ULIP acts as a mixture of investment and insurance, and it promises a wide scale of advantages. As it is not a traditional insurance product, it functions in different ways. Forgetting the facility’s best, you need to pay a certain amount of money for the charges.
Unit linked insurance plan is a brilliant choice for achieving short term and long term financial goals. Deviating from the regular insurance or investment tool, the policyholder has the option of making investments in debt funds or equity funds and ensure high returns in the end. However, before you invest one penny in the plan, it is important to know about ULIP charges.
Mortality Charges in ULIP
While choosing the ULIP, you are entitled to get a specific amount of money for insurance coverage. Like the traditional insurance products, you need to pay for the premium of unit-linked insurance plans. This charge is defined as mortality charges. People with low age marks do not have a high rate of mortality charges.
For example, if you invest Rs. 1 lakh in the plan, there are chances that approximately Rs. 90,000-94,000 will be invested as per your age. The high amount that goes into the ULIP mortality charge is also the amount of insurance premium.
The charges in ULIP can often be five times more than the yearly premium. However, the mortality amount is vacillating based on the health condition of the policy user and his/her age. During the initial years, the amount can go around 35%.
Calculating Mortality Charge
The rate is based on several factors like the sum assured or amount of coverage, your age, and other things.
Amount of charge = Accomplished age mark x sum at-risk/1000 x 1/12
The above-mentioned formula is used for calculating the mortality sum of mortality in the ULIP. The accomplished age mark implies the date of calculating ULIP and the sum at risk signifies the number that the policy-maker will pay the nominee in the event unfortunate demise of the policy-holder.
The charge is allotted each month and withdrawn from the fund value of your ULIP. In a nutshell, the higher your age is, the more you will have to for the mortality charge in your ULIP plan.
Fund Management Charges of ULIP
This charge is levied for managing the funds, and a certain percentage of the asset value of ULIP is deducted. As the ULIP performance is related to equity funds more than the debt-related funds, the former’s fund management charges are high. However, IRDA has posed the guideline of capping 1.35% per annum over the fund management cost of ULIP.
It is important to keep in mind that an asset’s value increases over time, the fund management value increases. If your fund value of ULIP is Rs. 1,00,000, you may have to pay Rs. 1350 for fund management in a year. With the appreciation of your ULIP asset, the fund management cost also increases.
In the conflict of ULIP vs. mutual fund, mutual fund edges a little bit because ULIP levies various charges of the financial tool. However, ULIP offers to invest money in different fund options, various equity-debt exposures, and the permission to shift money between various funds. The process of shifting the money in the ULIP is known as switching.
If you switch a certain amount of money from the fund allocated 100% in equity for gaining a stable portfolio. This refers to the division of 40% of debt and 60% of an equity fund.
The ULIP policy only provides the investor with limited switches per year because the unit-linked insurance plan is considered for the long-term. Many of the insurance companies provide a free switch for a limited period per year. After exceeding the free switches, the plan will charge Rs. 100-250 for every switch.
The switching charges in ULIP will be deducted by dropping the unit equally for every fund that you have already selected. Moreover, many insurance companies ask for a low price while charging for the ULIP online payment.
ULIP Discontinuance Charges
During the first five years, your money is saved for the ULIP lock-in period, and if you discontinue the plan, you will have to pay an additional charge.
When the yearly premium of the policy is around Rs. 25,000, the person may have to pay up to Rs. 2,000, Rs. 4,000, Rs. 5,000 and Rs. 6,000 for in the fourth, third, second, and first year of the ULIP, respectively. There will be no extra charge for discontinuing the policy in the fifth year.
When the value is allocated in the policy, the company will apply FMC or fund management charge, and the amount cannot go beyond 0.5% of the fund. The money existing in the discontinuance policy may keep gaining ULIP interest rate because the policymaker needs to offer the minimum guarantee fund return that may change with time. Only after completing the lock-in period, the discontinuance policy fund amount is paid out.
The experts indicate that it is always best to be invested for a minimum of 10 years and get the best out of the policy’s benefits.
Premium Allocation Charges of ULIP
The amount is deducted from the premium, and the spared amount is utilized to invest in the investor’s chosen funds. As per the ULIP companies, the cost is charged for taking care of the expenditure related to distributor fees. Additionally, the charges are linked to underwriting.
At the time of making the payment for ULIP, the premium allocation charge is deducted. Even when the ULIP renewal premium is paid, the premium allocation charge is applied. Nevertheless, the amount decreases in later years, after five to seven years.
Only if you purchase the online policy will there be no addition of the premium allocation charge. The charge is also variable based on whether the policy is a regular premium, single premium, premium frequency (annually, quarterly, and monthly), payment medium, and premium amount.
ULIP and Rider Charges
Referring to the conclusion of ULIP plans vs. mutual funds, it is to note that mutual funds do not have rider charges. The ULIP acts as an insurance product along with offering the advantage of mutual funds to people.
The rider charges are the additional benefits you wish to include in ensuring your life. When you purchase a critical illness rider and a ULIP plan, you enjoy the benefits health plan, which secures your life and financial goal. However, the protection charges you extra money.
Premium Redirection Charges
For example, an investor may keep the whole premium amount in fund X of the plan. The future premium is to be included in the exact fund. Now the premium redirection gives you a chance of redirecting the future premium payment in various fund options, which may be Fund Y. The redirection of premium amount does not have a direct effect on the investments already made on Fund X.
There is a limitation on how many times the premium payments can be directed without charging one penny. Here, the premium redirection charge is similar to that of the switching cost of a ULIP, and redirection can be reduced to a significant amount if an online mode is chosen. After going beyond the free limit, the insurer may start charging Rs. 100 to Rs. 250.
Top-Up Charge in ULIP
ULIP mutual fund has a unique feature, which is top up. The insurers can invest additional money through the feature during different times or only once in the policy. When the surplus amount is gone and over the regular premium payment, it can be used any period when the policy is viable.
The top-up is effective in expanding the investor’s wealth by raising the amount of corpus. It would help if you remembered that the ULIP provider might cut down a certain amount from the top-up as the charges.
Policy Administration Charges of ULIP
In the ULIP, there is a policy administration cost, which takes care of the administrative expenditure taken place to maintain the policy. These administrative expenses are
It is mainly charged for conducting paperwork or sending timely premium payment notifications. Usually, the administrative charge is deducted per month. Based on the policy, the chargers stay similar across the term policy.
The amount of these charges is lower than other vital charges mentioned previously. When you wish to switch from a quarterly to yearly premium payment, the insurance company applies the miscellaneous cost.
According to IRDA, the entire reduction in yield for ULIP and term is equal to or less than ten years, and it cannot be more than 3% of maturity. Without charging for mortality cost, the insurer should calculate the yield, and the supervisor caps the effect of every charge.