When you invest in a policy or a fund, you are required to pay a certain amount towards it. This amount is known as premium. The product stays operational as long as the premium is being paid on time. The premium is utilised for many things in the policy or fund. When you invest in a product like a ULIP policy, the premium you pay is utilised for more than just sustaining the policy. Read on to know how the premium gets utilised in ULIPs.
What is a ULIP?
A ULIP policy is a type of life insurance policy in which you get the dual benefits of investment and insurance in a single policy. You get to invest in equity funds and debt funds. Equity funds are high-risk, high-return; debt funds are low-to-medium risk, medium-returns fund. The investment is based on your risk appetite and what your life goals are.
Via insurance, your loved ones gets financial protection from life risks. If the policyholder passes away suddenly during the term of the policy, the insurer will compensate their family with a death benefit. This amount can be used by them to manage daily expenses.
How is the premium in ULIPs utilised?
The premium that you pay towards your policy is utilised in the following ways:
1. For investment
When you invest in ULIPs, you have the option of investing equity funds, debt funds or balanced funds. The investment you make should match your risk appetite and your requirements. The money that is required for investment is taken from the premium. A portion of the premium is used for investing the money in the funds of your liking. If at any point of time you want to increase your investment amount, you can easily do so with the help of a top-up premium.
2. For insurance
In ULIPs, your dependents get life protection cover from different life risks. This protection is given in the form of a death benefit. If you pass away suddenly during the mid-term of your policy, the insurer will compensate them with the death benefit. The amount for this cover is deducted from the premium. When you buy the policy, the life protection cover begins from Day 1.
While there are different types of ULIPs available for you in the market, the charges that are applied on them are common. There are various charges that get applied on them. These charges are:
4. Policy administration charges
These charges are related to the management of your policy. Charges related to the maintenance and paperwork of your policy are included in it.
5. Fund management charges
If you opt for the services of a fund manager to manage your investment, your insurer will charge you for availing this service. Under this service, the fund manager will manage your funds and make decisions based on your instructions.
6. Premium allocation charges
This charge is related to the different expenses incurred when the policy is issued to you. These charges are related to documentation, medical paperwork, and other underwritings related to the policy.
7. Mortality charge
As mentioned above, the dependents get a death benefit upon the passing away of the policyholder. There is a charge levied on this benefit that is deducted from the premium. This charge is known as a mortality charge.
8. Switching charge
You have the option of reallocating your investment from one fund to another fund. This reallocation is known as switching. There are a limited number of free switches that you can do. After that, the insurer will charge you for switching your funds.
As you can see, this is how the premiums in ULIPs are utilised. You can get in touch with your insurance advisor to know more about other charges related to ULIPs. If you want to purchase your policy online, you can use the ULIP plan calculator to see how much it would cost you based on your requirements.