Unit Linked Insurance Plans (ULIPs) are market-linked insurance plans. The premiums you pay are invested in market-linked funds that grow as per market performance. The fund value under ULIPs is a combination of equity funds, debt funds or a combination of both.
While you can choose the premium that you want to pay and the returns are market-dependent, you need to know the ULIP-related charges. In this context, here are 11 such charges that ULIPs usually levy and their meaning:
- Premium allocation charge
This is the first charge that is deducted from your premium. The allocation charge is deducted to compensate for the costs incurred in issuing your ULIP policy. These costs include underwriting costs, stamp duty, commission to agents, etc. This is an annual charge usually levied in the first five years. The first-year fee is the highest and then decreases with each ULIP policy year till it becomes zero.
This is the cost of the insurance cover that the ULIP plan provides. The mortality charge is calculated monthly on the sum at risk, which is the difference between the sum assured and the fund value. If the difference becomes zero during the policy tenure, the mortality charge also becomes zero.
- Policy administration charge
The policy administration charge is levied monthly for the administrative costs incurred by the company in maintaining the policy.
- Fund management charge
ULIPs give you the benefit of professional fund management wherein the fund portfolio is managed by experienced fund managers. The managers are paid a fee for their services in the form of fund management charges. The charge is expressed as a percentage of the fund value every year and depends on the type of fund selected. Equity-oriented funds have higher charges compared to debt funds.
- Policy discontinuation charge
If you surrender your policy within the first five years, a discontinuation charge would be levied; the charge depends on the year in which you surrender the plan. The sooner you surrender, the higher the charge and vice-versa. No charge is levied if you surrender after the lock-in period of five years.
- Partial withdrawal charge
ULIPs allow partial withdrawals after the first five policy years. These withdrawals might incur a charge that is specified by the policy. Some ULIPs allow a specified number of free withdrawals. Excess withdrawals are, then, subject to charges. Some plans, conversely, allow free partial withdrawals.
- Switching charge
Switching means changing your investment funds. While switching allows flexibility, it might also incur a charge. Many ULIPs allow a specified number of free switches. Switching over and above the free limit incurs a charge. Some ULIPs, however, allow unlimited free switching during the policy tenure.
- Rider charge
Riders are additional coverage benefits that you can add to your base plan. If riders are added, an additional premium is required for them. This additional premium is recovered through rider charges that are deducted from your fund value.
- Premium redirection charge
If you redirect your subsequent premiums into another fund(s), you might have to pay a charge.
- Top-up charge
Top-up premiums allow additional investment in the ULIP plan. However, you might have to pay an additional charge on the top-up premium before it is invested in the selected fund(s).
- Miscellaneous charge
Lastly, miscellaneous charges are levied by insurers for any alteration in the policy or for any other service requests that you make.
Things to Know About ULIP Charges
Here are a few things to know about ULIP charges:
- The charge structure of every ULIP is different
- ULIP charges directly affect the return potential of your investments
- Many insurers have introduced ULIPs that refund specific charges on maturity. The charges that are usually refunded include the premium allocation charge, mortality charge and policy administration charges
- Some online ULIPs also offer nil allocation charges
The Bottom Line
Read the fine print of your ULIP policy to know the charges involved. Look for plans that either have a low charge structure or refund the charges on maturity; this would ensure that your investment is maximised for better returns. Moreover, you can use the ULIP calculator to determine the expected returns.