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8 Charges in ULIP That You Must Know

Like every BFSI product, ULIPs also have certain charges associated with the policy. Here are the 8 most common types of charges in Unit-Linked Plans that you must know.

  • Apr 13, 2022

Unit Linked Insurance Plans are a type of insurance plans that helps you reach your financial objectives by generating wealth through market-linked investments. Depending on your risk tolerance, you may distribute your money among debt, equities, or balanced funds using these instruments. This allows you to earn market returns that outperform inflation.

ULIP is like a mutual fund with an insurance cover added to it. However, there are some charges involved in ULIPs, unlike mutual funds, which have a single consolidated Total Expense Ratio (TER).

Types of Charges in ULIP

  • 1. Premium Allocation Charges

The Premium Allocation Charges (PAC) is a predetermined charge in ULIP policy. The percentage of the premium collected is normally imposed at a greater rate in the first few years of a policy. The original and renewal charges and the intermediary’s compensation expenses are usually included in this. It is a percentage of the premium deducted, and the remaining funds are utilized to obtain units at the current Net Asset Value (NAV).

  • 2. Fund Management Charges

The price levied by the insurance provider for managing multiple funds in ULIP is known as the Fund Management Charge (FMC). It is a fee for fund management and is subtracted before reaching the NAV. Therefore, on a routine basis, the FMC is modified from NAV. Though it varies from investment to investment, life insurance firms aren’t allowed to impose fund administration fees greater than 1.35 percent annually under the IRDAI cap. The fund management charge for debt-oriented ULIPs is typically substantially cheaper than that of their equity equivalents.

  • 3. Discontinuance Charges in ULIP

For the full or partial early encashment of units, a surrendering fee may be imposed. Typically, a proportion of the corpus or the yearly premiums is used to compute this fee. The maximum surrender fees that life insurance firms may impose are governed by IRDAI regulation. There shall be no further fees assessed by the insurer upon surrender of the policy beyond the discontinuation charge, which shall not exceed 50 basis points per year on the unit sum insured. After understanding these fees, it’s important to know that the IRDAI has set restrictions to minimise their impact on the overall yield from the investible component of your premium.

8 charges in Ulip that everyone must know

ULIP discontinued charges are imposed when an investor prematurely surrenders ULIPs. The minimum lock-in term for these investment programs is five years. ULIPs, on the other hand, can be surrendered before the lock-in term expires in the event of unforeseen circumstances that prevent regular premium payments. The surrender charge, which is computed as a percentage of the yearly premium amount, will be imposed in this situation.

  • 4. Fund Switching ULIP Charges

Switching is the process of moving money or investments from one option to another. A limited amount of fund switches may be permitted without charge each year, with other switches incurring a fee of ₹100 or ₹250 for each switch.

  • 5. Partial Withdrawal Charges

ULIPs allow for partial withdrawals of money. Some plans allow unlimited partial withdrawals, while others limit them to only 2-4 each year. These withdrawals might be free up to a specific point before costing ₹100 apiece as part of the ULIP policy charges, or maybe they’re free for an infinite series of withdrawals.

  • 6. Partial Administration Charges

The reimbursement of the charges incurred by the insurer is known as administration cost in ULIP. These are monthly fees that may or may not be related to the insurer’s standard paperwork or activities. Administration costs are imposed by cancelling a proportionate number of the investor’s units from each fund.

  • 7. Premium Discontinuance Costs

You can discontinue paying your premiums before the five-year lock-in term expires. When you stop paying your premiums, your money will be put into a Discontinuance Fund. As stated in the policy terms, a Premium Discontinuance fee may be charged as part of ULIP plan charges. This is calculated as a percentage of the fund’s worth or the premiums.

  • 8. Mortality Charges

When a person invests in ULIP, the insurer charges mortality charges in ULIP to pay insurance protection and other expenditures in the event of the insured’s death.

Everything About Mortality Charges in ULIP

When a person invests in ULIP, the insurer charges mortality charges in ULIP to pay insurance protection and other expenditures in the event of the insured’s death. It is generally taken along with other fees, before the policyholder’s money is invested.

The mortality fee is calculated using the amount at risk, which is equal to the sum assured minus the fund value. The sum at risk is the amount that the insurer must pay out of pocket if the insured dies. Further, the fee should ideally reduce as the fund value increases throughout the policy period.

ULIP mortality costs are determined by a variety of characteristics, including age, health condition and gender. A young person’s mortality costs are significantly lower than those spent by an older adult. Adult ULIPs, on the other hand, should not be mistaken with child ULIPs which have a higher death rate, especially in children aged 7 to 14.

Women get a lower mortality charge since it is based on gender. This fee in women’s ULIPs is determined over a three-year period. Simply put, a 35-year-old woman would have to pay the very same ULIP mortality fee as a 32-year-old male.

Calculating Mortality Charges in ULIP

In ULIP, the mortality charge is calculated as a percentage of the cover or the annual total at risk. As a result, the total at risk is the most important metric to consider when calculating the mortality charge in ULIP. The amount at risk varies depending on whether you have a Type I or Type II ULIP

ULIP Type – I

As a death benefit, the nominee receives the greater of the guaranteed sum and the fund value. In this case, when the fund’s value grows, the amount at risk decreases.

When an insured die, the insurance company under Type I ULIP policies generally pays the nominee the sum insured amount or the cash value of the ULIP plan (s). The nominee will receive the highest value of the two options (s). Therefore, if your amount guaranteed is 40 lakh and the fund value is 50 lakh, the beneficiary will get the fund value of ₹50 lakh.

ULIP Type – II

The nominee receives the whole amount pledged as well as the fund value as a death benefit. As a result, the total at risk is equal to the guaranteed amount. The sum of the insured and the fund amount is what is paid in this situation. Due to the substantial significant benefit of the life coverage amount upon the death of the policyholder, the premium is greater for these types of ULIPs. The beneficiary would acquire 90 lakh (40 lakh amount guaranteed + 50 lakh funds value) - with reference to the same example as used above.

The mortality charges in ULIP are determined by parameters such as the country’s life expectancy ratio, the policyholder’s age, gender, financial condition, living area, and employment, in addition to the sum at risk. The formula for calculating the monthly mortality fee in ULIP is:

Mortality charge = [Mortality rate (for attained age) * Sum at Risk/1000] * 1/12

To summarise, after learning everything there is to know about mortality charges in ULIP and knowing how to calculate mortality charges in ULIP, it appears to be a great investment choice that provides you with two in one benefits. Besides, the eight most essential types of charges in ULIP are apparently what to look out for when purchasing ULIP insurance. However, it is important to remember that these ULIP charges differ from one insurance company to the next.

Alongside, it is essential to know the tax benefits of investing in ULIP under Sec 80C of the Income Tax Act.

In this policy, the investment risk in the investment portfolio is borne by the policyholder.

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Ref. No. KLI/22-23/E-BB/521


- A Consumer Education Initiative series by Kotak Life

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