You have probably come across the Unit Linked Insurance Plan (ULIP) as a popular option for combining insurance and investment. But do you understand how ULIP premiums work and the factors that influence them? ULIP premiums are the money you pay towards a ULIP policy.
A portion of your premium is dedicated to life coverage, which is the guaranteed sum that your chosen beneficiary will receive in case of your demise. The remainder of your premium is invested in market-linked funds, such as equity, debt, or balanced funds. The returns from these funds contribute to your fund value, which is the total amount of money accumulated within your ULIP policy.
How are ULIP premiums calculated?
ULIP scheme premiums are calculated based on several factors, such as:
- Sum Assured: It refers to the life coverage you wish to obtain. If you choose a higher sum assured, your premium will also be higher. However, it’s important to note that, per IRDAI regulations, the sum assured should not be less than ten times the annual premium for regular ULIPs or 1.25 times the single premium for single premium ULIPs.
- Policy term: It represents the length of time you intend to purchase the ULIP policy. Opting for a longer policy term typically results in a lower premium. However, it’s vital to adhere to IRDAI regulations, which stipulate that the policy term should not be less than five years for regular premium ULIPs.
- The premium payment term: The premium payment term can span the entire policy term or a shorter duration, like 5, 10, or 15 years. Choosing a shorter payment term will lead to higher premiums.
- The premium payment frequency: The premium payment frequency is how often you pay your ULIP premiums, which can be yearly, half-yearly, quarterly, or monthly. Opting for more frequent payments will reduce the premium.
- The fund option: You can choose between equity, balanced, or debt avenues based on your risk tolerance and financial objectives. The fund option you choose can affect the premium indirectly, as different funds may have different charges and returns.
- Policyholder’s age: This factor affects the life cover component of the ULIP premium. The older and less healthy you are, the higher the premium. That is because the insurer considers you to have a higher mortality risk and charges a higher mortality charge, which is the cost of providing the life cover.
What are the charges involved in ULIP premiums?
When decoding ULIP meaning, you must get familiar with the fact that their premiums are not entirely invested in the fund option you choose. A certain percentage of the premium is deducted towards various charges, such as:
- Premium allocation charge: This is the charge levied by the insurer for allocating the premium to the fund option. It is usually higher in the initial years and reduces over time. It covers the insurer’s expenses, such as commission, underwriting, and administration.
- Fund management charge: This is the charge levied by the insurer for managing the investment fund. It is usually a percentage of the fund value and may vary depending on the type of fund. It covers the expenses of the fund manager, such as research, analysis, and trading.
- Mortality charge: This is the charge levied by the insurer for providing the life cover. It is usually a percentage of the sum at risk, the difference between the sum assured and the fund value. It depends on the age, health, and lifestyle of the policyholder and may vary over time. It covers the risk of death of the policyholder.
- Switching charge: This is the charge levied by the insurer for allowing the policyholder to switch between different fund options. It is usually a fixed amount per switch and may be waived for a certain number of switches in a year. It covers the expenses of the insurer, such as transactions and administration.
- Partial withdrawal charge: This is the charge levied by the insurer for allowing the policyholder to withdraw a part of the fund value before the maturity of the ULIP policy. It is usually a fixed amount per withdrawal and may be waived for a certain number of withdrawals in a year. It covers the expenses of the insurer, such as transactions and administration.
- Discontinuance charge: This is the charge levied by the insurer for allowing the policyholder to discontinue the ULIP policy before the maturity or the lock-in period. It is usually a percentage of the fund value or the annualised premium and may vary depending on the policy term, premium payment term, and premium amount. It covers the loss of the insurer due to the interruption of the policy.
ULIP premiums are an essential aspect of ULIP plans that determine the cost and benefits of the policy. You should understand how ULIP premiums are calculated, what charges are involved, how to save tax on them, and how to choose the best ULIP plan for your needs. You can also compare different ULIP plans online and use a ULIP calculator to estimate the premiums and returns of various ULIP plans. This can help you make an informed and smart decision about buying a ULIP plan.