Investing for your life goals is the key to turn those goals and aspirations into reality. As a responsible investor, it is important to set aside a portion of your income every month for your goal-based investments. Unit Linked Insurance Plans (ULIPs) have emerged as one of the preferred mode of investing for your life goals as it serves the dual purpose of earning good returns through marked-linked funds and at the same time ensuring protection to your family. Like other financial products, ULIP have charges associated with it too. But the good thing is these ULIP charges have reduced over the years because the Insurance Regulatory and Development Authority of India (IRDAI) has capped these charges.
In this article, let's discuss about the different ULIP charges :
1. Premium Allocation Charge
Premium Allocation Charge is an upfront charge deducted from the policyholder's premium. It is levied as a percentage of premium. These charges account for the initial expenses incurred by the company in issuing the policy, e.g., cost of underwriting, medicals and expenses related to distributor fees. After deduction of these charges, the remaining premium gets invested in the funds chosen by the policyholder.
2. Mortality Charge
Apart from investing in market-linked funds, ULIPs primarily provide life cover. That means the insurance company provides financial compensation to the insured's family in case of a sudden death. For providing this life cover, the insurance company levies a mortality charge. The amount payable as mortality charge can vary based on different factors like age, health and coverage amount sought under the life insurance plan.
Today, there are a few new-age ULIPs that return back the mortality charges deducted over the years, to the customer at the time of maturity. This not only makes the new-age ULIPs cost effective, but also enhances the value of the policyholder's corpus on maturity, making it more customer-friendly
3. Fund Management Charge
When policyholders invest their money in market-linked funds through a ULIP, a fund management expert manages their money so that they can earn better returns. For this service, insurance companies levy a fund management charge. As per IRDAI, the insurer can levy a maximum charge of 1.35% of the fund value per annum. Usually the fund management charge for a bond or liquid fund is on the lower side
4. Policy Administration Charges
These charges are deducted on a monthly basis to recover the expenses of maintaining the policy including record keeping, paper work, services, etc. The policy administration charge is deducted through redemption of units at the prevailing unit price, from the policyholders unit account.
5. Surrender Charge
ULIPs have a mandatory lock-in period of 5 years which allows policyholders to reap its long-term investment benefits. But in case a policyholder chooses to discontinue paying premiums before the lock-in period ends, there will be a policy discontinuance charge or a surrender charge levied. The surrender charges varies, depending on the year in which the policyholder has surrendered the policy. As per IRDAI rules, for regular premium policies, the maximum discontinuance charge for the first year is ` 6,000. This is followed by ` 5,000, ` 4,000 and ` 2,000, during the 2nd, 3rd and 4th year respectively. However, if the policyholder decides to surrender the policy after it has completed 5 years, there are no surrender charges provided the policyholder has paid at least 5 annual premiums.
It is best to have knowledge of the ULIP charges associated with this investment, in order to maximise the benefits from your ULIP policy. It will give you a better understanding of how your funds are being invested and help you make sound and informed investment decisions.