Cost of buying a life insurance policy

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We take a lot of time going through a host of options before choosing a dress for that special occasion. But when it comes to buying insurance we depend on some third-party advice without understanding the fine-prints of the policy. This calls for a behavioural change, as it is important to know the cost of your insurance policy. So, here’s a primer on how much your insurance policy costs.

Term Insurance

Term insurance plans are considered to be the cheapest plans as they only deduct expenses towards mortality charges for the insurance cover they offer. These plans offer only insurance cover and have no investment element.

Unit linked insurance plans or ULIPs

These are market-linked policies that offer you a combination of both insurance and investment. ULIPs have standardised cost-structure as determined by the Insurance Regulator and Development Authority of India (IRDAI). Here are the different heads under which charges are deductible:

Premium allocation charge: This charge is deducted to cover various expenses such as commission and underwriting expenses. These charges are capped at 3% of gross yield for policies with a term of up to 10 years and 2.25% for those with a term of more than 10 years.

Fund management charge: It generally varies between 1 and 2% and is deducted at the time of calculating the net asset value.

Policy administration charge: These charges are deducted to meet the cost of administration and maintenance of a policy.

Mortality charge: These are charges for offering death cover.

Endowment or traditional plans

Unlike unit-linked insurance plans, endowment plans are non-transparent as you are not aware of how much money gets deducted towards expenses. Charges in an endowment plan are generally high in the early years.  Having said that, endowment policies are long term policies, where you commit to paying for the term of at least 5-10 years. If you surrender the policy midway, you probably get a very small portion of your investment because surrender value is generally around 30%-40% of the total premium paid so far. Moreover, on surrendering the policy you lose the life cover associated with the policy immediately.