People have started taking investment planning very seriously from a young age. However, with so many options out there, selecting the right option as per individual needs remains a risk.
As an investor, it is wise to explore every option present in the market. One such investment option is the Unit-Linked Insurance Plan or ULIP. Along with the wealth-building option, ULIPs offer life coverage as well. Remember, ULIP investments and returns are market linked.
ULIPs bring decent returns, but you must educate yourself on the charges or fees involved to navigate the impact of various charges or fees on the returns in the long run. Below mentioned are most common charges that individuals must know before investing in ULIP.
1. Premium Allocation Charges
During the policy insurance, the insurance company incurs few specific expenses. These expenses are the percentage of the first-year premium charged before the fund allocation, including medical, underwriting costs, intermediary fees, agent’s commission, etc. Once the deduction happens, the remaining amount is invested in the chosen fund. The premium allocation charges levied on the policy may seem high in the first year but the same tapers subsequently.
2. Administration Charges
Every policy administered by the insurance company costs you an administration fee by cancelling units proportionately from each of the funds in your chosen ULIP plan. These administration charges may remain the same or vary at a predefined rate depending upon the policy.
3. Fund Management Charges
For an investor, there are several fund options available. However, there exists a fee for managing these funds, which is calculated as a percentage of the fund value and deduced before the computation of the fund’s net asset value.
4. Discontinuance charges
As the name suggests, when the insurer decides to surrender the policy before 5 years, there are discontinuance charges levied by the insurance company. These charges are a percentage of the fund value or the premium and may vary depending on the exit timeline. For instance, if you exit in the second year, the charge is lower, but an exit in the fourth year will cost the lowest.
5. Partial withdrawal charges
Investors are allowed to withdraw from ULIP from the fifth year onwards, subject to specified conditions. These withdrawals generally attract penalty charges from the insurance company in the form of partial withdrawal charges.
6. Mortality charges
ULIPs offer life cover along with market-linked returns. For the life cover, the insurance provider levies a mortality charge on the policy. The insurer considers factors like health risk, gender, age, along with the reference from the mortality table.
7. Switching charge
The investor gets the ease of free-fund switches between debts to equity funds and vice versa and the ease of switching between funds depending upon their risk profile. After a prescribed number of free fund switches, the insurer may charge nominal fee per fund switch.
8. Premium redirection charges
Redirecting future premiums into different funds attracts premium redirection charges. The premium redirection happens without changing the existing funds structure. After a prescribed number of free premium redirections, the insurer may charge nominal fee per premium redirection.
ULIP proves to be a good insurance cum investment option. Some ULIP charges may or may not be applicable depending on the policyholder’s choice. Always choose an insurer that guarantees transparency and assures a financially secure future.