Lately, many young investors are opting to buy the unit linked insurance plans due to its dual benefits. However, there are also considerable number of people who have no idea about what is ULIP policy. Well, Unit Linked Insurance Plans are primarily an insurance product with an investment option. Hence, it is known to offer dual benefits – insurance and investment – under a single plan.
A part of the premiums paid towards the policy is used for life insurance coverage; whereas the remaining amount is used for investing in funds of your choice. The insurer has certain charges associated with ULIP investments. In this article, we are discussing the eight different types of ULIP charges that you should know.
- Premium Allocation Charges
There is a fixed percentage of premium allocation charges (PAC) that are deducted from your ULIP investments. During the initial phases of the policy, these charges are relatively high. However, it reduces gradually over the years. The PAC includes initial and renewal expenses and the commission expenses of the intermediary. The percentage of PAC deducted from your premiums will vary depending on the type of premium payment you have chosen, premium amount, premium frequency, and payment mode.
- Mortality Charges
The mortality charges are imposed by the insurer for offering the death benefits to the beneficiaries of the policy in case of your death. The amount to be deducted is calculated based on your age, health risk, and mortality table used by the insurer.
- Fund Management Charges
As the name suggests, the fund management charges are levied for managing your funds in the ULIP investment. The insurer will deduct a percentage of the fund’s value, and the deduction is calculated based on the net asset value (NAV) of the fund. As per the Insurance Regulatory and Development Authority of India (IRDAI), this amount should not be more than 1.5 per cent.
- Policy Administration Charges
The insurer charges a fee every month to administrate your ULIP investment. It is known as policy administration charges. These charges are either constant throughout the policy tenure or vary at a predefined rate (depending on your insurer).
- Partial Withdrawal Charges
After you complete the lock-in period, you are allowed to make partial withdrawals from your ULIP investments as and when needed. However, know that making these withdrawals will attract certain charges, which are known as partial withdrawal charges.
- Fund Switching Charges
In case you are not satisfied with the performance of your investment portfolio, you can switch between the funds for a better return. Some insurers offer a fixed number of free switches every year. After the free switches are exhausted, a certain amount is charged for every switch you make.
- Premium Redirection Charges
The premium redirection charges are applied when you redirect the future premiums to other less risky fund options without changing the existing fund structure.
- Surrender Charges
If you want to discontinue paying for the ULIP investment before the lock-in period is over, you will have to pay surrender charges. However, know that you will receive the final payout only after the lock-in period is complete and not before that.
Even though ULIP investments have certain charges applicable to them, in the long run, the policy provides reasonable returns. Hence, it is advisable to invest in long-term ULIPs. Apart from consistent ULIP returns, the policy offers tax benefits under Section 80C and Section 10(10D) of the Income Tax Act, 1961. The policy is ideal for all kinds of investors. It is a great way to build your wealth gradually over time.