Mortality Charges in ULIPs – A Detailed Guide
Mortality charges are an integral part of all life insurance policies, and Unit Linked Insurance Plans or ULIPs are no different. When you buy ULIP or any other life insurance product, the insurance company promises to pay the sum assured or the death benefit to the nominee if you pass away during the policy period. And to provide life cover, the insurers charge a mortality fee, which is deducted from the fund value.
Now that you know what ULIP means and what mortality charge is, let us understand the working of mortality charges in ULIP with an example.
Miss. Archana Pawar, a 25-year-old woman, purchases ULIP with a sum assured of ₹10 lakhs and pays an annual premium of ₹1 lakh. In the event of Miss Pawar’s demise, the insurer will pay either the death benefit amount or the fund’s value, whichever is higher to the nominee.
Let us assume Miss Pawar passes away in the fourth year of the policy, and the fund value is ₹5.5 lakhs. In this case, the nominee will receive the sum assured amount, i.e., ₹10 lakhs, as the death benefit. Insurance company bears the risk of providing life cover and, therefore, levy mortality charges to cover this risk.
How do insurance companies charge mortality charges?
Insurance companies decide the mortality charges based on several factors such as the sum assured of the policy you buy, age of the policyholder, lifestyle habits (whether you smoke or consume alcohol), health condition, etc. Generally, the insurers deduct the mortality charges every month, and when you buy the policy when you are young and healthy, the charges are lower.
What is the formula for calculating the mortality charges?
In India, most reputed insurance companies use the following formula to compute mortality charges:
Mortality charge = mortality rate (for the attained age) x sum at risk/1000 x 1/12
Can you get back the mortality charges?
Over the years, ULIPs have evolved significantly. Today, insurance companies offer a variety of ULIP plans with customer-friendly features. And one such feature is the Return of Mortality Charges (RoMC). Many experts suggest that the introduction of RoMC is a welcome move to attract more investors towards ULIPs and increase the returns potential for the customers.
With the Return of Mortality Charges feature, you can be assured that the insurance company pays back the mortality charges you have paid during the policy term when the policy matures. The amount is added to your fund value at maturity. However, you must pay the premiums on time and avoid surrendering your policy to get the maturity charges back.
Thus, mortality charges are an integral part of ULIP. However, new features like the RoMC enhance ULIP investment benefits and help you accomplish your financial goals faster. Like any other insurance policy, compare different ULIP policies offered by different insurance companies and choose the one with the most favourable terms, conditions and affordable premium.