Demystifying Life Insurance Charges: A Comprehensive Guide

 

In this policy, the investment risks in the investment portfolio is borne by the policyholder

When it comes to securing your loved ones’ future, having life insurance is indeed a relief. In addition, if you purchase a Unit Linked Insurance Plan (ULIP), it doesn’t just operate as a life insurance, but opens up a lucrative investment opportunity as well. In these policies, a part of the premium you pay is dedicated to the life cover, while the remaining is invested in a portfolio of your choice, to fetch returns from the market. So, while your family gets the death benefit in the event of your untimely demise, the fund value is available as the maturity benefit if you survive the whole term. But wait, is the entire amount you pay, available for investment? The answer is no. The insurance company levies these five types of charges on different occasions, which you need to be aware of.

In most cases, these five charges associated with your life insurance policy are not communicated openly to you. Neither are they elaborated on in the policy document. So, let us guide you on how and where your money gets deducted.

Premium Sum Allocation charges

A part of your premium gets deducted as the fee for allocating the same. This amount of money compensates for the major costs incurred by the insurer in allotting your policy. Heads like distributor charges, cost of underwriting etc. fall in this category. 

Surrender or Discontinuation charges

Suppose you wish to discontinue your policy before its maturity or decide to make a partial withdrawal of your fund. In this case, the insurer may charges a surrender value which is a percentage of the annualised premium funds. .

Mortality charges

The premium and sum assured in a life insurance policy is calculated based on the life expectancy of the policyholder depending on his age, gender, overall health and lifestyle. However, in case Policyholder dies an untimely death, the sum assured needs to be paid to the nominee. To compensate for this, a portion of the premium is deducted every month as mortality charges. Even though a ULIP is primarily considered an investment, mortality charges are deducted.

Fund Management charge

The investment component of the premium of a ULIP policy is put into equities, bonds, or a mix of both depending on the policyholder’s financial goals and risk appetite. Based on the funds’ performance, evolving life goals or risk preferences, the portfolio gets restructured to fetch optimum returns. The insurance company imposes a fund management charge levied upon the accrued fund value. However, according to the IRDAI guidelines, the upper limit for this charge is 1.35% per year. 

Insurance Policy Administration charge

The insurance company charges a monthly fee to ensure proper administration of your Ulip policy. This charge is basically the organisational expenditure towards your policy, which includes the cost of paperwork, premium payment notification etc. These charges can be deducted at a fixed percentage throughout the policy term or can get increased at a specified rate over time.

A detailed read of the policy document might inform you of the charges payable from your premium or fund value. But in most cases, we all skip the process. Needless to say, being well aware of these hidden costs can always help you optimise the gains from your investment.  

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ARN -  ED/10/23/5490