All ULIP charges explained

Among the popular investment instruments that people are opting for these days is a ULIP. A unit linked insurance policy is a life insurance policy that provides the policyholder the benefit of investing in different funds, along with the added benefit of a life cover. A ULIP policy helps you in achieving your life goals based on the investments you make and the gains that you get on those investments. If you are planning on buying this policy, you should know about the different charges of this policy to get a better idea about what you are paying for. Read on to know more about them.

What are the different ULIP charges?

When you opt to purchase a ULIP policy, there are a host of charges that will applied on your policy. The charges include:

1. Fund management charge

In a ULIP, you have the option of investing in equity funds. Equity fund invests in stocks of market-listed companies. As equity funds have a huge risk factor due to the market fluctuation, not every policyholder will feel comfortable handling the funds by themselves. In such a situation, they are provided the services of a fund manager by their insurer. The fund manager will overlook the customer’s investment and make decisions which could help in maximising the returns for them. Now, the fund management charge is applied for availing this service. Your insurer can charge you a maximum of 1.35% of fund value every year, as per the IRDAI mandate. 

2. Mortality charge

As you are aware, you get the benefit of investment and life cover in a ULIP. The life cover protects your loved ones from different risks of life. This is especially beneficial in the event of your untimely demise. The amount they receive would help them to be financially stable for a certain period of time. This pay-out is known as a mortality benefit. Your insurer charges a mortality charge on this pay-out. Factors that decide the amount charged include age and coverage of the policy. Many companies return the amount of mortality charges at the time of maturity. 

3. Premium allocation charge

One of the ULIP charges is the premium allocation charge. This charge is levied on the policyholder before the policy is allocated to them. The charge covers underwriting costs, medical costs, commission fees, etc. This charge is initially incurred by the insurer when the policy is issued. This charge is levied on the first premium payment; the remaining amount is then invested in the fund selected by the policyholder. 

4. Switching charge

When you invest in a ULIP, you have the option of switching from one to another. For example, if you have major investment in equity funds but, want to switch to debt funds due to market volatility, you can do so in a ULIP. Insurers allow free switching to their customers, up to a certain limit pre-defined by them. However, if the customer wants to switch funds beyond that limit, the insurer will charge them a certain amount for that switch. The switching charge varies from insurer to insurer.

5. Administration charge

Each month, your insurer charges you a policy administration charge. Under this charge, expenses such as the paperwork related to your policy, various services provided, and managing records related to your policy, are covered. Your insurer deducts this charge by redeeming units from your funds. 

6. Surrender charge

When you invest in a ULIP, your policy comes with a lock-in period of 5 years. While most policyholders do not surrender their policy before the end of the lock-in period, there are instances where a policyholder might surrender their policy before the end of the lock-in period for various reasons. If you surrender your policy before the end of lock-in period, your insurer will charge you surrender fees. As per the IRDAI, the first-year charge is Rs.6000.  For the 2^nd year, its Rs.5000. It goes up till Rs.2000 for the 4^th year. However, if you surrender your policy after the end of the lock-in period, no charge will be applied, given that you have paid your annual premium for 5 years. 

When you are planning to buy a ULIP, do remember to keep these charges in mind. You can ask your insurance advisor about other charges that could be applied on your policy. You can also check these charges online on your preferred insurer’s website, where you can also use the ULIP plan calculator to get a better idea about your policy based on your requirements.