ULIP Essentials – 8 Charges You Must Know About- A Comprehensive Guide 2023

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ULIP Essentials

If you want to invest in a ULIP, putting a little time and effort into the process beforehand is always advisable. Unit-linked insurance plans, or ULIPs, are popular options since they combine investments with insurance, ensuring life coverage and the chance to build wealth through returns from market-linked instruments.

You can choose the fund types for investments, namely debt funds, balanced funds, equity funds, and hybrid funds. You can select the investment amount and tenure as well. However, the policy will have a 5-year lock-in period, during which you cannot access your deposits. Nevertheless, ULIPs may eventually help you earn inflation-beating returns if you stay invested for the long haul. You should also watch out for the fund-switching feature.

With this provision, you can switch funds depending on the market conditions to increase your returns or lower market risks for your portfolio. In addition, there are attractive ULIP tax benefits under Section 80C (up to Rs. 1.5 lahks on premium payments) that you should also consider. Yet, while analyzing these aspects, remember that ULIPs come with additional charges for customers. Here is a guide to all these charges payable to the insurance company, and they may influence your net returns.

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Key ULIP Charges for Policyholders

Here are some of the charges for ULIPs that every investor should know more about:

  1. Premium Allocation Charge- The PAC (Premium Allocation Charge) is a predetermined amount. The renewal and original charges with the compensation expenses of the intermediary come under this head. It is a percentage of the premium and is usually higher in the first few years of the policy tenure.
  2. Fund Management Charge- It is the cost of managing multiple ULIP funds. It is the fee for the professional management of your investments, and the insurer deducts it from the NAV. The maximum amount is usually 1.35% per year as per IRDAI regulations. The charges for debt-based funds are mostly lower than for equity-oriented funds.
  3. Discontinuance Charge- A fee may be chargeable on partial or total encashment of fund units. A portion of the annual premium or corpus mostly goes into the computation fee. IRDAI regulations put a cap on the maximum surrender fee. There will be no additional costs upon surrendering the policy after paying the discontinuation charge. It can be 50 basis points per year on the insured amount.
  4. Fund Switching Charge- Switching refers to shifting investments or money across various options. A limited number of switches are usually allowed each year without any charges. Other fund switches may require charges of Rs. 100-250 each.
  5. Partial Withdrawal Charge- Some ULIPs enable unlimited partial withdrawals while some restrict them to 2-4 annually. These may be free till a certain point before they become chargeable at Rs. 100 each as per the ULIP regulations.
  6. Administration Charge- This is called the administration cost and is a monthly fee that may/may not have a connection to the regular activities and paperwork of the insurance company. They apply via the cancellation of a proportionate number of investor units from every fund.
  7. Premium Discontinuation Cost- Investors may stop paying premiums before the conclusion of the 5-year lock-in period. When premium payments stop, the funds will go to the discontinuance fund. A fee may be charged accordingly as a percentage of the fund value or premium.
  8. Mortality Charge- These charges apply to ULIP investments for the payment of insurance coverage and other expenses in case of the policyholder’s demise. It is worked out based on the amount at risk, equal to the sum assured, deducted from the fund value. It is the amount to be paid by the insurance company from its coffers in case of the insured’s demise. The fee should keep reducing in an ideal scenario due to the increase in the fund value throughout the policy tenure. Mortality costs depend on aspects like health conditions, gender, and age. The mortality costs are lower for younger policyholders as compared to older customers. The calculation formula is the following- Mortality Charge = (Mortality rate (for the age attained) * sum at risk/1000) * 1/12.

These are some of the applicable charges for ULIPs that you should know more about before investing. Keep all these charges in mind before going ahead. Staying informed is always the best way forward since these charges will impact your returns.

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