ULIP Charges

ULIP charges include premium allocation, mortality, fund management, policy administration, and surrender charges. Know these costs to make informed investment decisions.
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3 min
20-July-2024

Unit Linked Insurance Plans (ULIPs) are popular investment options that offer a combination of insurance and investment benefits. While ULIPs provide an opportunity to grow your wealth through market-linked returns, they also come with various charges that can impact your overall returns. Understanding these ULIP charges is crucial for making informed investment decisions. In this article, we will explore what ULIPs are and delve into the different types of charges applied to these plans, helping you choose the best ULIP plan with low charges.

What is a ULIP?

A Unit Linked Insurance Plan (ULIP) is a hybrid financial product that combines the benefits of life insurance and investment. When you invest in a ULIP, a portion of your premium goes towards providing life insurance coverage, while the remaining amount is invested in a selection of equity, debt, or balanced funds based on your risk appetite and investment goals. ULIPs offer the flexibility to switch between different funds, allowing investors to take advantage of market opportunities. The performance of the invested funds determines the returns on your investment.

Read more: Life insurance definition

Types of ULIP charges and their example

ULIPs come with various charges that impact overall returns. Understanding these charges helps policyholders make informed investment decisions.

Type of ULIP charge

Description

Example

Premium allocation charge

A percentage of the premium deducted upfront before investment.

If you pay Rs. 1 lakh annually and the charge is 5%, Rs. 5,000 is deducted, and Rs. 95,000 is invested.

Fund management charge

A fee for managing ULIP funds, deducted as a percentage of the fund value.

If your fund value is Rs. 10 lakh and the charge is 1.35% per annum, Rs. 13,500 is deducted yearly.

Policy administration charge

A fixed monthly charge for managing the policy, deducted from the fund.

If the charge is Rs. 300 per month, Rs. 3,600 is deducted annually.

Mortality charge

A fee for providing life cover, varying based on age and sum assured.

If a 35-year-old has a Rs. 50 lakh cover, the mortality charge could be Rs. 5,000 per year.

Switching charge

A fee for switching between funds beyond the free limit.

If the insurer allows 4 free switches but you make 5, the 5th switch may cost Rs. 200.

Partial withdrawal charge

A charge for withdrawing from the ULIP fund beyond free limits.

If the insurer allows free withdrawals up to Rs. 50,000 but you withdraw Rs. 70,000, you may pay Rs. 500.

Discontinuance charge

A penalty for exiting the policy before the lock-in period.

If you surrender a policy worth Rs. 2 lakh in the 3rd year, the charge may be Rs. 5,000.


By understanding these charges, policyholders can optimise their ULIP investments for better returns.

What are the different charges applied to ULIP?

Understanding the various charges associated with ULIPs is essential for assessing their impact on your investment returns. Here are the key charges to consider:

Premium allocation charges in ULIP:

These charges are deducted from the premium paid before allocating the remaining amount to the chosen investment funds. They cover initial expenses such as distributor fees, underwriting costs, and policy issuance. Premium allocation charges in ULIP are typically higher in the initial years and may reduce over time.

Fund Management Charges (FMC) in ULIP:

Fund Management Charges (FMC) are fees levied by the insurance company for managing the investment funds. These charges are expressed as a percentage of the fund's value and are deducted daily before calculating the fund's Net Asset Value (NAV). FMC charges in ULIP can vary depending on the type of fund chosen, with equity funds generally attracting higher charges than debt funds.

Mortality charges in ULIP:

Mortality charges are deducted to cover the cost of providing life insurance coverage. These charges are based on the policyholder's age, health, and sum assured. Mortality charges in ULIP are typically higher for older policyholders and those with higher insurance coverage.

Policy administration charges in ULIP:

These charges cover the administrative costs of maintaining the policy, including record-keeping, customer service, and other operational expenses. Policy administration charges in ULIP are usually deducted monthly and can be a fixed amount or a percentage of the premium.

Fund switching charges:

ULIPs offer the flexibility to switch between different investment funds based on market conditions or changing financial goals. However, insurers may impose a fund-switching charge after a certain number of free switches. This charge is usually a nominal fee per switch.

Partial withdrawal charges:

ULIPs allow partial withdrawals from the investment fund after a lock-in period. Some insurers may levy a charge for partial withdrawals, which can be a fixed fee or a percentage of the withdrawn amount.

