Costs and Charges in a Unit Linked Insurance Plan
While we are on the topic of ULIPs and after having discussed and understood the working, features and benefits of a ULIP in the last two articles, it is also essential to know what are the various kinds of expenses and charges involved with a ULIP. Though ULIPs are transparent and the client gets to know exactly how much of his premium goes towards charges once he has taken the policy, Insurance Companies seldom talk about it in detail while marketing and selling their policies. Unit Linked Policies with huge recurring expenses eat away a major portion of the profits earned by way of NAV appreciation.
- Premium Allocation charges – These are charges to cover the running expenses of a policy and to pay for issuance and distribution commissions. These are a percentage of the regular/single premium paid and are usually high in the first year. For Example – If a product has an allocation charge of 5 % in the 1st year, an amount of Rs 5000 would be deducted from the first annual premium of Rs 100000/- towards this expense.
- Policy Administrative charges – These are levied for the administration of the policy – IT, operational etc. These charges usually get adjusted in Unit Value or the NAV, and the NAV is declared after adjusting these costs.
- Fund Management Fee – All Unit Linked plans have underlying funds constituting of various financial instruments like equity, debt, money market etc. The Fund Management Fee or FMC is levied to pay for managing these instruments – cost of buying and selling them for various funds. The fund option which has a higher percentage of equity would have higher charges.
- Mortality charges – This covers the cost of providing life protection for the insured and is expressed as per thousand of the Sum Assured or life cover. For example if a person aged 35 buys a ULIP with a life cover of Rs 10 Lakhs and a mortality charge of 1.5 , the recurring mortality charge would be (1.5* 10Lakhs)/1000 = Rs 1500.
- Rider charges– These pay for other protection benefits that the policyholder has chosen- accident benefit, critical illness etc.
- Surrender charges – If the policyholder wishes to close the policy or withdraw partially during the term, this charge may apply. Usually this charge is applicable only for withdrawal in the first few years.
- Transaction charges – These are specific charges levied when the client does transactions like switching between funds or top ups.