. Since the insurer is taking care of investment as well, there are several charges that a ULIP policyholder has to pay. We take a look at these charges below.

ULIP

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. Both of these duties are handled by the insurance company. In terms of investment, you can choose between debt instruments and equity instruments. Depending on how these instruments perform, you gain returns on your ULIP plan. A ULIP return calculator can help you understand the estimated returns for a certain investment amount.

Choosing a good insurer is important, as it is their fund managers and financial analysts that determine the distribution of your investment to a large extent.

Charges of a ULIP plan

  • Mortality charges

The mortality charge is nothing but the amount of the premium that goes towards building the life cover. In a regular policy, this charge takes up a major chunk of the premium amount. In a ULIP plan, however, it is a relatively small portion of the entire premium. This amount is influenced by the sum assured and the tenure you have chosen.

  • Premium allocation charge

The premium allocation charge, or the PAC, is a charge deducted by the insurer in the first few years of the policy. It includes expenses such as underwriting fees, agent’s commission charges, renewal charges, and so on. Once the PAC is deducted, the remaining amount is used for investment.

  • Policy administration charges

The policy administration charge is charged on a monthly basis at the same rate or various pre-determined rates, by the insurance provider for the administration of the ULIP plan. Unlike the previous charge, the administration charge is received by the insurer on cancelling the units equivalent to the charge from the funds you have invested in.

  • Fund management charges

The insurance provider levies such a kind of ULIP charges to 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 on a daily basis. The IRDAI has regulated that this charge should not be more 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 from equity to debt and vice versa. Some insurers have a limit on the number of switches you can do in a year. Post the limit, you may be charged a small amount for every switch, known as the fund switching charge. This charge may not be charged by many insurers.

  • Surrender charges

A ULIP policy has a lock-in period of five years. If you surrender the policy before the lock-in period ends, the insurer imposes a surrender charge. This charge is meant to help the insurer recover the initial acquisition cost and is dependent on the premium you have paid.

  • Partial withdrawal charge

Once the lock-in period of the ULIP is over, the policyholder can make partial withdrawals from the policy. Some insurers may allow as many withdrawals as one wants. However, other insurers might have a limit on the number of withdrawals you can make and may levy this type of ULIP charge once the limit is crossed.

Note that if you are using a ULIP return calculator, the return estimation does not take into consideration all these charges.

Depending on the insurer, there might be several other charges for a ULIP plan. Remember that not all the charges are levied by all the insurers. Some companies have lesser charges. It is important to understand these various ULIP charges before you go ahead with a ULIP purchase.