Everything comes with a price attached; the same goes for financial products. When you invest in a fund or buy insurance, there are certain charges that you have to pay. These charges cater to the expenses incurred by the company for managing your financial instrument and catering to its goal. Unit Linked Insurance Plan (ULIP) is one such insurance that offers life insurance and investment opportunities in one plan.
ULIP is a type of life insurance at its core, which also offers an investment opportunity on the side. When you buy a ULIP, the premiums you pay are divided between two goals, providing you with a life cover and offering returns on investments. When there are two elements involved, there are several charges that are involved in the product.
Here are the 9 charges associated with ULIP and how they affect your purchase:
Premium allocation charges
When the distributors sell a ULIP plan, the fee that is charged for making the sale is known as premium allocation charges. As the tenure of your policy increases, these charges reduce overtime. They can be anywhere from 0% to 9%, depending on your insurance provider. This is one of those ULIP charges that most insurance companies have eliminated completely for their online buyers.
Fund management charges
For managing the investment component, the insurance company charges a certain fee. Since there are professional fund managers who manage your investment. The Net Asset Value (NAV) of your fund comprises this charge. The reason behind these changes is the work that the fund managers put in to meet your investment goals. You can use a ULIP calculator to invest and get the returns that you want. These charges have been minimized and do not exceed 1.35% of your fund value.
Fund switching charges
When an investor buys a ULIP, they choose the funds they want to invest in. However, a policyholder can switch their fund allocation anytime they want. You can switch your allocation from debt to equity or vice versa. This seamless switching enables you to meet your investment goals with ease. Most insurance companies allow free switching between the fund two to three times during the policy duration. However, after that, most have found switching charges that the policyholder is required to pay.
Policy administration charges
An insurance company does operational and administrative work when you buy a ULIP. To complete the paperwork, communication, and distribution, there are several charges that are incurred. These charges eventually add up. However, when a policyholder buys a ULIP online, most of these ULIP charges may be erased completely.
Mortality charges
ULIP is a type of life insurance. The costs incurred to provide life cover to the policyholder are known as mortality charges. Over the years, insurance companies have lowered these charges, while some have even eliminated them.
Rider charges
For the life insurance aspect of your ULIP, you can also take add-on covers as riders. There are several types of rider charges to choose from, based on your needs. You get add-on benefits, which come with add-on premium charges to pay. You can use a ULIP calculator to find the add-on premiums you need to pay for the additional riders.
Surrender charges
ULIPs have a lock-in period of 5 years. If you surrender it before that, then there is a charge that you have to pay. Surrendering the policy after the lock-in period has ended does not incur any charges. If you surrender before the lock-in, the insurance company will ask you to pay the surrender charges as per your policy.
Premium redirection charges
In the duration of your ULIP, your risk appetite and financial goals may evolve over the long haul. This may lead to you changing the allocation of your premium. Some insurance companies levy premium redirection charges if the policyholder moves their allocation to less risked fund options. The existing structure of the ULIP remains the same even though the internal allocation has changed.
Guarantee charges
Guaranteed returns come at a guaranteed price. Guaranteed charges are ULIP charges a policyholder is required to pay, usually on high-NAV ULIPs. If the insurance company is offering the policyholder a guaranteed return, they charge for meeting their expectations.
