Know your ULIP charges


A traditional plan has an opaque structure which does not reveal the break-up between the charges and the investible amount. An ULIP scores in this regard as it is transparent in respect to the charges and a clear break up is available to the policyholder. That brings us to the question on what the charges in an ULIP are.

Read on to know more:

Premium allocation charge (PAC) – This charge is deducted upfront from the premium and the balance premium (investible amount) is used to purchase units of the chosen investment fund(s). This charge is deducted to cover the initial charges borne by the company for agent’s commission, underwriting expenses, medical expenses, marketing and distribution expenses etc. It is deducted as % of the premium paid (on both initial and renewal premium) and is higher in the initial policy years. Most products have a PAC only in the initial 5-7 policy years and then it is nil. It varies depending on whether the product is a single premium or regular premium one. Some of the ULIPs sold online do not have a PAC and the entire premium is invested.

Cost of Insurance/Mortality Charges – Though most people buy ULIPs from an investment perspective, it is an insurance policy and hence has a life cover component for which mortality charges or cost of insurance is payable (like it or not). It is usually deducted on a monthly basis by cancellation of units from the policy fund (proportionately in case of more than one fund) at the prevailing NAV.

The mortality charge is dependent on age, gender, health conditions etc. The mortality table is a part of the policy contract and depicts the mortality charges applicable for your policy.

Fund Management charge (FMC) – The ULIP investments are similar to those made in a mutual fund. Accordingly, FMC is applicable. The FMC is built into the NAV i.e. it is deducted before computation of the daily NAV. IRDA has capped these charges to 1.35% of policy fund value in a year.

Policy administration charges – These are the charges incurred by the company for servicing and maintaining the policy (renewal intimations etc). It is deducted on a monthly basis by cancellation of units from the policy fund (proportionately in case of more than one fund) at the prevailing NAV. It is usually a fixed amount. Some of the ULIPs sold online do not have this charge.

­These are the 4 charges applicable for every ULIP policy. Additionally, surrender charges, reinstatement charges, switching charges, top-up charges etc may be applicable in case the policyholder exercises any of these options.

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