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Investing in a ULIP? Here are the ULIP charges you need to know

No matter what stage in life you are currently at, an investment in a Unit Linked Insurance Plan or ULIPs is always a fruitful one. ULIPs are a financial instrument that meets two diverse ends of insurance and investment. Your premium is partly utilised for providing you insurance coverage and partly for investments in equity and debt markets. ULIPs are designed to help balance risk and rewards and to help you reach long-term goals like saving for retirement and children’s education.

In case you are caught in the duel of ULIP vs SIP, please understand that both these financial instruments are an important part of your portfolio and serve different purposes.

There are different kinds of ULIPs being sold by different financial companies tailored specifically to match your needs. Before you decide to purchase a ULIP, here is a list of factors you should consider:

  1. Know your risk appetite
  2. Assess your investment timeline
  3. What is the quantum of sum assured that you are looking for?
  4. What is the premium amount and lock-in period that you are most comfortable with?
  5. Understand in-depth the ULIP charges that can affect your returns

Let us take a deep look into the charges that one has to incur for ULIPs.

Premium allocation charge

Premium allocation charge is an upfront charge levied by the company and one that is deducted from your first insurance premium. It includes charges for agents and underwriters as well as medical expenses incurred if any. This levy is usually a small percentage of your first premium and the balance amount remaining is invested in your folio.

Fund management charges

Your ULIP is managed by financial experts who know the ins and outs and the ups and downs of the markets. These financial experts shoulder the responsibility of delivering the maximum returns to the insured and help customers reach their lifelong goals. That expertise comes at a cost.

As per the insurance sector regulator IRDAI, insurers can charge a maximum of 1.35% of the fund value per annum as fund management charges.

Partial withdrawal charges 

Once you invest in a ULIP, you cannot withdraw your funds till five years. However, you can start making partial withdrawals after the five-year window. However, even for this facility, you will have to pay charges which differ with every insurer.

Fund switching charges

ULIPs allow you to optimize the allocation of your funds to different segments in the markets and rejig your investments as per your risk appetite. So, in case you have opted in for an investment that has a high-risk profile and you wish to reduce the risk, you will have the option to allocate a larger portion of your funds to conservative and safer assets. 

To switch your funds you will have to pay a charge that varies from insurer to insurer.

Policy administration charges

Policy administration charges are incurred for running the everyday expenses of the insurer such as paperwork, record keeping, and other administrative costs. The amount is deducted from the policyholder’s account by redemption of units at the prevailing market price.

Premium redirection charges

Premium redirection charges are similar to fund-switching charges. Insured individuals might want to switch their funds depending on their risk profiles. Consequently, your premium is redirected to a different fund. The charge levied is for diverting your premium to another fund.

Premium discontinuance charge

All ULIPs have a lock-in period of five years during which the insured person cannot withdraw. If for some reason, the insured individual is unable to pay the premium, then he has to face premium discontinuance charges. As per the IRDAI rules, the amount you pay as a premium discontinuance charge depends on the year in which you miss your policy payment. The charge keeps decreasing as your policy ages. 

Rider charges

If the insured person adds other riders like accidental death, family income or critical illness coverage, he will have to pay for these additional add-on benefits.

The final word

These charges can make a big dent in your ULIP returns. Do ask your financial advisor and ULIP Company about the charges that are likely to be levied under these sub-heads before investing in the financial product.