Mortality Charges in ULIPs

If you are seeking a life insurance plan and an investment avenue, you can consider Unit Linked Insurance Plans (ULIPs). These are hybrid financial instruments combining the advantages of insurance and investment. 

With ULIPs, you can pursue your long-term investment goals and also get financial coverage in case of an unfortunate event. It offers various benefits, such as:

• Freedom to choose your life cover 

• Tax benefits 

• Goal-based planning 

• Premature withdrawal facility

If you intend to get a plan, being aware of the mortality charges in ULIPs and how they are calculated is essential. This can help you understand the potential returns that you stand to receive.

Knowing how ULIPs work is essential in making an informed decision. Here is an overview of how these plans work:

• You need to pay a premium amount to start investing in a Unit Linked Insurance Plan

• The premium can be paid in a lump sum or monthly, quarterly, semi-annual, or annual instalments

• After payment, the premium is divided into two parts. One is invested in a fund of your choice, and the other towards a life insurance plan

• For the investment part, you can select between equity, debt, or hybrid funds

• Professional fund managers manage these funds, keeping your investment goal and risk appetite in mind

• The returns on investment depend on market performance and the chosen fund's performance

Financial institutions offering a ULIP generally levy a fee for providing life insurance coverage in case of your demise and address various associated costs. This fee is known as the mortality charge, which generally gets subtracted before the funds are invested. 

As mentioned, the premium towards investment fetches your returns, while the portion towards life insurance provides financial cover during demise. If you survive through the term, the company pays you the total fund value upon maturity of the policy. 

In the unfortunate case of your demise, the insurance company needs to pay the sum of the risk out of its pocket. Mortality charges are deducted to compensate the insurer for this cost or loss.

Mortality charges in ULIPs can affect the investment’s potential returns and the final value. As such, it is important to be aware of these charges and seek plans that have low charges. Here are some factors to know:

• Age: It significantly influences the extent of mortality charges for your policy. The younger you are, the lower these charges will be and vice versa

• Lifestyle choices: Habits like smoking and excessive alcohol consumption can have adverse effects on your health, resulting in higher mortality charges

• Overall Health: Your health and fitness also factor into the calculation of mortality charges, and with better health, you can get lower charges and vice versa

• Coverage Amount: With a higher sum, the insurer’s risk increases, leading to high charges, so ensure you do not choose unnecessarily high coverage

Similar to other insurance plans, the mortality charges are on the lower side if you get the plan when you are young. Insurance companies compute the mortality charges by taking into account the mortality rate as well as the risk cover. 

The monthly mortality charges for ULIPs can be calculated through the following formula:

• Mortality charge = [Mortality rate (based on attained age) x Sum at Risk / 1000] x 1/12

Some life insurance providers have introduced new ULIPs in the market. These plans come with minimal charges and innovative features. These new-age plans offer features such as Return of Mortality Charges (ROMC). 

Under this, the mortality charges are returned if the policyholder survives the plan’s term. ROMC ensures that upon policy maturity, you receive back the cost of your life cover. This helps boost the overall value of your investment. Such plans are known by the following names:

• New age ULIPs

• Whole-life ULIPs

• 4G ULIPs