The new-age life insurance buyer is a different one than the traditional buyer. Besides the security of a conventional life insurance policy, they want something else. To meet this demand, insurance providers have been coming up with various approaches. 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. Both of these duties are handled by the insurance company. You can choose between debt instruments and equity instruments in terms of investment. 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 specific investment amount.
Choosing a good insurer is essential, 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
The mortality charge is nothing but the amount of the premium that goes towards 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 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, etc. Once the PAC is deducted, the remaining amount is used for investment.
Policy administration charges
The policy administration charge is charged every month at the same rate or various pre-determined rates by the insurance provider to administer the ULIP plan. Unlike the previous order, the administration charge is received by the insurer on canceling the units equivalent to the amount 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 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 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 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 are using a ULIP return calculator, the return estimation does not consider all these charges.
There might be several other charges for a ULIP plan depending on the insurer. Remember that not all the orders are levied by all the insurers. Some companies have lesser amounts. It is essential to understand these various ULIP charges before going ahead with a ULIP purchase.