What are premium allocation Charges in ULIPs? I saw some ULIP plans which did not levy such charges. What is the current scene with such charges?
Every time you take up a ULIP insurance plan, the insurance company spends some amount of money on distributor fee, underwriting expenses of the policy as well as medical expenses. Premium allocation charges are levied as a certain percentage of the premium to offset for all such expenses. Premium allocation charges are deducted upfront and the remaining money gets invested in the chosen fund.
Yes you are right that some insurance companies are waiving off any premium allocation charges. Usually the waiving of is only in case the annual investment exceeds a certain threshold limit. Still it is always prudent to check with your insurance service provider about the charges they are likely to deduct towards premium allocation.
Can we still get ULIPs with no premium allocation charges?
Premium allocation charges are deducted upfront and the remaining money gets invested
in the chosen fund. But yes some insurance companies are waiving off any premium allocation charges in case the annual investment exceeds a certain threshold limit. If you invest Rs 5,000 each month in a ULIP plan which has a 2% premium allocation charge, this means that Rs. 100 would be deducted upfront and only Rs. 4900 will be used to purchase units of the fund.
Premium allocation charges are those that are deducted from the ULIP premium upfront. This is a percentage of the premium that is deducted before allocating the units for your policy. Premium allocation charges are levied by insurance firms in order to recover the initial expense incurred by them for issuing the policy. This will include costs such as distributor fee and the cost incurred for underwriting the policy. After deducting these charges, the balance is used to purchase units of the fund chosen by you.
Earlier, the high charges levied by insurance companies made way for rampant misselling by distributors and insurance agents. Now with the Insurance Regulatory and Development Authority of India capping the annualised charges of ULIPs at 2.25% for the first 10 years of holding, ULIPs might be worth looking at. Also, ULIP charges are required to be evenly distributed during the lock-in period.
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