All ULIP charges explained

A Unit Linked Insurance Plan (ULIPs) is an investment option offered by insurance companies that provides the investors with both insurance and investment under a single plan. When you invest in ULIP, a portion of the premium paid is used to provide insurance coverage, whereas the remaining portion is invested in equity or debt funds according to your choice. You must do some prior market research in order to invest in top performing ULIP funds. While investing in ULIPs, you must make a note that ULIPs come with a lock-in-period of 5 years. Thus, if you choose to discontinue the policy during the lock-in-period, you won’t receive any liquidity or payout.

8 Must-know Charges on ULIPs

Charges associated with ULIPs

  • While investing in ULIP, you must also make a note of various charges such as premium allocation charges, fund management fees, mortality charges and surrender charges, etc. It may often take ample time to recover these charges and get a potential return on investment. Thus, if you happen to exit ULIP just after the end of the lock-in period, you may not be able to reap the real ULIP benefits. You might end up getting comparatively lower returns if you exit ULIP just after the end of its lock-in-period.
  • Since ULIP is a long-term investment game, you should stay invested for a long duration to obtain higher returns and other benefits. You must understand that in ULIP, your investment is purely related to market fluctuations. Therefore, if the market is underperforming, instead of withdrawing the ULIP, you should stick around for some time until the market bounces back. However, if you are facing a financial crunch and you are in need of funds, you can consider partial withdrawal to meet your financial requirements.

Let us have a detailed look at the various ULIP Charges

Premium Allocation Charge

Premium Allocation Charge is deducted as a percentage of the premium received. It is usually charged at a higher rate in the early years of a policy. The Premium Allocation Charges normally includes initial and renewal expenses as well as the commission of the intermediary.

Fund management charges

Fund Management Charges are levied as a percentage of the value of assets and is directed towards managing the fund. This charge is deducted before arriving at the net asset value, or NAV. Though the fund management charges may vary from one fund to another, according to the IRDA cap, insurance companies cannot charge fund management fees more than 1.35% per annum.

Mortality charges

Mortality charges is towards providing you the insurance cover. When a ULIP policy is issued, the insurance provider assumes that the insured will live to a certain age depending upon the current age, gender and health conditions of the insured. The mortality charge compensates the insurance company in case the insured person doesn’t live to the expected age. The mortality fee is generally charged once a month. The amount paid under the mortality charge is dependent upon the amount of life cover sought, the age of the policy holder and other such details.

Surrender charges

A surrender charge, also known as discontinuance charge may be deducted when the insurer surrenders ULIPs prematurely. IRDA has laid down certain guidelines on the maximum surrender charges that can be levied by the insurance providers. The surrender charge or the discontinuance charge is a percentage of the fund value or premium.

Switching charges

If you happen to invest in ULIPs, you get the flexibility of choosing funds as per your wish. Moreover, you would also be allowed a fixed number of free switches between different fund options every year. Once you exceed your limit of free switches, you may have to bear some charges for switching your funds, which could go up to Rs. 100-500 per switch.

Now that you are aware of various ULIP charges, ensure to make of note of these before investing in ULIPs. Also, when investing in ULIP, you can get an estimate of your investment returns by using an online ULIP return calculator. This can help you invest wisely depending upon your risk appetite and financial goals.