A Life insurance policy is one of the best investment products that offers life cover and extends support in investment and savings at the same time.
The major benefit of investing in a Life Insurance policy is getting the financial safety of their loved ones during times of crisis or for dealing with influential life situations.
However, to avail of the benefits of a Life Insurance Plan, it is necessary to be aware of all the charges and fees associated at the time of buying a Life Insurance Plan.
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Major Charges Associated with Life Insurance Policies
Premium Sum Allocation Charges
The Premium Sum allocation charges are a kind of upfront fee deducted from the Policyholder’s Life Insurance premium. Against the premium payment, the insurance company is giving financial security to the policyholder.
For example, At times of hospitalization, the medicals and charges related to distributor charges, cost of underwriting, and many more. Moreover, after deducting these charges, the outstanding premium is used for reinvestment in the funds preferred by the insured person.
Surrender or Discontinuation Charges
The surrender charges in a Life Insurance levies at the time of premature encashment of the insurance, either partially or in full. This life insurance surrender charge usually gets determined as a portion of the annualized premium funds. As per IRDAI guidelines, the maximum surrender or discontinuation charges shall not surpass 50 basis points per year on the unit capital value, and the insurance company shall levy no other charges.
Mortality Charges
Mortality charges in life insurance is the fee imposed by the insurance company in favour of the life protection of the policyholder. These charges are levied by 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.
Generally, mortality charges are involved with Unit Linked Insurance Policies. When an investor subscribes to a ULIP plan, the premium is paid in two parts. One part covers the life risk and the remaining part in market-linked products for wealth creation. The former part includes the mortality charges to provide insurance protection upon the death of the policyholder.
Fund Management Charges
The charges that the insurance company levy for fund management under the Unit Linked Insurance Policy. Under ULIP, part of the premium paid goes for the life cover, and the remaining half goes for investment in the funds. The management of these funds attracts a fee called fund management charges.
The charges vary from one insurance company to the other, but the regulator IRDA has levied a capping on these charges. The regulatory body has stated that the insurance company can charge 1.35% per year in the name of fund management.
Insurance Policy Administration Charges
This charge is levied by the insurance company to cover the costs of administration of the policy and includes paperwork expenses and costs incurred for sending premium intimations and regular updates to the policyholder.
Premium Redirection Charges
These charges are applicable when a policyholder plans to redirect future premiums towards a low-risk fund to help you meet your future financial requirements. If you do this without tweaking your fund structure, the company levies a premium direction charge.
Miscellaneous Charges
These charges are imposed at the time when a policyholder makes some amendment to the policy. For example, if you want to change your premium payment frequency, you may have to pay an additional fee.
Partial Withdrawal Charges
In a policy, when you partially make withdrawals from the accumulated corpus in emergencies. It varies from company to company, depending on the reason and the number of withdrawals already completed during the policy term.
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 the above-mentioned charges will ensure that you get the most profitable earnings for an extended time.
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