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There are top-up premiums for Ulips

LiveMint logoLiveMint 27-08-2017 Deepti Bhaskaran

A life insurance policy is a long-term contract in which you agree to pay a fixed premium every year (in case of a regular premium policies) or for a specified number of years (in case of a limited premium pay policies) or just once (in case of a single premium policies). You pay the same premium instalments every year. However, what if you have a windfall gain and want to pump that money into your life insurance policy? 

Unit-linked insurance plans (Ulips) allow you to top up your policy. Here are the details of doing so. 

What is top-up premium?

A top-up premium is the amount paid at irregular intervals over and above the basic premium that is  specified in the insurance contract. 

As per insurance rules, each top-up premium needs to be treated as a single premium contract. In other words, the extra money that you park in your Ulip also needs to buy you an insurance cover. 

As per regulations for single-premium policies, the minimum sum assured is 125% of the single premium for individuals up to 45 years of age. For those above 45 years, the minimum sum assured is 110% of the premium paid. 

A top-up premium option is typically not available in the case of traditional insurance-cum-investment policies because, unlike a Ulip which has unbundled costs and the returns are market linked, traditional insurance plans are opaque and come with a minimum guaranteed return. 

Charges and features

In terms of charges, typically you pay a one-time premium-allocation charge—this is deducted straight from the premium you pay—and a recurring mortality charge and fund management charge. Mortality charge (the charge for providing you life insurance cover) is as per the attained age of the policyholder, and not as per the age at which you bought the policy. 

So, when you buy a policy at 35 years of age and top up at 40, the mortality charge applicable will be that of a 40-year-old person and not that which would be charged from a 35-year-old. In the same manner, the minimum sum assured is decided on the attained age. 

You need to keep in mind that just like in the rule for Ulips, the minimum holding period of top-up premiums is 5 years. But if you are surrendering the policy, then you can withdraw the top-up money without waiting for the lock-in to get over. 

Also, except in a unit-linked pension plan, top-up premiums are not allowed during the last 5 years of the policy term. In case of a unit-linked pension plan, you can make unlimited number of top-ups. 

However, in a regular Ulip, at any point of time during the policy term, the total top-up premiums paid cannot be more than the sum total of the regular premiums paid till that point of time. 

Should you top up?

In the case of traditional insurance plans and term plans, there are no top-ups. 

However, Ulips are transparent market-linked products. You can pump in any windfall gain in it and it would work like a single-premium policy attached to the main policy, with the benefit of paying a lower premium allocation charge and zero policy administration charge. 

Flexibility of a top-up is a good thing, but of late insurers are not actively offering top-up premium options and this is primarily due to the fact that the rules now mandate a minimum insurance cover with a top-up premium cover for this facility. And this is something you need to be mindful of as well. 

If your motive is to increase the insurance component of your Ulip, then we suggest you look at buying a pure insurance cover called the term plan. And if the idea is to increase your investments, then you are better off without paying the mortality charge, and you can look at other market-linked products like mutual funds. 

For those who only want to buy a bundled insurance product, a top-premium is a good option, but you should use it wisely. Make sure the fund performance of your Ulip is consistently good before you pump in more money. 

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