Keep These Charges in Mind before Investing in a ULIP

If you are looking to reap the benefits of the stock market as well as receive insurance benefits, then a Unit-Linked Insurance Plan (ULIP) is an ideal investment option. Such policies invest in the stock market through a mix of growth, balanced, and equity schemes. Since these have an equity advantage, they have the potential to earn higher returns. ULIP plans also offer the benefit of life cover, thereby providing financial security to your loved ones in case an unfortunate event occurs.

A ULIP policy is one of the best instruments to build wealth over a long term. You may invest in the form of a Systematic Investment Plan (SIP) regularly or as an annual lump sum amount. Through the power of compounding, you may enjoy higher returns if invested for a longer tenure. The good news is that a ULIP plan offers tax deduction under the Income Tax Act, 1961. You may avail of tax benefit up to a maximum amount of INR 1.5 lakh under Section 80C and reduce your tax liability largely.

ULIP fees and charges

There are numerous aspects that need to be taken into consideration while investing in a ULIP insurance policy – main being the charges levied by the insurance company. More than often, insurers do not plainly communicate these fees to the policy buyers. Hence, you may be unaware of the key charges that tag along with ULIP plans. It is, however, imperative to be well informed about these costs.

Following are six general costs associated with a ULIP policy.

1. Premium allocation charge

Premium allocation charge is a fee levied towards the commission expenses of the intermediary/agent, cost of underwriting, and includes the initial and renewal expenses of the policy. It is deducted as a fixed percentage of the premium amount. For example, if your annual premium is INR 1 lakh, and the premium allocation charge is 10%, then INR 10,000 is deducted and the balanced INR 90,000 is invested into the desired fund options. It is important to note that this fee is generally higher in the initial years of the policy, and tapers off in the later years. Generally, insurers impose this fee for the first five-seven years, and thereafter there is no charge levied. Some companies do not levy any premium allocation charge at all and hence you may purchase your policy from such insurers.

2. Policy administration fee

Policy administration fee is levied towards the maintenance expenses of the UIP insurance plan. This includes the cost of paperwork, sending premium renewal reminders, and other administrative-related expenses. It is generally charged on a monthly basis as a flat fee throughout the policy period or the charge varies at a pre-determined rate. Some insurers may levy a flat policy administration fee during the beginning years and may increase it by a fixed percentage every consecutive year thereafter.

3. Partial withdrawal fee

ULIPs provide a great degree of flexibility to the policyholder, in the sense that you may partially withdraw an amount before the completion of the policy term. You may partially withdraw an amount from the third year onwards, subject to certain terms and conditions of the insurance provider. It is, however, important to note that partial withdrawal attracts a penalty. Some insurers allow free withdrawals up to a certain limit and thereafter may levy a fee.

4. Mortality charge

Mortality charge is a fee levied towards the cost of insurance coverage. This fee depends on numerous factors such as your age, gender, health conditions, and sum assured, besides others. Such a fee offsets the risk of the insurance company in case the policyholder does not live to the assumed age.

The good news is that certain insurance providers such as Bajaj Allianz Life provide the benefit of Return of Mortality Charge (ROMC). The company adds back the total amount of mortality charges levied throughout the policy term at the time of maturity. It will be added back to the ‘Regular Premium Fund Value’ and ‘Top-Pp Premium Fund Value,’ as applicable.

5. Surrender or discontinuance charge

There may be instances where you wish to discontinue your policy due to certain reasons. Though insurers allow you to do so, they charge a surrender fee. This fee is generally levied as a percentage of the fund or of the annual premium amount. The Insurance Regulatory and Development Authority (IRDA), the statutory body regulating insurance in India, has placed a cap on the surrender charges imposed by insurance companies. This fee cannot exceed 50 basis points annually on the unit fund value. Besides, the insurer cannot levy any other charge besides the surrender fee upon discontinuance of the policy.

6. Miscellaneous charges

Besides the aforementioned charges, your ULIP plan may be subjected to other miscellaneous fees. This includes charges in respect of change in premium paying term, change in premium apportionment, change in premium mode, or decrease of sum assured amount, besides others. Insurers are also required to levy Goods and Service Tax (GST) on the policy.

ULIPs are an ideal investment choice, given the dual benefit of insurance cover and high returns. However, it is necessary to understand all the applicable charges before investing in such an investment vehicle. You may note that the IRDA has set guidelines to limit the impact of these charges. For policies with a term less than or equal to ten years, the net Reduction in Yield (RIY) cannot exceed more than 3% at maturity, and for policies having a term greater than ten years, the RIY is capped at 2.25%. While calculating the yield, mortality charges are not taken into consideration.

You may, therefore, be aware of all these ULIP charges and be a well-informed policyholder.

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Author: Chakraborty

Dr Chakrabarty is the Chief Innovation Officer of IntuiComp TeraScience. Earlier she was Assistant Professor of Delhi University, a QS ranked university in India. Before that she has held research positions in IIT Mumbai, IIT Chennai and IISc Bangalore. She holds 2 patents and over 20 research publications in her name which are highly cited. Her area of research is in smart technologies, integrated devices and communications. She also has a penchant for blogging and is an editor of Business Fundas.