Surrender charges:

If a policyholder decides to surrender the ULIP before the end of the policy term, a surrender charge may be applicable. This charge is typically higher in the initial years and decreases over time. Surrender charges are meant to discourage early termination of the policy.

Premium redirection charges:

Premium redirection charges apply when a policyholder chooses to allocate future premiums to a different fund option within the ULIP. Some insurers allow a limited number of free redirections per year, while additional redirections may incur a fee. For example, if an insurer permits two free redirections but charges Rs. 200 for each additional request, policyholders must plan wisely to minimise costs. This feature helps adjust investments based on market conditions or financial goals, enhancing flexibility.

Guarantee charges:

Guarantee charges are applicable in ULIPs that offer assured returns, capital protection, or minimum guaranteed benefits. These charges are deducted as a percentage of the fund value to compensate for the insurer’s risk in providing guaranteed benefits. For instance, if a ULIP ensures a minimum return of 4%, a charge of 0.5% to 1% of the fund value may be levied annually. While these plans provide financial security, investors should assess the impact of these charges on their overall returns before opting for a guaranteed ULIP.

Rider charges:

Rider charges are additional fees applicable when policyholders opt for extra coverage beyond the basic ULIP benefits. Common riders include accidental death, critical illness, and waiver of premium riders. These charges vary based on the rider type and the insured amount. For example, an accidental death rider may cost Rs. 500 to Rs. 1,000 annually for a sum assured of Rs. 10 lakh. Riders enhance the protection offered by ULIPs, ensuring comprehensive financial security, but they also increase the overall cost of the policy.

Miscellaneous charges:

Insurers may also impose other miscellaneous charges such as policy alteration fees, premium redirection charges, and miscellaneous administrative charges. These charges can vary between different insurers and policies.

ULIP GST charges:

Goods and Services Tax (GST) is applicable on various ULIP charges, including fund management, policy administration, and premium allocation charges. The GST rate on ULIP charges is currently 18%, and it is added to the respective charges.

Read more: ULIP returns

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Conclusion

ULIPs offer a unique combination of insurance and investment benefits, making them an attractive option for many investors. However, understanding the various ULIP charges is crucial for evaluating their impact on your investment returns. By being aware of charges such as premium allocation, fund management, mortality, policy administration, and others, you can make informed decisions and choose the best ULIP plan with low charges. Remember to consider the ULIP charges percentage and the impact of ULIP GST charges when comparing different plans. By carefully assessing these factors, you can maximise the benefits of your ULIP investment and achieve your financial goals.

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Frequently asked questions

Which are the five charges applicable to ULIP?
The five primary charges applicable to ULIP are premium allocation charges, fund management charges, mortality charges, policy administration charges, and surrender charges. These charges cover various costs such as policy issuance, fund management, life cover, administrative expenses, and early termination.

How do ULIP charges get deducted?
ULIP charges are deducted from your premium or the fund value at different intervals. Premium allocation and policy administration charges are usually deducted upfront, while fund management and mortality charges are deducted periodically, often monthly, from the fund's NAV.

How much ULIP is tax-free?
Under Section 80C of the Income Tax Act, premiums paid for ULIPs up to Rs. 1.5 lakh per annum are tax-deductible. Additionally, the maturity proceeds are tax-free under Section 10(10D) if the annual premium does not exceed 10% of the sum assured.

What are the various charges associated with ULIPs?

ULIPs include multiple charges such as premium allocation, fund management, policy administration, mortality, switching, and discontinuance charges. These fees are deducted from the investment, impacting overall returns. Understanding these costs helps policyholders choose plans that offer better value and optimise their investment.

How do ULIP charges impact investment returns?

ULIP charges reduce the investable amount and overall fund value over time. High charges can lower returns, especially in the early years. Choosing low-cost ULIPs and monitoring expenses can help maximise gains, ensuring better financial growth over the long term.

Do ULIP charges differ across insurance companies?

Yes, ULIP charges vary based on the insurer, policy type, and features offered. While some insurers have lower fund management fees, others may charge higher administration or mortality fees. Comparing plans from different providers helps select a cost-effective option with better growth potential.

How can policyholders reduce ULIP charges?

To minimise ULIP charges, opt for plans with lower fees, limit fund switches, and avoid early withdrawals or premature policy surrender. Selecting ULIPs with minimal premium allocation and administration charges ensures more investment is directed towards wealth creation, enhancing long-term returns.

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