ULIP or unit-linked insurance plan is an excellent investment instrument available in the market that gives you the dual benefit of investment and insurance. A specific portion of the premium you pay is allocated to provide insurance protection. The remaining amount is invested in different assets, including debt, equity, hybrid mutual funds, government bonds, stocks, etc., based on your risk appetite and financial goals.
ULIPs are also highly tax-efficient financial products as they offer various tax benefits. If you are a first-time insurance buyer or an amateur investor, you must be aware that ULIP has a complex structure, and different charges are associated with it.
While the charges’ structure associated with a ULIP plan may vary from insurer to insurer, you must know about the following charges:
Fund management charges
Although ULIP is primarily an insurance product, it also has an investment component and allows you to invest in different funds of your choice. The insurance companies levy fund management charges since professional fund managers manage the investments.
As per IRDAI (Insurance Regulatory and Development Authority of India), the fund management charges cannot be more than 1.35% of the fund value in a financial year. Generally, the insurance companies deduct the FMC (fund management charges) before arriving at the fund’s net asset value.
Policy administration charges
When you buy ULIP, you must pay a certain amount of fees for policy administration. These fees are charged every month by cancelling the units of funds from your portfolio.
Premium allocation charges
The insurance companies levy this type of fees upfront as a percentage of the premium amount. Unlike traditional ULIPs, the new-age ULIPs do not charge high premium allocation fees. Some of the online ULIPs do not levy any premium allocation fee at all.
As the name suggests, the insurance companies levy this type of fee when you surrender the policy during the lock-in period, i.e., before five years of buying the policy. The charges you pay may vary depending on when you surrender and the premium amount you pay for the policy. However, as per the IRDAI mandate, the maximum charge an insurance company can levy is ₹6,000. You need not pay any surrender charges if you surrender the policy after the lock-in period.
Fund switching charges
All insurance companies allow you a limited number of free fund switches in a year. With this option, you can move your investments from one fund to another to maximise your returns potential. However, if the number of switches exceed free switches, you must pay the fund switching charges.
Partial withdrawal charges
ULIPs have a lock-in period of five years. Although ULIPs are a long-term investment product, they allow you to partially withdraw the funds from your savings after five years. Generally, insurance companies do not charge any fee for such withdrawals, but you must pay the partial withdrawal charges if you withdraw the amount before the lock-in period.
Insurance companies charge mortality charges on the insurance component of the ULIP. These charges are levied every month by deducting the units proportionately from each of the funds you have chosen.
ULIPs offer several additional coverage options known as riders or add-ons. You can purchase these riders to get coverage against specific risks that are not covered under your standard policy. However, you may have to pay an additional amount known as rider charges when you opt for these riders.
Now that you know about the different ULIP-related charges, do your due diligence and make an informed buying decision.