When it comes to investing in a unit-linked insurance plan (ULIP), there are many charges that the investor needs to be aware of. These range from administration charges, mortality charges, and more, all of which can add up over time and significantly affect your returns. This article will talk in detail about ULIP charges and how each one impacts your investments with such plans so you can make an informed decision when selecting the right ULIP for you.

Types of ULIP Charges

Unit-linked insurance plans (ULIPs) are a popular choice for life insurance in India. They offer the death benefit of a traditional life insurance policy and an investment component for building wealth. However, before you invest in a ULIP, it’s essential to understand the various charges that come with this type of policy.

There are eight main types of ULIP charges: premium allocation charges, mortality charges, discontinuance charges, fund management charges, fund switching charges, partial withdrawal charges, policy administration charges, premium redirection charges, and premium discontinuance charges. These days, you can easily access ULIP calculators from reputed life insurance companies where such information is provided. Let’s examine each one in more detail.

  1. Premium Allocation Charges

The premium allocation charges, assessed as a percentage of the premium, are evaluated only during the first year of a unit-linked insurance plan. Insurers impose this fee on paying for various expenditures, including commission fees, underwriting costs, and medical test costs. The insurer will deduct the charge from the first-year premium you pay and will only invest the leftover sum in your chosen funds if the premium allocation charges are front-loaded. 

  1. Mortality Charges

The mortality charge, one of the most prevalent fees in a ULIP, is assessed by insurance companies in exchange for providing the policyholder with insurance protection. This fee often varies from person to person and depends on several variables, including a person’s health, age, gender, and the coverage they chose. 

  1. Discontinuance Charges

The premium discontinuance charge often referred to as a surrender charge, is yet another fine imposed by the insurance company for early plan termination before the conclusion of the 5-year lock-in period. 

  1. Fund Management Charges

A fund manager actively manages the market-linked funds you decide to invest in through ULIP insurance. The Fund Management Charge is levied to recoup the expenses made by the insurance company in administering these assets. Fund Management Charges are considered when calculating the fund’s net asset value (NAV). Insurance companies are only permitted to charge the FMC at a maximum rate of 1.35% of the fund’s value annually, as per IRDA regulations.

  1. Fund Switching Charges

One of the many benefits of a ULIP is that you can switch the funds you wish to invest in at any time during your tenure. While some insurance providers don’t levy any fee for fund switching, others levy a certain fee beyond several accessible switches. The fund switching charges are, however, very nominal and can range anywhere from 1% to 2%.

  1. Partial Withdrawal Charges

You can partially withdraw your investment capital from almost all unit-linked insurance plans, sometimes even during the lock-in period. However, if you decide to use this option, you will be paying a small fee known as partial withdrawal costs.

  1. Policy Administration Charges

Another one of the charges of a ULIP plan levied each month is the Policy Administration Charge which can either be fixed or be a percentage of the total fund value. The insurance provider levies this charge to cover the policy’s administration costs. It includes paperwork expenses and costs incurred for sending premium intimations and regular updates to the policyholder.

  1. Premium Redirection Charges

When you switch funds, your entire investment is transferred from one fund to another. However, with premium redirection, your prior investments will stay in the fund of your choice. Conversely, your future premium payments will be allocated to a different fund of your choosing. Insurance companies levy the premium redirection fee in return for providing you with this opportunity.

Investing in a unit-linked insurance plan (ULIP) can be a great way to achieve your financial objectives. However, it is crucial to understand the associated charges to know what will impact your investment returns. We trust that this article gives insight into different types of ULIP insurance charges and how they affect your future investments. 

Before investing in ULIPs, make sure you read the terms and conditions and assess the sum on the ULIP calculator to make an informed choice.