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Charges You Must Know Before Investing in ULIPs

A Unit-Linked Insurance Plan is an excellent wealth creation avenue that offers the dual benefits of life insurance and investment. When compared to any other investment instrument, ULIP returns are significantly higher. If you are planning to invest in ULIPs, it is advisable to use the ULIP plan calculator to compare the estimated returns of different policies on maturity.

Once you are sure about investing in a suitable ULIP, learn about the different costs associated with this instrument.

Types of charges involved in a ULIP

The various ULIP charges include:

1. Premium allocation charge (PAC)

The insurance company levies a PAC before allocating units to you. This charge is a fixed percentage of the total premium that you will pay the insurer towards your policy. Such charge covers the initial underwriting process and agent’s commission. For instance, if your insurer levies a PAC of 15%, and your premium is INR 1 lakh, the insurer will deduct INR 15,000 and utilize INR 85,000 for life insurance coverage and investments. 

2. Fund management charges

The insurer levies this charge to manage the ULIP fund. The cost is calculated as a percentage of the fund value. This expense varies among insurers. The Insurance Regulatory and Development Authority of India (IRDAI) has set a maximum limit of 1.35% for fund management charges. The insurer imposes this charge before calculating the fund’s Net Asset Value (NAV).

3. Mortality charges

All insurance companies levy mortality charges, and it is practically easy to understand why. An insurance company is liable to pay the sum assured to the nominee in case the policyholder passes away. Usually, the insurer deducts the mortality expenses from the policy’s fund value. This charge is levied to cover the risk of providing life insurance. For instance, if you purchase a ULIP, which has a sum assured of INR 5 lakh at an annual premium of INR 50,000, the insurer has to pay a death benefit, which is the higher amount of the sum assured or fund value. Therefore, in case of any unfortunate incident during the fourth year of the policy, the fund value should have grown to approximately INR 2.5 lakh. Now, the insurer has to pay the death benefit, in the form of an amount, which is higher between INR 5 lakh and INR 2.5 lakh. In this case, the nominee will receive INR 5 lakh. Therefore, to cover the risk associated with life insurance, the insurer levies mortality charges.  

4. Administration charges 

The insurance company levies this charge to cover the maintenance and administration expenses of your policy. The insurer deducts the administration costs by cancelling units proportionately from your ULIP fund. 

5. Fund switching charges

Investing in ULIP comes with the advantage of fund switching. ULIP allows you to switch from one plan to another. It helps to avert the losses that can arise due to the volatility of the market. With the fund-switching facility, you can meet your long-term financial goals by maximizing ULIP returns. Insurers have set a maximum limit of free switches from one fund to another. Fund switching charges are applicable if you exceed the number of preset limits. Such costs differ among insurers and usually range from INR 100 to INR 500 per switch. 

6. Discontinuation of premium charges

Such charges are applicable if you surrender the policy before maturity or stop paying the premium. The insurer shifts your investment to the discontinuation policy fund after the deduction of such charges. You will receive the fund value only after the completion of the lock-in period of five years. The IRDAI has laid down guidelines for discontinuation of premium charges. These charges cannot exceed more than INR 6,000 in the first year for a policy with a yearly premium of more than INR 25,000. 

Even though a ULIP plan has various charges, it is one of the best investment products available in the market. All you must do is search for the policy with the highest ULIP returns to meet your financial objectives in the long term. Use a ULIP calculator to compare the expected returns across various plans and invest wisely.

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