Finance

Charges you must know before investing in ULIPs

When you decide to purchase a financial product, such as a policy, there are certain procedures involved in the process. While it may seem quite simple to purchase a policy; there are lot of things that the insurer has to take care of before they can issue the policy to you as a buyer. All the formalities must be met by the insured.

If you are planning to invest in a ULIP, read on to know more about the charges related to this policy.

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What is a ULIP Policy?

A ULIP is a type of life insurance policy which provides dual benefits of investment and insurance to the policyholder. Via investment, you get to put your money into equity funds and debt funds. The investment you make is based on your risk appetite and your life goals. Via insurance, your family is provided with life protection cover from different life risks. If you were to pass away during the term of the policy, the insurer will compensate your family with a death benefit.

What are the charges related to ULIPs?

These are the charges of ULIP that you need to be aware of:

1. Mortality charge

You get the dual benefit of investment and insurance in ULIPs. The life cover protects your loved ones from different risks of life. This is beneficial in the event of your untimely demise. The amount they receive would help them to be financially stable and manage vital expenses. This pay-out is known as a death or mortality benefit. Your insurer charges a mortality charge on this pay-out. Factors that decide the amount charged include age and coverage of the policy. Many companies return the amount of mortality charges at the time of maturity.

2. Policy administration charge

Charges related to the expenses of paperwork related to your policy, various services provided and managing records related to your policy are known as policy administration charge. Each month, your insurer deducts this charge by redeeming units from your funds.

3. Fund management charge

In ULIP, you have the option of investing in equity funds and debt funds. Via equity fund you invest in stocks of market-listed companies. Via debt funds, you invest in government bonds, securities, and other markets. Many policyholders prefer to have a professional handle their investment either due to unsurety about their judgment or due to other time constraints. Your insurer will provide you with the services of a fund manager. The fund manager will overlook the customer’s investment and make decisions which could help in maximising the returns for them. Now, the fund management charge is applied for availing this service. Your insurer can charge you a maximum of 1.35% of fund value every year as per the IRDAI mandate.

4. Premium allocation charge

One of the charges of a ULIP is the premium allocation charges. This charge is levied on the policyholder before the policy is allocated to them. The charge covers costs related to the underwriting of the policy, medical tests, etc. During the issuing of the policy, your insurer will cover this charge. However, once the policy is issued, this charge is levied on the first premium payment.

5. Switching charge

When you invest in a ULIP, you have the option of switching from one fund to another. You can reallocate your investment from one fund to another with the help of switching. Insurers allow limited number of free switches to their customers. However, if the customer wants to do switching of funds beyond that limit, the insurer will charge them a certain amount for that switch. The switching charge varies from insurer to insurer.

6. Surrender charge

If you were to surrender your policy during or after the lock-in period, your insurer will charge you with a fee for surrendering it. The insurer will deduct this fee from the fund value before giving you the returns of the plan.

These are the charges that are levied in ULIPs. You can get in touch with your financial advisor to know more about other ULIP charges and different plans.

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