A life insurance plan is an exceptional investment product that extends life cover and an investment-cum-savings policy with lucrative gains. By investing funds in a life insurance policy, people can plan for the safety of their loved ones during times of crisis and some influential life situations around the life policy maturity. While conventional insurance products are great, they get even better if the gains are capital market-linked.
This is precisely what ULIPs (Unit-Linked Investment Plans) are as they extend the benefits of life insurance and capital market instruments to help investors subdue their tax liability. However, people can only receive advantages of this life insurance product only when they remain informed of what are the various life insurance fees and charges that insurance companies levies from their customers.
Five Charges Associated with Life Insurance Policies
As a competent investor, it is crucial to place aside a part of your earnings every month for your goal-based investments. This awareness amongst people led to the introduction of several life insurance products to help you invest funds for your long and short term life goals.
However, insurance companies have usually found themselves at the receiving point for forcing stiff life insurance charges since these costs shrink the investible part of the premium sum paid. Also, these insurance charges do not usually get openly communicated to the policy customers and never get mentioned in the policy either.
This is why to familiarise customers and investors with these fees, mentioned hereunder are different types of charges available in an insurance policy.
1. Premium Sum Allocation Charges
Premium sum allocation charges are upfront fees subtracted from the policyholder's life insurance premium. It gets imposed as a portion of the insurance premium. Also, these costs reckon for the principal expenses incurred by the insurance company in allotting the life insurance policy.
Examples of this include the medicals and charges related to distributor charges, cost of underwriting and many more. Moreover, after deducting these charges, the outstanding premium sum gets reinvested in the funds preferred by the insured person.
2. Surrender or Discontinuance Charges
A surrender charge in a life insurance policy might get deducted for premature encashment of the insurance, either partially or in full. This life insurance surrender charge usually gets determined as a portion of the annualised premium funds.
Moreover, IRDAI set guidelines on the maximum charges that life insurance companies impose. The surrender or the discontinuance charge shall not surpass 50 basis points per year on the unit capital value and, the insurance company shall levy no other charges.
You must likewise understand that the IRDAI has established guidelines to curb the influence of these modifications on the overall gain from the investible part of your premium.
3. Mortality Charges
These mortality charges get imposed towards equipping you with insurance coverage. When a life insurance policy is issued, the insurance company considers the person insured will live to a specific age based on their prevailing age, health conditions and gender.
These life insurance fees and charges (levied once a month) compensate the insurance company when the person insured does not live to the expected age. Moreover, the actual sum spent under this head relies on the sum of life cover solicited, the age of the policyholder and other such information.
This method of calculating the mortality charges along with the death charge table is usually a section of the policy document. Also, when people purchase an insurance cum investment life insurance product like a ULIP, their principal purpose is an investment. While they might get sufficient coverage, they still have to pay the mortality charges on the chosen insurance product.
4. Fund Management Charge
Insurance companies usually levy these charges on administering your fund, and it gets imposed as a portion of the worth of assets. This life insurance charge gets subtracted before coming at the net asset value, or NAV.
While it varies from one insurance sum to another, according to the IRDAI's fixed limit, life insurance companies cannot impose fund management charges of more than 1.35% per year. Customarily, debt-oriented life insurance products such as ULIPs will hold a more economical fund administration fee than their equity-oriented counterparts.
You must further note that the fund management expenses get imposed on the accrued value and not merely the premium spent. Hence, in material terms, as the corpus increases, the exact amount subtracted as a fund administration charge moves up.
5. Insurance Policy Administration Charge
This policy administration charge gets subtracted from the organisational expenditures incurred by the firm towards the sustenance of the life insurance policy. These charges (levied once a month) usually include the paperwork cost, the premium intimation, and so on.
This charge could either be even throughout the life insurance policy duration or could rise at a predetermined price. Alternatively, it could be an even rate during the opening 3-5 years and then multiply by a set rate every year.
To sum up, we can say that as an investor, you must remain informed of these different types of life insurance charges. Being well-aware of these charges will ensure that your funds never get reduced due to unnecessary expenses, and you get the most profitable earnings for an extended time.