What Are the Charges Associated with ULIPs?

Nowadays, many individuals seek more than the traditional life cover when they are looking to add a life insurance policy to their portfolio. While some may be satisfied with a savings scheme attached to the policy, others look for a market-linked investment component. A ULIP or a Unit-Linked Insurance Plan is one such product that offers the policyholder a chance to invest in the financial instruments of their choice. The policyholder enjoys life coverage as well as returns from their fund performance.

Because ULIP plans work differently than other products and offer various benefits, they tend to incur higher charges. Before you invest in a ULIP, you must have a thorough understanding of these charges. We provide a list of the same for your benefit.

How do ULIPs work?

The ULIP manager divides your premium in two. One portion of the premium is used to build the life cover and the other for investment purposes. The investment amount is pooled with the money from other ULIP policyholders. The lump-sum money is then invested into the instruments of your choice. One can select from low-risk, low-reward debt funds; high-risk, high-reward equity funds; or a combination of both via hybrid funds. As per your contribution to the pooled amount, you are allotted a number of units. The returns accumulate over a period of time and are also shared as per the number of units you own.

You can use a ULIP return calculator to get an approximate idea of how much return you can expect with different kinds of instruments.

Important ULIP charges

  • Mortality charges

The portion of the premium that goes into creating the life cover is referred to as the mortality charge. In a non-linked life insurance policy, this charge is what constitutes the majority of the premium amount. However, in a ULIP, the mortality charge is a comparatively smaller chunk of the premium.

  • Fund management charges

This charge is levied to compensate for managing the investment aspect of the plan and for making the right decisions to drive your funds in the proper direction. While the mortality charge is deducted from the premium, this one is subtracted from the returns generated before the NAV is calculated. Insurance companies cannot levy this charge beyond 1.5% of the fund value as per current IRDAI norms.

One must note that the ULIP return calculator does not take these charges into consideration when estimating the returns.

  • Premium allocation charge

The premium allocation charge is deducted by the insurer in the initial years of the policy to compensate for expenses, such as underwriting fees and agent’s commission charges. The insurer directs the money for investment only after the premium allocation charge is deducted from the premium.

Note: Do not get overwhelmed due to these charges. Along with the dual benefit of insurance and investment, there are a considerable number of ULIP tax benefits.

  • Premium redirection charges

ULIPs permit you to redirect your premiums in the future to meet your changing risk appetites and investment needs. When you are a bachelor, equity funds may be a preferable option as you can bear risk at that age. When you get married, you may want to shift your money to debt funds for a more stable portfolio. You can choose to redirect your premiums accordingly without making major changes in your fund structure; for the same, you will incur the premium redirection charges.

  • Policy administration charges

This charge is levied at a pre-decided rate by the insurer to compensate for the costs of managing the policy. The insurer takes the policy administration charge by cancelling the number of units equivalent to the charge mentioned in the policy contract.

  • Surrender charges

If you plan to cancel your ULIP before the end of the lock-in period, you may have to incur the surrender charges. ULIPs have a lock-in period of five years. If you surrender the policy post the end of this period, you may be spared these charges. The charge depends on the fund value and the premium paid by the policyholder.

Also, note that you may lose and may have to return the ULIP tax benefits that you may have attained till then if you surrender the policy during the lock-in period. ULIP tax benefits are only applicable to individuals who have opted for the old tax regime.

ULIP charges differ from insurer to insurer and plan to plan. It is best to reach out to your insurer and get a list of the charges that you may have to pay during the course of your policy.