What Are Charges in ULIP and Its Type?

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ULIP stands for Unit-Linked Insurance Plan, offering a policyholder two significant benefits - life insurance cover and wealth accumulation for the future. When an individual purchases a ULIP policy they need to pay premiums. This premium they pay is used partly to invest in mutual funds and partly to buy a life insurance cover.

However, there are a few charges in ULIP that an insurance company levies. Therefore, if you want to purchase a ULIP policy, you must be aware of all charges involved.

When you purchase a ULIP policy from an insurance-providing company, they charge a certain sum of money for services they offer. Additionally, these fees may differ slightly based on an insurance-providing company you choose. Many companies in the market choose not to charge certain charges.

Furthermore, the Insurance Regulatory and Development Authority (IRDA) has placed numerous limitations and restrictions beyond which insurance providers cannot charge a policyholder. For example, as per IRDAI regulations, an annual ULIP plan can only charge up to 2.25% for the first ten years of a ULIP policy term.

The various types of charges involved in a ULIP policy are as follows:

1. Premium Allocation Charges:An insurance provider levies a premium allocation charge only in the first year after purchasing a ULIP plan. After that, an insurance company levies this charge on a policyholder to cover various expenses like commission fees, underwriting costs, medical tests etc. 

   Furthermore, this type of ULIP charge is front-loaded. An insurance company will deduct a fee from a policyholder’s first-year premium. Furthermore, it will invest the remaining funds of the policyholder’s choice.

   For instance, a ULIP plan premium allocation charges are 15%. So, this premium that a policyholder will have to pay is around ₹40,000. So now this insurance company will deduct up to ₹6,000 as premium allocation charges in ULIP. The remaining ₹34,000 from this premium will be invested in securities. 

1. Administration Charges: Insurance provider levies a charge on a policyholder to administer a policy. An insurance provider will collect this fee every month. Often these charges tend to remain the same throughout the entire term period. However, if it changes, it will change at a predetermined rate. Usually, administration expenses include paperwork expenses, costs incurred while sending premium intimations etc. 

   The insurance provider will also levy charges if the policyholder decides to cancel units from the fund, which will be in proportion to the rate. 

1. Mortality Charges: Mortality charges in ULIP are the most common type of charge that an insurance provider levies in a ULIP fund. This fee typically varies from one policyholder to another. It depends on a few variables, including the person's health score, age, gender, and the coverage they chose.

   The insurance provider will monthly deduct the mortality charges from a policyholder's funds. The insurer charges this charge for providing insurance coverage to the investor as a part of their ULIP plan benefits. 

1. Fund Management Charges: As stated earlier, one of the significant benefits of ULIP is that investors can invest in market-linked securities alongside getting insurance coverage. Furthermore, the investor will be free to choose the type of market-linked funds they want to invest in based on their risk tolerance.

   These funds are now actively managed by fund managers. The insurance-providing company will obviously levy a charge for the expenses it has incurred to manage an individual's funds. Furthermore, the insurer levies the fund management charges daily. As per IRDAI regulations, insurers can only charge up to 1.35% of the fund's value as FMC in a financial year. 

1. Surrender or Discontinuation Charges: An insurance company levy these fees on the policyholder when the individual surrenders or discontinues the policy prematurely. According to IRDA's guidelines, the insurer can recover only the incurred acquisition expenses that they had incurred after discontinuing the ULIP policy. 

   The insurance company will charge this as a percentage of an individual's fund value and premium. Typically, the surrender or discontinuation charges for a ULIP scheme for the first four years of taking the policy will be around ₹1,000-₹3,000. This charge will also depend on the premium an individual has paid. 

   On the other hand, if the individual surrenders the ULIP after holding it for five years, then an insurer will not be allowed to levy any surrender charges.  

1. Switching Charges: Investors can easily switch from one fund to another if they invest in a ULIP policy. However, they can switch without paying any charges up to a certain amount. Once the investor exceeds the stipulated number of switches allowed, they must pay switching fees to the insurance provider. Usually, these charges are between the range of ₹100 to ₹500 for every switch. 

1. Partial Withdraw Charges: While holding a ULIP policy, an individual might encounter situations like medical emergencies where they need funds immediately. This is when ULIP policies come in handy, as insurers partially allow individuals to withdraw funds from their ULIPs.There are some ULIP plans available in the market which allow policyholders to withdraw partial funds from the ULIP for unlimited times. Whereas there are a few other plans that have a set limit and policyholders can partially withdraw funds only 2-4 times in a particular year. Insurers can charge up to ₹100 for each withdrawal in some cases. 

1. Premium Redirection Charges: An investor can redirect their premium into funds that carry less risk in the future without changing the policy's original structure or the policy itself. However, while redirecting the finances into low-risk options, this investor may have to pay additional charges to the insurance provider.  

1. Guarantee Charges: If an investor is looking for a ULIP policy to ensure that they receive high returns at maturity, then their insurance provider will charge them a guarantee fee. Usually, these ULIP policies come with high NAV and guaranteed returns.For instance, if an insurance provider offers a ULIP policy that will give the policyholder 120% returns within ten years, then any individual who purchases such a policy will have to pay the insurer an additional fee. 

1. Rider Charges: Rider charges are levied when the policyholder decides to add certain other benefits to the policy. For example, say a policyholder wants to include a critical illness rider in the policy. The insurance provider will charge an additional cost along with the base cost of the policy. 

1. Miscellaneous Charges: Insurance companies that sell the ULIP to individuals may charge certain small charges and such costs fall under the category of the miscellaneous charge. For instance, if a policyholder wishes to change his/her premium frequency from monthly to annually, then this policyholder will have to pay a small charge to the insurer. As an investor, one must know about all the charges in ULIP that any insurance-providing company can levy. This will help investors make informed choices while purchasing ULIP policies.