Everyone aspires to achieve long-term financial stability and meet personal goals such as wealth creation, education funding, or retirement planning. One of the effective ways to achieve these goals is through disciplined investing. Among several investment options, ULIP insurance plans have become one of the popular life insurance products in the market, as they offer the dual benefit of life coverage and investment. However, with ULIPs, different charges are levied by the insurer depending on the services offered to the insured. In this article, we will explore the different types of ULIP charges, their purpose, and what investors should know before making a decision.
What are ULIP Charges?
In a unit-linked insurance plan, there are certain fees and charges that are levied on the policyholder. Some charges also depend upon the actions of the policyholder. The ULIP charges differ from one insurance company to another.
If you are wondering which charges are applied under a ULIP policy, then read ahead and find out.
Premium Allocation Charges
Premium allocation charges cover the initial expenses that the insurer incurs to allocate the policy to you. The PAC includes underwriting charges, commission charges, medical test charges, etc. These charges are deducted as a fixed percentage from the premium paid during the first policy year.
For example, if the premium allocation charges are 10% and the premium paid is ₹50,000, then ₹5,000 will be deducted, and ₹45,000 will be invested.
Fund Management Charges
Fund Management Charges (FMC) are fees collected by the insurer for actively managing the investment portfolio within your ULIP. This charge compensates the company for the expertise and resources used to manage the underlying equity, debt, or balanced funds. The FMC is calculated as a percentage of your fund's value and is deducted daily before the Net Asset Value (NAV) is computed. Regulatory guidelines stipulate that this charge cannot exceed a maximum limit of 1.35% per annum.
Policy Administration Charges
Policy Administration Charges are recurrent fees levied by the insurance company to cover the general administrative expenses of maintaining your ULIP. These costs typically include tasks such as record-keeping, processing paperwork, and providing essential customer service throughout the policy term. The charge is usually deducted monthly by cancelling a specific number of units from your accumulated fund value. Depending on the insurer's terms, this fee may remain fixed or increase annually at a pre-defined rate.
Mortality Charges
Mortality Charges represent the cost of providing the life insurance coverage component that is embedded within the ULIP structure. These fees are determined by several factors, including the policyholder's current age, the total sum assured, and their general health condition. Because risk increases with age, these charges are generally higher for older policyholders. The insurer deducts these costs on a monthly basis by cancelling units from the fund value, ensuring continuous life cover.
Rider Charge
Policyholders opt for riders# to enhance the coverage of the policy. If you choose riders# to enhance the coverage of your ULIP plan, then additional charges are applicable. The ULIP charges are deducted from the funds of the policyholder every month.
Switching Charges
Investors are allowed to switch between funds in ULIP insurance plans. The policyholder can make a certain number of switches free of cost. However, after the limit gets exhausted, each switch the insured makes attracts charges between ₹100 to ₹500. The charge depends upon the insurance company that you choose.
Premium Redirection Charges
If you redirect your future premiums to a less-risk fund without tweaking the existing fund structure, then there are some charges that you need to pay. These are called the premium redirection charges. For example, if you have been directing your premiums to fund A but wish to invest in fund B. In that case, you can easily redirect your future premiums to fund B without affecting the investment already made in fund A.
Partial Withdrawal Charges
After the lock-in period, the policyholder can make partial withdrawals from their ULIP policy. While some insurers do not charge for partial withdrawals, others charge a partial withdrawal charge as per the policy term if the insured makes more than a certain number of withdrawals.
Policy Surrender Charges
In an unexpected financial crunch, the policyholder may decide to withdraw the units either through complete or partial policy surrender within the first 4 years of the policy. After the 5th year, you do not have to pay any charges if you plan to surrender your policy. The policy surrender charges are calculated as a percentage of the fund value or the annual premium amount.
Guarantee Charges
Guarantee Charges are fees paid to the insurer for promising minimum benefits, such as a Minimum NAV or an Assured Maturity Value. This charge compensates the company for taking on the market risk, ensuring your capital is protected even if fund performance is poor, and is deducted periodically from your fund value.
Top-up Charges
A Top-up Charge is a small percentage (usually 1-3%) deducted when a policyholder makes an additional investment beyond their regular premium. This allows investors with surplus funds to enhance their long-term growth, though the extra contribution may also lead to a slight increase in the associated mortality charges.
Premium Discontinuance Charge
The Premium Discontinuance Charge is levied if premium payments stop before the mandatory five-year lock-in period is completed. The policy moves to a separate Discontinuance Fund with limited growth. It is highly recommended to continue paying for at least ten years to avoid this fee and maximise your policy's potential.
Miscellaneous Charges
These are small fees that you pay in case you wish to change some things in your insurance plan. For example, you might have to incur a small fee if you wish to change your premium payment mode from yearly to half-yearly.
Overview of ULIP Taxation and Applicable Rules
Let's see the taxation rules that apply to ULIPS
GST Charges Applicable on ULIPs
Goods and Services Tax (GST) applies only to specific ULIP service fees, not the entire premium. Charges like fund management or policy administration attract an additional GST of 18%. This tax is calculated on the amount of the charge itself, ultimately affecting the net return on your investment.
Tax Deductions on ULIP Premiums under Section 80C
Under Section 80C of the Income Tax* Act, an individual can avail of a tax deduction up to ₹1.5 lakh on premiums paid for a ULIP policy. However, this comes with a condition that the premium paid in any given year should not surpass 10% of the Sum Assured provided under the respective plan.
Tax Exemption on ULIP Maturity under Section 10(10D)
The maturity amount received from a ULIP is exempt under Section 10(10D), provided certain conditions are satisfied. Importantly, for the full tenure of the policy, the annual premium must not exceed 10% of the Sum Assured in order to obtain this full tax benefit.
Understanding the Key ULIP Charges Before You Invest
Due diligence is important to analyse the real cost of a ULIP. Specific documents should be looked into, and an expert should be consulted to identify the total charges and their impact on net investment returns.
Sales Illustration and Cost Breakdown
A Sales Illustration gives the detailed, year-by-year cost breakdown of all charges levied on your policy. The review of this document is necessary because it will allow accurate comparisons between different ULIP plans and identify the net amount invested over time.
Reviewing the ULIP Product Brochure
The ULIP Product Brochure is the authoritative source for detailed charge information. It discloses the structure of fees, such as policy administration and switching charges, including the maximum limits. Thoroughly reviewing this ensures transparency and compliance with regulatory guidelines.
Role of a Financial Advisor in Explaining ULIP Charges
A qualified Financial Advisor helps explain the complicated fee structures of ULIPs. They can accurately explain how each charge affects your fund value and help you select a plan that aligns with your specific financial goals and risk tolerance.
Tips to Reduce ULIP-Related Charges
Select newer, reformed ULIP plans known for minimal fund management and zero allocation charges.
Commit to the long term (10 years or more) to ensure initial charges are amortised effectively.
Limit fund switches to the complimentary annual allowance to avoid flat switching fees.
Refrain from early policy surrender to bypass the high discontinuance charge structure.
Conclusion
Even though ULIPs come with a combined benefit of life insurance coverage and investment returns, it is important to be aware of the types of charges in ULIP before you decide to buy a plan for yourself. If you are someone who wants to secure their family financially and create wealth through market-linked returns, ULIPs may be suitable for you. It is also advisable to consult a financial professional to interpret costs accurately and align the plan with personal goals. Ultimately, awareness and informed comparison can help ensure that the chosen ULIP fits your financial planning approach effectively.
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