Top-up is a facility provided in Unit Linked Life Insurance Policies. It is a flexibility that is not provided by traditional policies and is only offered by ULIPs. It is an amount that can be paid by a policyholder at any point of time to increase his fund value without much charges attached to it. The concept of Top-Up premium is very similar to top up of prepaid mobile account, where only the talk time increases and not the validity.
Thus, even in case of ULIPs, the fund value increases and not the sum assured, but only till 25% of all regular premiums paid. Top Up premium can only be paid if all the regular premiums have been duly paid and the policy is inforce.
Let us understand with an example. Rashmi bought an ULIP with Rs 25,000 annual premium for 25 years. Her Sum Assured was Rs 2,50,000. Now, after paying her 4th regular premium, she wanted to Top Up her Fund Value by Rs 60,000. Is she allowed to do so?
Yes. But let us understand the break up. She has paid Rs 25,000 for 4 years, i.e. Rs 1,00,000 of regular premium till date. So 25% of Rs 1,00,000 is Rs 25,000 and hence she can top up her policy for Rs 25,000 without having to increase her Sum Assured.
But she wants to Top Up for Rs 60,000 total. Hence for the remaining amount of Rs 60,000-Rs 25,000= Rs 35,000, the Top Up premium would be considered as a Single Premium Amount and her Sum Assured would increase to about 110% of the premium. Hence her Sum Assured would increase by Rs 38500 and her total Sum Assured would rise from Rs 2,50,000 to Rs 288500.
Thus, the basic features of Top Up premium can be summed as:
- Top-Up Premium can be paid any time during the policy term at irregular intervals besides the basic regular premium specified within the contract and is treated as single premium.
- Top-Up Premium can only be made only during the policy term provided all regular premiums have been duly paid.
- At any point of time during the term of the contract, as long as top-up premium is less than 25% of all regular premiums paid till that date, the top up premium will not be required to have a sum assured.
- The balance amount of the top-up premium, over and above the 25% of all regular premiums paid till that date, it needs to have a subsequent insurance cover of minimum 1.25 times which would remain constant during the entire tenure of the policy.
There are 3 parts of the premium in a ULIP product, namely mortality, expenses and investment. However, in Top-Up premium, as long as it is within the 25% of all regular premiums paid till that date, only a small amount of expenses are deducted, usually 2-3%, and the rest is included in the Fund Value as investment, since there is no requirement of subsequent rise in Sum Assured.
However, when the top-up premium exceeds 25% of all regular premiums paid till that date, even mortality charges are deducted from it for the subsequent rise in Sum Assured.
Since ULIP is an investment driven product, this is a very important feature where fund value can be enhanced till a certain amount without affecting the Sum Assured. For further rise, a small increase in Sum Assured is definite.