Common ULIP Charges to Know Before Investing

Are you worried about the financial security of your family? If yes, then investing in a life insurance policy is an advisable option, as it can help you provide a stable financial future, especially if you are not around.

There are various types of insurance policies available in the market. Still, Unit-Linked Insurance Plan (ULIP) is one of the most popular options, as it offers life cover as well as substantial returns. If you are wonder what is ULIP plan and why it is a noteworthy investment avenue, then read on.

ULIP is a one-of-its-kind financial product, as it offers the dual benefits of insurance and investment. The insurer invests part of the amount in equity or debt funds. One of the best things about ULIP is that it allows you to choose the type of fund where you want to invest your hard-earned money. When you have made up your mind about investing in ULIP, it is essential to know about the various types of ULIP charges levied by the insurer while underwriting the policy.

Different costs related to ULIP investment

Here are some common ULIP charges that you should understand before investing.

  • Premium allocation charge (PAC)

PAC is a front-loaded charge deducted by the insurer from the premium you will pay for the first year. The percentage varies from insurer to insurer, and during the initial years of the policy, they are usually higher. PAC covers underwriting fees, cost of medical tests, and the agent’s commission. After PAC’s deduction from the premium, the insurer invests the balance amount in your chosen fund.

  • Administration charges 

Administration expenses are deducted every month to cover the policy’s management fees. You do not have to pay anything to the insurer; they will deduct it equitably from the selected funds’ units.

  • Fund management charge (FMC)

A part of the premium you pay towards your ULIP is invested in equity, debt, or a combination of both funds. The insurer levies an FMC to manage your investments. They deduct these charges before ascertaining the NAV. The FMC is usually high in equity funds compared to the debt funds. Usually, such charges range between 0.75 to 1.35 percent of the fund value per annum

  • Partial withdrawal charge

One of the best aspects of ULIP investment is that you can partly withdraw your investments after the mandatory lock-in period of five years. The partial withdrawal charge is a type of cost that you will have to bear while making such withdrawals.

  • Mortality charge

The insurer imposes mortality charges to provide the policyholder with death cover. Such charges vary, as they are influenced by factors like your lifestyle habits, age, and medical conditions, if any.

  • Fund switching charge

One of the reasons why ULIP is one of the most favored life insurance plans available in the market today is that it enables you to move your investments from one fund to another based on your risk-bearing appetite. The prime benefit of switching funds is that you can avert the risks of losing money due to the market’s uncertainties. The switching of funds is subject to some charges based on your policy’s terms with the insurer.

Though there are various charges involved with ULIPs, it is still advisable to invest in such a policy. When it comes to long-term investments, ULIP returns are significantly high as compared to other instruments. So, if you do not have ULIP, invest in a suitable one without any further delay. If you need advice, get in touch with a financial expert to guide you with the procedure.