The ULIP is a life policy that offers an additional investment option. These are excellent long-term investment instruments that offer significant wealth build-up.
If you consider ULIP as an investment choice, it is vital to learn about its associated charges. That way, you will be aware of your total expenses when purchasing the policy.
Read on to learn about them in detail.
1. Administration charge
One of the most significant ULIP charges is the administration fee that insurance companies charge for managing the policy. They charge it every month by canceling fund units depending on the fee amount and selected investment funds.
2. Premium allocation charge
The insurance company charges a percentage of your premium as a fee for managing the costs associated with medical expenses, insurance agent’s commission, and underwriting. This is a front-loaded charge, which means the insurer deducts it from the premium first and then invests the balance amount in different funds. The amount ranges from 2% to 5%, depending on the insurance provider.
3. Fund switching charge
One of the best features of the ULIPs is the fund switching option. When purchasing a ULIP, you can choose how to allocate the money between different funds such as debt and equity. You can put the entire investment in one of them or divide the premium between the funds to create a balanced option. Your choice depends on your risk tenacity and market situation. If the market’s condition changes later, you can switch the funds accordingly to maximize your profit or lower the risk. However, the insurer charges you a fee for the action after you exceed the limit of free fund switches. Here, the amount charged depends on your insurer.
4. Fund management charge
When you purchase a ULIP policy, the insurer’s fund managers use the money to invest in debt, equity, or a mixture of funds to ensure safe, higher returns. Only experienced professionals manage the funds to make sure that the profits match your expectations. For this service, insurance companies charge a fund management fee. They deduct 0.75% to 1.5% from your fund’s total Net Asset Value (NAV). Remember that the amount charged depends on multiple factors such as the insurer and the type of funds used. For example, debt funds come with lower charges compared to equity funds.
5. Partial withdrawal charge
ULIPs come with a lock-in period of five years. Experts suggest that you must keep your money invested during this tenure to benefit from long-term returns. However, in case of any necessity, you have the option to withdraw a portion of the total fund. For this service, the insurer charges a partial withdrawal fee.
6. Mortality charge
A ULIP policy is a life insurance cover. It pays a death benefit to the nominees in case of an unfortunate event resulting in the policyholder’s absence. For this, the insurer levies a mortality fee. The amount depends on factors such as the insured’s health and age.
7. Risk charge
This charge is applied for the life insurance cover offered by the ULIP. When your total fund value is low, the risk charge can be higher. However, as the fund value increases, the charge reduces. If your ULIP offers a life cover larger than the total fund, the risk charge may increase with age.
Now that you know about the ULIP charges, it will be easier to determine the total cost of such a policy. Having a clear idea about this will help you calculate your estimated returns on investments.
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