Investing in ULIPs? Know the 5 Key Charges That Impact Your Returns

The most crucial aspect to consider while investing in a ULIP is the charges in the ULIP plan. They are the fees charged by the insurance company in return for their services. The charges are based on the policyholder's actions and are used for managing and administering the ULIP plan.

An insurance provider may collect various types of charges in ULIP, depending on several factors, such as ULIP plans and the insurance provider. Some are deducted from the premium amount, and some are charged by cancelling units from the fund.

What Are Some Types of ULIP Charges?

Unit Linked Insurance plans (ULIP) are considered as an excellent way to benefit from market upswing while also being protected with a life. While investing in a unit linked insurance plan, it is beneficial to take a look at all the charges in such plans. For a ULIP, insurers deduct specific premium amount for life cover before allotting the amount to the units. The charges may vary depending on the insurance companies and different types of ULIP plans. However, there are some types of charges in ULIP that remain constant irrespective of this.

Let us look at the ULIP plan charges in detail:

1. Premium Allocation Charge

   Premium allocation charges in ULIP are a fixed percentage of the cost deducted from the first premium. This charge is collected as a one-time fee at the beginning of the policy tenure, as the insurer performs various formalities and tasks related to the policy allocation, such as medical tests, underwriting, commission, etc.

2. Mortality charges

   These charges are levied for providing death cover to the insured. The mortality charges in ULIP are based on the policyholder’s health conditions, age, and the mortality table used by the insurance provider.

3. Fund management charge

   Fund management charges in ULIP are the fees levied by insurance companies to manage ULIP funds. The maximum charge insurance companies can levy is 1.35 percent of the fund value. For equity-oriented funds, the charge levied will be higher than for debt-oriented funds in your plan. /li>

4. Policy administration charge

   The insurance company levies policy administration charges every month for the expenses it incurs for policy administration. These include charges for policy maintenance, paperwork, bookkeeping, sending updates, etc. The charge is automatically levied by cancelling units from the fund.

5. Premium discontinuance charge

   When you discontinue your premiums in the initial five years (lock-in period), your funds will be allocated to the discontinuance policy fund and payable to you after the lock-in period is over. A discontinuance charge is applicable for discontinuance during the lock-in. If you discontinue your Ulip policy after five years, you won't be charged a surrender fee.

6. Partial withdrawal

   All ULIP plans come with a lock-in period, during which, the insured cannot withdraw any funds. However, after the lock-in period is over, the insurance provider may allow partial withdrawal only after paying a partial withdrawal charge. The maximum amount that can be withdrawn and the number of times it can be withdrawn varies from one company to another.

7. Goods & service tax

   When you purchase a ULIP, the insurance provider offers you various types of services, including allocating your funds, policy administration, premium allocation, surrender of funds, and so on. All these services attract a GST at the prevailing rates mentioned in the tax laws.

8. Rider charges

   You have the option to enhance the insurance coverage by including add-ons in the policy. However, the add-ons or riders can be added to the insurance after paying a charge, known as the rider charge.

9. Surrender or discontinuance charges

   All ULIP plans come with a lock-in period, during which withdrawal is not allowed. However, if you are suddenly faced with a financial crunch, you may want to liquidate the funds from your ULIP. In such a situation, your insurance provider will allow you to surrender the policy early by paying them a surrender or discontinuance charge.

10. Switching charge

    One part of your ULIP investment is invested in debt-equity funds in the market. Apart from choosing the debt-equity exposure, you can also move your money from one fund to another. For instance, if your debt-equity ratio is 50-50, you can make it 60-40. This is called switching, and it can be done by paying a switching charge.

11. Premium redirection charges

    You can select the funds towards which you want to allocate your premium amount. For this service, the insurer may charge a fee called the premium redirection charge. For instance, if you want to redirect your premium from fund A(low return) to fund B (high return), you can ask the insurer to do so by paying the charges.

12. Top up charge

    If you have a surplus at your disposal and wish to add it to your ULIP, you can do so by paying a top-up charge to the insurer. It allows you to invest an amount over and above the regular premium to gain higher returns.

13. Guarantee charges

    Once your ULIP completes the specific number of years, the insurer may offer guaranteed high returns irrespective of the market conditions. However, to get a higher return, you must pay the guarantee charges.

14. Miscellaneous charges

    The insurer may charge miscellaneous fees to offer added services such as changing the premium payment method or updating information.

Find out more about the benefits of ulip policies, as well as the best ULIP plans available at PNB MetLife.

Understanding ULIP Taxation

Investing in the ULIP plans is not only an excellent investment option, but it also allows you to enjoy tax benefits. While you invest in a combination of equity-debt and get insurance coverage, here are some tax benefits that you must be aware of:

• You can claim a tax deduction of up to ₹1.5lakhs per annum under section 80(C) of the Income Tax Act.
• When the policy matures, the amount received is exempt from tax under section 10 (10D) if the total premium paid is less than ₹2.5lakhs. However, if the premium for one ULIP or multiple ULIPs is more than ₹2.5lakhs, the sum received will be taxable as per the Income Tax Amendment 2021.
• For plans bought before 1st April 2012, if the premium is less than 20% of the sum assured the maturity amount will be exempt from tax.
• ULIPs bought between 1st April 2012 and 1st February 2021 shall be eligible for maturity benefits under section 10 (10D) if the premium is less than 10% of the sum assured.
• In the event of the death of the policyholder, the entire sum received will be tax-free.
• Partial withdrawals are not liable to tax if the withdrawal amount is less than 20% of the fund value. (lock-in-period 5 years).
• Taxable ULIP (equity-oriented) are liable to long-term capital tax at 10% if the return exceeds ₹1 lakh. Other investments are liable to be taxed at 20%.

Read more to know about tax on ULIP.

Understand the Charges Associated with Your ULIP Policy

Understanding the ULIP charges can be challenging for an ordinary person as they involve plenty of technical terms and complex fundamentals. However, here are three ways in which you can better understand the charges associated with your ULIP and find out which ULIP plan is best for you.

1. Sales Benefit Illustration: It is a document in which you can find out about the various charges the insurance company levies, how much amount is deducted and how much amount is invested in the funds. You can obtain a sales benefit illustration from the sales executive of the insurance company before you invest.
2. Advisor: If you know an advisor, you can seek his help in understanding how the ULIP charges work and how it will affect your premium and policy.
3. Product Brochure: All insurance companies have product brochures for the different insurance plans that they offer. The brochure contains a detailed explanation of the different aspects of the insurance product, including the charges, when they are applicable, and so on.

To Sum

If you are worried that your yield will reduce because of these charges, then do not worry as the regulator has a cap for the maximum reduction in yields. Now that you know about all the charges in ULIP that affect your yields, decide how much percentage of your income must get invested in ULIPs.
To know more about term plan, life insurance, term insurance, long term savings visit PNB MetLife website.

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