Many people are afraid to block all their money from paying premiums for their life insurance. There is a type of life insurance policy that allows individuals to get a life cover while also providing returns on investment. A Unit Linked Insurance Plan (ULIP) exactly does that. What is a ULIP policy? It is a combined financial instrument of insurance and investment. However, since it has two instruments clubbed, it can seem complicated to understand. It is important to know the different components of a ULIP and their meaning before buying one.

What is a ULIP policy and how is it different from other insurances?

It is important to know that ULIP is directly linked to the market. When you buy a ULIP plan, you are required to pay premiums on a recurring basis. They partially used these premiums towards your insurance cover and partially investment in different funds. You choose the funds where your money goes. Depending upon the risk you can endure, there are three types of ULIP available: debt, equity, and balanced. Most ULIPs usually have a lock-in period of 5 years. After the lock-in periods, you are permitted to withdraw partial funds from ULIP in time of need. After the tenure of your ULIP plan ends, you get the fund value of your investment. This includes the investment quotient of your ULIP and the returns received on it. However, in an unfortunate event where you have lost your life, your nominee received the death benefit. They may receive the sum cover, your investment, or a combination of both. This depends on the terms and conditions of your policy.

What are the important components of a ULIP?

Since ULIP has two financial quotients, there are several components you will come across when you buy a ULIP online or offline. Here are some important components and charges of ULIP that you need to know:

Policy administration charges

When you buy a ULIP policy, you are required to pay a fixed amount of charges for all the paperwork. The paperwork usually includes documentation regarding your policy, sending premium intimation, or a notice of policy revival.

Premium allocation

 When you pay the premium of your ULIP, a fixed percentage of it is deducted towards the allocation of premium. They used these fees against expenses incurred, like renewal charges and commissions against the policy. The amount of these charges is based on the frequency of the premium and the type of premium selected. After the initial years, usually, the insurance companies reduce the premium allocation charges.

Fund management

Depending upon the different types of ULIP funds you choose, your money is invested accordingly. There are charges levied for managing the investment part of your ULIP. They directly deducted these charges from the net asset value (NAV) of the fund. An insurance company can charge a maximum of 1.35% annually for managing your funds. Usually, equity funds have higher charges for management compared to debt or balanced funds. This may be because equity funds are high risk, high return funds.

Charges for switching between funds

Most ULIPs allow you to switch between different funds so you can get maximum returns from your investments. This is one of the biggest benefits of opting for a ULIP plan since it gives you flexibility. As years go by, your risk appetite may change. Say earlier you had no dependents, so you could place all your money in equity. Whereas, now you are married and would instead prefer debt or balanced funds. Some ULIPs allow you to do these switches on unlimited times with no charges. While others charge you after you have exhausted the maximum number of switches.

Mortality fee

A mortality fee is a fee that you have to pay every month towards the insurance component of your ULIP. They include it in the premium of your ULIP. Your age, sum assured, medical history, and several other policy details determine your mortality fees.

If, after the lock-in period, you prefer to discontinue your ULIP; you are required to pay discontinuance charges to the insurance company. Also, there are upfront fee charges levied by ULIP companies for partial withdrawals. When you buy a ULIP online, it is important to be well aware of these components in advance to avoid any confusion.