Insurance providers often find themselves at the receiving end to impose a stiff fee since such charges contract the investible share of the paid premium. This battle fumed significantly in case of ULIP for years. ULIP full form being Unit-Linked Insurance Plan has various charges associated with it.  

More significantly, such charges are not communicated directly to the buyers of the policy. If this is the case, then what should a policy buyer do?

Well, here’s a rundown to top five ULIP charges that you should not avoid.

Policy administration charge:

Policy administration charges the charges that are deducted for the administrative expenditures incurred by the insurance provider for the maintenance of the ULIP policy. So the premium intimation, the cost incurred for the paperwork, etc. are covered under this category.

This charge is generally imposed monthly. The policy administration charge could either boost at a pre-determined rate or could be flat all through the term of the policy. On the other hand, it could be a flat rate in the first 3-5 years and then amplified by a fixed percentage yearly.

Premium Allocation Charges:

Premium allocation charges are the charges that are directly deducted from the premium. A premium allocation charge is a fraction of the premiums appropriated with regard to the charges before the units are allocated under the ULIP plan.

These charges are imposed to claim the preliminary expenses incurred while issuing the scheme such as the underwriting cost and the distributor fees. The remaining amount is the investible sum that is used to but the fund units selected by the policy buyer.

Although, IRDA (Insurance and Regulatory Development Authority) of India has set the guidelines, which make sure a cap on such charges from the commencement of the 5th year of the policy, these ULIP charges in the initial years continue to be significantly higher.

Fund Management Charges:

Another category of ULIP charges is Fund Management Charges. These charges are paid towards the management of funds and are imposed as the percentage of the asset value. This charge is deducted before the net asset value (NAV) arrives.

Although it varies from fund to fund, according to the IRDA cap, the life insurance providers cannot levy fun management charges exceeding 1.5 per cent every year. Generally, the debt-oriented ULIP (ULIP full form – Unit-linked insurance plan) will have lower fund management fee compared to their equity-oriented funds.

Being an investor, you must bear in mind that the fund management fees are imposed on the collected amount, and not just the paid premium. Hence, in real terms, with the growth of corpus, the actual sum deducted as the fund management charge goes up.

Surrender or Discontinuance Charges:

Surrender charges, also known as discontinuance charges, are either deducted partially or fully for the premium unit encashment. The surrender charges are generally evaluated as the percentage of the annualised premiums or funds.

Insurance regulatory body, IRDA has set the guidelines on the highest surrender fees that can be imposed by the life insurance providers. The discontinuance charges or the surrender charges must be below than the 50 basis points p.a. on the fund value of units and not another fee apart from this fee must be imposed by the insurance provider on the policy’s surrender.

Mortality Charges:

The mortality charges are paid for offering insurance coverage. While issuing the policy, the insurance provider assumes the policyholder will live a life to a certain age depending on the health conditions, gender, and current age. Mortality charges compensate the insurance provider if the policyholder doesn’t live up to the expected age. This is usually levied once in a month.

The actual sum paid under the mortality charge is based on the sum assured, the age of the insured, etc. The method of calculating these charges together with the table of mortality charge is usually a part of the document of policy.

While insurance seekers buy an investment-cum-insurance product like ULIP, the primary goal is an investment. As a matter of fact, they might be covered sufficiently with an add-on term policy. Nevertheless, they still end up paying the mortality charges, which comes along with the plan.

Wrapping it up!

Unit-linked Insurance Plan is the ULIP full form. ULIP plans are more transparent and include various charges. Investors who buy ULIP schemes are given switching option, where they can switch their investments from one variant to another without any worried of paying extra charges. The aforementioned charges are the important charges that the investor must take into consideration while buying a ULIP plan. Always, do proper research before investing in any ULIP scheme. Have a safe and prosperous investment!

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