Know ULIP and its charges
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A Unit Linked Insurance Plan (ULIP) offers insurance and investment to investors under a single integrated plan. Under ULIP, a portion of the premium paid by you is used to offer insurance cover while the rest gets invested in several equity and debt schemes. Insurers collect the money from you to build a pool of fund to invest in both equity and debt instruments in different proportions. As a ULIP policy holder, you will be allotted units, the net asset value (NAV) of which gets determined on a daily basis. The NAV decides the rate of returns that you will get from the ULIP policy. But you must know the charges before hand to put you on the safe path. Here are the list of charges that ULIP investment has.
Premium allocation charge
Premium allocation charge refers to a portion of the premium earmarked towards the expenses before the allocation of units. Insurers levy such charges to recover the initial expenses made on underwriting, distributor fee and others during the issuance of the policy. The balance amount is the one that gets invested towards purchasing the funds selected by the policyholder.
Policy administration charge
As the name suggests, the policy administration charge is deducted on account of administrative expenses made by the company on the policy maintenance, paperwork, premium intimation, etc. You will be levied the charge monthly in most cases. The charge may be a flat one during the first 3-5 years and then rise by a certain percentage each year.
Fund management charge
The charge, which is recovered from you towards the management of fund, is levied at a certain percentage of the asset value. The fee gets deducted prior to arriving at the NAV. As per the norms of the Insurance Regulatory Development Authority of India (IRDAI), the cap on fund management charge is stipulated to be 1.35% per annum. As an investor, you must be aware that the management charges are made on the accumulated amount and not the premium alone. And as the investment grows, the fund management charges increase.
Mortality charge, levied on a monthly basis, is taken by the insurer to provide you the insurance cover. Upon the issuance of the policy, the insurer makes an assumption of the years you will live based on your current age and health conditions. The insurance company gets compensated with the charge if the insured individual fail to live to the assumed age. Factors determining the actual amount under mortality charge include the amount of life cover that you want, your age and other details.
Insurance company may deduct partially or full surrender charge in the event of the premature encashment of the units. The charge is taken at a certain percentage of the fund or the annual premiums. As per the IRDAI norms, the surrender charge must not exceed 50 basis points per annum on the unit fund value and no other charge shall be made by the insurer on the policy surrender.