A Unit-Linked Insurance Plan, also known as a ULIP, is an investment option that provides two benefits - insurance and wealth creation. The premium that you invest in a ULIP goes towards providing you with an insurance cover and is also invested in either the equity market or the debt market.
If this investment option is something that you would be interested in, then it is crucial to know the fees and charges that insurance providers levy on them. This way, you would be in a much better position to make a purchase decision.
The insurance provider from whom you purchase the Unit-Linked Insurance Plan levies certain fees and charges in exchange for providing their services. And, depending on the insurance provider that you opt for, these charges can vary slightly, with some providers opting not to levy certain charges.
In a bid to prevent the charges in a ULIP plan eating into the returns, the Insurance Regulatory and Development Authority (IRDA) has imposed several limitations and restrictions, beyond which insurance providers are not permitted to charge.
There are as many as 8 different types of charges available in a ULIP. Depending on the plans that you choose, some might even levy more than that.
Here’s a quick look at 8 of the most standard charges that you might encounter.
Levied as a percentage of the premium, the premium allocation charges are only levied for the first year of a Unit-Linked Insurance Plan. This charge is levied by insurers to cover various costs like medical tests, underwriting expenses, commission charges, and more.
The premium allocation charges are front-loaded, which means that the insurer will reduce the charge from the first-year premium that you pay and will only invest the remaining amount in the funds of your choice.
One of the most common types of charges in a ULIP, the mortality charge is levied by insurance providers for providing the policyholder with the insurance coverage.
This charge tends to vary from one individual to another and is dependent on various factors such as the health score of the individual, their age, their gender, and the coverage that they opted for.
The mortality charges are levied each month and are deducted from the funds that you’ve chosen to invest in.
The market-linked funds that you choose to invest in through a ULIP are actively managed by a fund manager. The costs incurred by the insurance provider for managing these funds are recovered through the levy of the Fund Management Charge (FMC).
The FMC is levied each day and is factored into before arriving at the Net Asset Value (NAV) of the fund. According to the regulations laid out by IRDA, insurers are only allowed to charge a maximum of 1.35% of the value of the fund per annum as the FMC.
Another one of the charges of a ULIP plan that’s levied each month, the Policy Administration Charge can either be fixed or be a percentage of the total fund value. This charge is levied by the insurance provider to cover the costs of administration of the policy and includes paperwork expenses and costs incurred for sending premium intimations and regular updates to the policyholder.
One of the many benefits of a ULIP is that you can switch the funds that you wish to invest in at any point in time during the tenure. While some insurance providers don’t levy any fee for fund switching, others levy a certain fee beyond a number of free switches.
The fund switching charges are, however, very nominal and can range anywhere from Rs. 100 to Rs. 500.
Almost all Unit-Linked Insurance Plans offer you the ability to withdraw your investment fund partially, sometimes even during the lock-in period. However, if you choose to exercise this option, you will have to pay a nominal fee, known as the partial withdrawal charges, as penalty for doing so.
In fund switching, your entire investment amount is transferred from one fund to another. In premium redirection, however, your previous investments will continue to remain in the fund that you chose.
Your future premiums, on the other hand, will be redirected to a new fund of your choice. In exchange for providing you with this facility, insurance providers levy the premium redirection charge.
Also known as surrender charges, the premium discontinuance charge is again another penalty that the insurance provider levies for prematurely surrendering the plan before the end of the 5-year lock-in period.
If you choose to surrender your ULIP after the lock-in period ends, no such charges will be levied.
Not all insurance providers levy the same ULIP charges; some might charge less, while others may choose to charge more. Therefore, when shopping for a Unit-Linked Insurance Plan, you should always remember to take these 8 types of charges in a ULIP into consideration.
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Yes. All Unit-Linked Insurance Plans come with additional fees and charges. That said, you can also find a few of them that don’t levy one or two charges like premium allocation charges and fund switching charges.
FMC or Fund Management Charges are the fees that you’re required to pay to the fund manager of the ULIP for actively managing the fund that you’ve chosen to invest in. These charges are usually factored into the Net Asset Value (NAV) of the ULIP fund itself.
It depends on the type of ULIP that you opt for. Some of them don’t levy any fund switching charges, whereas others allow you to switch for free for a certain number of instances, beyond which you will be charged.
The mortality charges in a Unit-Linked Insurance Plan are dependent on the following factors - your age, your health score, and the coverage that you’ve opted for, among others.
Yes. PAC is one of the few charges in a ULIP policy that are front loaded. This means that the charge will be deducted from the premium that you pay and only the remaining premium will be invested in the funds of your choice.