Different types of Unit Linked Insurance Plan (ULIP) charges

Unit Linked Insurance Plan, better known by its acronym ULIP is one of the most popular types of life insurance policies in India. Many people prefer buying ULIP over other traditional plans mainly because it offers the dual benefits of insurance and investment. It allows you to secure your family against future uncertainties and lets you build wealth for your future goals.When you pay the premium for ULIP, the insurance companies use a part of the premium for providing life protection and use the remaining amount to invest in different money-market instruments. ULIPs are also known to be a highly tax-efficient investment product since it offers you tax benefits on premium, maturity proceeds and withdrawals.While ULIP is a simple financial product and is known to deliver valuable returns in the long run, it attracts multiple charges. Sometimes, understanding the charges’ structure can be difficult, especially if you are a first-time investor or an insurance buyer. As a smart investor, while buying a ULIP plan, you must know about the various charges applicable.

ULIPs have a complicated charges structure, and the associated charges tend to vary from one insurance to the other. Also, the extent of the charges varies among insurers and from plan to plan. Some of the most common ULIP charges are discussed below.

• Policy administration charges When you buy a ULIP, the insurance company may require you to pay specific fees for policy administrations. It is usually charged every month by cancelling the fund units you choose.
• Fund management charges Since ULIP is an investment-cum-insurance product, it gives you the flexibility to invest different funds of your choice, such as growth funds, balanced funds, income funds, etc. And since the professional fund managers manage your investments, the insurance companies levy charges for it.FMC (fund management charges) are levied daily, and it is adjusted from the NAV (net asset value) of the funds. The IRDAI (Insurance Regulatory and Development Authority of India) has capped the fund management charges for ULPs at 1.35% in a financial year.The insurance companies charge FMC as a percentage of the fund value, and it is deducted before arriving at the NAV.
• Premium allocation charges Insurance companies charge the premium allocation fee upfront on every premium you pay. The extent of the premium allocation charges vary based on the premium amount, and it could be different for different policyholders.The premium allocation charges for ULIPs are much lower compared to the traditional life insurance plans . In fact, some of the insurance companies are not charging premium allocation charges for online policy buyers.
• Fund switch charges ULPs allows you to switch your investments in different funds based on your changing goals and risk-taking capacity. You are allowed a specific number of free switches every year. But, if you exceed the number of free switches, then you must pay fund switch charges.
• Premium redirection fees When you purchase ULIP, you get the flexibility to invest in different fund options to suit your specific needs and goals.Let us assume you choose to invest in a specific fund initially. A part of the premiums you pay will be allocated to that fund. However, in ULIPs, you also have the flexibility to redirect your premium to a different fund. If you want to redirect the premium to a different fund, you must pay premium redirection fees.Many Insurance companies allow a specific number of free premium redirections in a year. Make sure that you know the term and conditions for redirection before you make the switch.
• Partial withdrawal charges Since ULIP is a long-term investment product, it comes with a lock-in period of five years. This means you cannot withdraw the funds during the lock-in period. However, after five years, you can make a partial withdrawal by paying the withdrawal fees. The extent of fees levied is usually a specific percentage of the amount you withdraw.
• Policy discontinuation or surrender charges Suppose you are not able to pay the premium for your ULIP plan and want to discontinue the policy within five years, i.e., the lock-in period. In that case, you must pay the surrender or discontinuation fees.The charges levied may vary depending on when you surrender the policy and the premium amount you pay. The IRDAI has mandated all the insurance companies in India to limit the surrender to a maximum of Rs. 6000. However, if you discontinue the policy after the lock-in period, you need not pay any charges.
• Add-ons or Riders Charges Riders or add-ons are additional protection that you can voluntarily purchase to extend the scope of your regular ULIP’s coverage scope. When you buy a rider, you must pay an additional premium, which is also commonly referred to as rider charges.Most insurance companies offer a variety of riders with ULIPs. Some of the common riders that people purchase along with the ULIP plan are accidental disability riders, critical illness riders, etc.
• Mortality fees When you buy any insurance plan, the insurance company assess the life risk based on the information you provide in the application form like medical history, age, gender, occupation, etc.The insurance companies charge the mortality fees on the insurance component of the ULIP, and it is levied every month by deducting units proportionately from each of the funds you choose.
• Guarantees charges ULIPs that have a high Net Asset Value or NAV guarantee variety are subject to guarantee charges. As an investor, you must incur these charges to get guaranteed returns.
• Miscellaneous charges The insurance companies levy miscellaneous charges on ULIPs, especially for specific services they provide, like altering the contract to increase the sum assured, changing the policy tenure, changes in the premium payment mode, issuing duplicate copies of policy documents, etc.

While ULIP is an excellent investment avenue to build a sizeable corpus for the future while enjoying tax benefits, it is primarily a life insurance product. So, you must do your research well, compare the different ULIP plans from different insurance companies, and select the best one to suit your requirements and budget. Pay close attention to the coverage, benefits offered, and the charges levied before making the final purchase decision.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.