What Are ULIP Charges?


Whenever you buy any financial product, there are usually some charges associated with it. The charges vary depending on the product you buy, and the factors associated with it. The reason for the charges is the need to make up for the expenses that a company incurs while managing its financial instrument. Unit Linked Insurance Plan (ULIP) is a popular instrument with a unique structure.

What is ULIP?

ULIP offers life insurance and investment opportunities in a single plan. Since ULIP offers both life insurance and investment, there are several components associated with it. When you buy a ULIP similar to any other life insurance, you pay premiums. The difference here is that your premiums are partially allocated towards providing you with a life cover and partially invested in funds of your choice.

Since two key aspects are associated with a single plan, several charges are associated with a ULIP plan. However, be rest assured that over the years, these charges have been significantly reduced and some have been completed eliminated too. Read further to know about ULIP charges.

Common charges associated with ULIP

Policy administration charges

There is an operational and administrative process that goes behind an insurance company when you buy a ULIP. To do the paperwork, communication, and distribution, there are several charges involved. These charges are added up and overall levied as policy administration charges. However, when a policyholder buys a ULIP online, most of the manual work is erased, and hence, these charges are often eliminated.

Premium allocation charges

 Premium allocation charges usually comprise the fee that the distributors charged for selling a ULIP policy. Over the years, as the duration of the policy increases, these charges reduce. They are usually anywhere between 0% to 9% and vary from insurance company to insurance company. When you use a ULIP calculator, you find that these charges are eliminated if you buy the plan online. Since when you buy insurance online, you directly buy from the insurance company and have no agents involved.

Fund switching charges

When you buy a ULIP, you choose your fund allocation based on your financial goals. However, over the years, your goals might evolve and your current investment allocation might not meet your needs. A unique feature of ULIP is that you can switch your fund allocation anytime you want. You can switch from debt to equity and vice versa seamlessly. Most insurance providers allow free switching of funds two to three times during the policy. However, after that, most require policyholders to pay fund switching charges.

Mortality charges

ULIP is a type of life insurance with an investment quotient. The charges that are incurred for providing a life cover to the policyholder are known as mortality charges. Insurance companies have reduced the mortality charges over the years, and some have even erased them.

Surrender charges

ULIP comes with a lock-in period of five years, so you cannot access your ULIP investment for that duration. If, because of some circumstances, you are surrendering your policy before the lock-in period; you are required to pay a surrender charge. There are no surrender charges that you are required to pay if you continue your ULIP until the lock-in period.

Fund management charges

Besides being a security option, ULIP is also an investment product. Your ULIP investment is handled by fund managers. To manage your funds and for providing you with desired returns, the insurance company levies certain charges. The Net Asset Value (NAV) of your ULIP investment comprises this charge. Since the sole purpose of the charges is the work that the fund managers put in for meeting your investment goals. With the help of a ULIP calculator, you can invest in funds that provide your desired returns and risk appetite. These charges do not exceed 1.35% of your fund value.

Premium redirection charges

Over the years of your policy, your risk appetite and financial goals may have changed, and you might not be happy with your existing allocation. ULIP offers the option of premium redirection, where you can redirect your allocation to any other funds of your choice. It is important to note that your previous allocation remains as it is and only your future allocation is redirected to new funds. Some insurance providers charge a fee for redirecting your premiums as premium redirection charges.

Once you understand what ULIP is and the charges associated with it, it allows you to make an informed decision. The number of charges mentioned above may seem overwhelming. However, it is important to remember that most of these charges have been eliminated over the years. The ones that exist also have been decimated.

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