Unit linked insurance plan (ULIP), a life insurance product, offers risk cover for the insured together with investment options. It is linked to the capital market and offers the flexibility to invest units in equity or debt funds depending upon the risk appetite.
At maturity, ULIP policyholders get back the investment portion of the policy.
ULIPs have a variety of charges and it's important to understand these charges so as to select the most suitable policy for the long-term objectives.
Here are some of the ULIP charges that one should know:
Premium allocation charges
It is the percent of the first year premium charged by the insurance company after allocating the policy.
This includes fees of underwriting, medical expenses and agent's commission. After deducting these charges, the remaining amount is invested in the chosen fund, according to Policybazaar.
As per Dhirendra Mahyavanshi, Co-Founder, Turtlemint ( an InsurTech Company, these charges are usually front-loaded and can range from 2 percent to 5 percent.
These are charged every month for administering the policy. They are deducted by canceling units proportionately from each fund selected.
Fund management charges
A portion of the ULIP premium is invested in various equity funds or debt funds or a mix of both. The fund management charge is for managing these investments in order to offer the insured with potentially higher returns.
According to Akshay Dhand, Appointed Actuary, Canara HSBC Oriental Bank Of Commerce Life Insurance, fund management charges are typically deducted in the NAV calculation of the underlying funds.
In the words of Mahyavanshi, "Equity funds usually have a higher charge as compared to debt and money market funds. The charge is deducted from the fund value and ranges from 0.75 percent to 1.50 percent".
ULIP allows flexibility to switch between equity, debt, and balanced funds, depending on the risk appetite. This switching attracts certain charges, depending on the policies of the insurance provider.
Partial withdrawal charges
Some insurance companies offer a facility to make partial withdrawals, even during the lock-in period of a ULIP’s term. However, some charges are deducted as a penalty for partial withdrawals. These are known as partial withdrawal charges.
Risk charges depend upon the life cover one has taken.
In the words of Dhand, "This will be higher in the initial years when the fund is lower in value and will normally reduce over time as the underlying fund value exceeds the life cover chosen. However, there may be some ULIPs where life cover is over and above the fund value in which case these charges will increase over time as the age of the life assured increases."
These are imposed by the insurance companies for providing death cover to the policyholder. It is calculated by the insurance company after considering the age and health risks of the insured.
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First Published: IST