Unit Linked Insurance Plans, or ULIPs, as they are commonly known, are financial tools that offer the dual benefit of investment as well as insurance in a single package. The insurance premium that you pay on your ULIP plan is divided into two parts. The first part of the premium goes into your insurance cover while the second part gets invested in the market. The investments in ULIP plans are market-linked and hence the returns also depend on the existing market conditions. However, a major advantage offered by ULIP over other investment options is the flexibility in investment. Depending on your risk appetite, you can shuffle your investment between debt, equity or balanced funds. This flexibility offers an advantage to make sound investment decisions in case of any market fluctuations and save on your ULIPs returns.
When you buy a ULIP plan, you might have to pay certain fees and charges to activate your insurance + investment policy. These charges may vary from one insurance provider to another. The common charges that you have to look out for include-
Premium allocation charges are a percentage of the premium amount paid during the first year of a ULIP plan. Since a part of your ULIP investment goes into a life cover, these percentage deductions help cover the initial expenses incurred by the ULIP provider to allocate the policy. Premium allocation charges cover expenses for underwriting, insurance agent’s commission, medical checkup costs, etc. Different medical providers might have a different percentage as their premium allocation charges. The remaining premium amount after the deductions is then utilized to make your investments. For instance, suppose your total premium is Rs. 60,000 and the insurance provider charges a premium allocation charge of 20%. Then, Rs. 12,000 will be deducted from the premium while the remaining Rs. 48,000 will get invested in market funds.
Fund Management Charges are levied for managing your investment funds and are a percentage of their asset values. The IRDA (Insurance Regulatory and Development Authority) has put a cap on the percentage for a fund management value. Insurance providers cannot charge more than 1.35% of the fund value per annum. Fund Management charges are deducted before computing the net asset value of the fund.
Every ULIP policy assures a fixed sum to the policyholder’s nominee in the case of his/her demise during the policy term. Mortality charges cover the cost of this death coverage for the insurer. Depending on the policyholder’s health, age and gender, the mortality charges are determined. These charges are deducted every month from each of the fund(s) the policyholder has selected to invest.
These ULIP charges are directed to manage the administrative expenses for maintaining the ULIP policy. These charges cover expenses for paperwork, sending monthly/quarterly/annual updates, premium intimation, etc. Depending on the company policies of your insurance providers, these charges may remain steady or vary during the ULIP policy tenure.
Some ULIP providers offer a facility to make partial withdrawals, even during the lock-in period of a ULIP’s term. However, some charges are deducted from the amount as a form of penalty for partial withdrawals. These deductions are the partial withdrawal charges.
As mentioned before, ULIPs allow flexibility to switch between equity, debt and balanced funds, depending on your risk appetite. However, every switching that you make attracts a charge between Rs. 100-500, depending on the policies of your insurance provider.
In case a policyholder wishes to redirect his/her future premiums towards a less risky fund option, he/she will have to pay some premium redirection charges according to the policies stated by the insurance provider. For instance, suppose you have been directing your money towards fund X, but want your future investment to go into fund Y. You can easily redirect your future premiums into fund Y, without affecting your existing investments in fund X by paying these charges.
In case of any urgent financial situation, a policyholder may decide to opt for premature encashment of the units, either through partial or complete policy surrender. These charges are calculated as a percentage of the funds or the annual premium amount. As per the IRDA, the surrender charges cannot exceed fifty basis point of the fund value, per annum.
Rider charges are levied when a policyholder decides to take any extra benefits or enjoy added features that are not included in his/her original ULIP plan.
Before, directing your investment into different market funds, certain service taxes are deducted from your premium amount. It is only after making service tax and other applicable charge deductions does the investment part of your premium gets directed to the funds.
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