Everything you need to know about ULIP charges

The main reason why people choose investment is to grow their wealth for a better future, which means that it is meant to be used to accomplish different goals, to secure the future of their loved ones and to become financially independent. However, simple investments cannot provide you with complete financial security for your loved ones. If you want a financial instrument that allows you to invest and lets your family get financial protection, you should invest in a ULIP.

While ULIPs have been gaining a lot of popularity among new investors, not many are aware of the different charges applied on it. If you are looking to invest in ULIPs to gain wealth and fulfil life goals, read on to know more about the charges involved in them.

What is a ULIP?

A unit linked insurance plan is a type of life insurance policy. In this plan, you get to enjoy the dual benefits of investment and insurance under the same policy. The money used for these two purposes comes from the premium you pay for the plan. Based on your requirement, you can decide how much money is used for investment and insurance. You get to invest in equity and debt funds. Each fund carries a different risk factor and offers variating returns. So, investing is based as per your risk appetite and life goals.

What are the charges related to ULIPs?

Like every other financial instrument, there are different types of charges that are applied on ULIPs as well. Listed below are some of them.

  1. Premium allocation charge

The charges related to underwriting costs, medical costs, commission fees, and other such costs is known as premium allocation charge. The insurer levies this charge on the policyholder before the policy is allocated to them. This charge is levied on the first premium payment. After this, the charge is deducted from the fund based on the investment made by the policyholder.

  1. Fund management charge

People who invest in ULIPs have the option of investing in equity funds and debt funds. Each fund carries a different risk factor. As equity funds have a huge risk factor when compared to debt funds, due to the market fluctuation, not every policyholder will feel comfortable handling the funds by themselves. In such a situation, the insurer provides them the opportunity to avail the services of a fund manager. The fund manager will overlook the customer’s investment and make decisions which could help in maximising the returns for them. The fund management charge is applied for availing this service. Your insurer can charge you a maximum of 1.35% of fund value every year as per the IRDAI mandate. 

  1. Switching charge

As an investor of ULIPs, you can switch from one fund to another. For example, if you have major investment in equity funds but want to switch to debt funds due to market volatility, you can do so in ULIPs. An investor can do free switches up to a certain limit pre-defined by the insurer. However, if the customer wants to do switching of funds beyond that limit, the insurer will charge them a certain amount for that switch. The switching charge varies from insurer to insurer.

  1. Administration charge

Among the many charges of ULIPs, your insurer charges you what is known as policy administration charge. This charge usually involves paperwork and other miscellaneous services provided by your insurer. Your insurer deducts this charge by redeeming units from your funds. 

  1. Surrender charge

If you were to surrender your plan before the end of the term, your insurer will charge you a surrender fee. ULIPs come with a lock-in period of 5 years. If you were to surrender your plan during this period, the surrender charge would be deducted from your fund value. However, you will not get access to your funds until the end of the period. Similarly, if you surrender your plan after the lock-in period, the charge would be deducted from your fund value and your ULIP plans returns  would be adjusted accordingly.

  1. Mortality charge

ULIPs provide insurance cover to the family of the policyholder from different life risks. If the policyholder were to pass away suddenly during the term of the plan; the insurer would pay death benefits to the family. They charge a fee for this pay out (known as mortality charge). This amount is deducted from the premium and is eventually added back to the maturity benefit.

These are the charges that are related to ULIPs. If you are planning on investing in one, you can use the ULIP calculator to see what kind of plan would suit you.