What is a top-up on a unit-linked insurance plan (Ulip)?

It is a facility to increase the amount of investment you can make as part of your insurance policy. It is something you can invest into, over and above your existing policy or the base policy. Hence, you cannot buy a top-up without the base policy.

The top-up is the additional amount over your regular premium that you can invest in. Top-ups can be availed anytime during policy term, provided all your due regular premiums have been paid. A top-up gives an advantage to increase the savings by means of investing, in addition to the regular premium. Partial withdrawals are allowed only after the initial lock-in of five years.

What is the cost of buying the top-up?
There is a premium allocation charge levied on the top-up premium, if it is between one to three per cent. But this is less than what you pay for a fresh policy. Some Ulips return the premium allocation charges at the end of the maturity of the policy. For instance, Bajaj Allianz Life Insurance returns the first three years’ premium allocation charges and top-up premium charges paid up to 350 per cent.

Who to buy from and why?
If you want to take advantage of a well-performing policy, you can increase your investments by taking a top-up plan. Experts say, ideally, one could take a Ulip with a lower premium and later, top it up if heshe wants to continue or wants an additional sum assured.

There is no compulsion to increase the insurance component of Ulip. But some increase the sum assured in accordance with the top-up. Say, if the total top-up premium exceeds 25 per cent of the total premiums paid, the sum assured of the policy can go up by 125 times of the top-up, depending upon the life insurance company. And, if the sum assured increases, mortality charges also rise, reducing the investment amount.

How can a customer buy one?
The top-up premium option is usually given to customers who pay their premiums on time. This provision can be useful for investment of any windfall gain such as salary bonuses or dividends.

One can pay a top-up premium anytime during the tenure of existing policy (Ulip or ULP). But the top-up premium should not exceed 25 per cent of total premium paid for that year. Typically, the minimum top-up premium should be Rs 2,000. If you pay for the top-up when the regular premium is due, your payment for the top-up gets directed towards the payment of the base policy.

Is there any tax benefit?
Top-up premiums enjoy the same tax benefits as regular policies. Since these are life insurance products, these come under the exempt-exempt-exempt regime and, hence, are tax-free.