ULIP Charges You Should Know About

What are ULIP Charges?

When selling a ULIP plan, insurance companies levy certain charges in exchange for their services of managing both the investment and insurance components of the plan. These charges are either directly deducted from the premium or deducted as units from the fund value of the customer. 

IMPORTANT NOTES:

• The Insurance Regulatory and Development Authority of India (IRDAI) has set limits on the charges that insurance companies can impose on ULIPs.

  • IRDAI limits the gap between a ULIP's gross and net yield — the reduction in yield. For policies with a term of up to 10 years, the gap cannot exceed 3%; for policies running longer than 10 years, the limit is 2.25%.

  • This applies to both regular premium and single premium ULIPs.

• While ULIPs do have charges, they also offer potential tax benefits on your premiums and maturity proceeds.

• ULIP charges are mandated to be evenly distributed during the lock-in period. 

Types of ULIP Charges

Typically, 14 types of charges are deducted from your ULIP plan. Know about all of them to correctly manage your finances while investing in a ULIP plan. 

1. Core policy Charges

   • Premium Allocation charges

     Premium allocation charges are the initial upfront fee deducted from your premium before it is invested to cover agent cost, underwriting cost and initial business expenses.

     • When is it deducted?

     It is deducted upfront before any investment.

     • How is it calculated?

     IRDAI caps the fund management charge at 1.35% a year of fund value. Money sitting in the Discontinued Policy fund is capped lower, at 0.50% a year.

     • Example: Assuming that your current fund value is ₹1lakh and the fund management charge as capped by IRDAI is 1.35%.

     Since FMC is deducted every day throughout the year,

     Charge	Calculation	Value
     The daily charge rate	1.35/365	0.0037%
     Daily deduction from your fund	₹1,00,000 × 0.0037%	₹3.70
     Total FMC charge	₹3.70 ×365	₹1,350

   • Fund Management Charges

     Includes the annual cost of managing the ULIP investment fund, including the cost for research and fund management 

     • When is it deducted? 

     The Fund Management Charges are calculated daily and deducted before the computation of the net asset value (NAV) of the fund. 

     • How is it calculated?

     Although legally capped at 1.35% by the government. The Fund management charges are generally calculated as a percentage of the total fund value 

   • Mortality Charges 

     Includes the cost of providing life insurance coverage that pays out to the beneficiary in case the policyholder dies. 

     • When is it deducted?

     Typically deducted monthly from the fund value 

     • How is it calculated?

     The calculations are based on factors such as age, health considerations, gender of the policyholder, along with the sum assured. Units are deducted from the fund to cover this cost. These charges are generally lower for younger, healthier individuals. 

     • Example: Assuming that your annual premium is ₹1lakh, the sum assured is ₹10 lakh, and your current fund value stands at ₹5 lakh. The sum at risk is ₹5 lakh. Considering you are 30 years old, the mortality rate for which is ₹1.50 per ₹ 1,000 of sum at risk per year.

     Charge	Calculation	Value
     Annual mortality charge	(Sum at Risk ÷ 1,000) × Mortality Rate 5,00,000 ÷ 1,000) × 1.50	₹750 per year
     Monthly deduction	₹750 ÷ 12	₹62.50 per month

   • Policy Administration Charges

     Includes the recurring charge to keep the policy running, like record-keeping, paperwork, and customer service updates. 

     • When is it deducted?

     Monthly or annually as per the policy terms 

     • How is it calculated?

     Generally remains fixed throughout the policy term. 

     • Example: Assuming that the policy administration charge of the policy is ₹100 per month

     Charge	Calculation	Value
     Year 1	₹100 x 12	₹1,200
     Year 2	₹100 x 12	₹1,200
     Year 3	₹100 x 12	₹1,200

   

2. Transactional and Operational Charges 

   • Surrender or discontinuance charges 

     Includes the penalties levied if the policy is surrendered prematurely or the policyholder stops paying premiums before the mandatory lock-in period of 5 years ends. 

     • When is it deducted?

     Deducted during the premature termination of the policy or discontinuance within the first 5 years of the policy. 

     • How is it calculated?

     IRDAI has set surrender or discontinuance charges for annualised premiums up to ₹ 25,000 and above ₹ 25,000. The following table summarises the charges.

     For annualised premiums up to ₹25,000
     Year of discontinuance	Maximum Charge
     Year 1	₹3000
     Year 2	₹2000
     Year 3	₹1500
     Year 4	₹1000
     Year 5	nil
     For annualised premiums above ₹25,000
     Year of discontinuance	Maximum Charge
     Year 1	₹6000
     Year 2	₹5000
     Year 3	₹4000
     Year 4	₹2000
     Year 5	nil

     Calculated as a percentage of the fund value or premium. Note that these charges are only levied if the policy is terminated within 5 years of starting. No such charges can be levied after the lock-in period is over. 

   • Partial Withdrawal Charges

     Applied when you withdraw a portion of your money before the lock-in period is complete. 

     • When is it deducted?

     Deducted during partial withdrawal of money after the completion of the lock-in period. 

     • How is it calculated?

     The penalty is generally pre-specified and is applied to the withdrawal amount, especially if it exceeds the prescribed withdrawal amount by the insurance company. 

     • Example: Assuming that the policy of your choice allows you to make 3 partial withdrawals for free every year and charges ₹250 per withdrawal after you have exhausted your free withdrawals.

     If you withdraw ₹25,000 for the fourth time during the year, an amount of ₹250 will be deducted from your withdrawn amount,t and thus you will receive ₹24,750.

   • Switching Charges

     Fee levied if you redirect your investment from one fund to another under the ULIP plan. Generally, insurers provide a certain number of free switches annually. 

     • When is it deducted?

     It is deducted when the policyholder exceeds the number of free switches provided by the company. 

     • How is it calculated?

     A fixed nominal fee is charged per switch after the free switches are exhausted. 

     • Example: Assuming that the policy of your choice allows a maximum of 4 free switches per year and charges a flat fee of ₹100 for every switch after that. On your 5th switch, an amount of ₹100 will be deducted from your fund as a switching charge.
   • Premium Redirection Charges

     Fee for redirecting your future investments throughout the funds available under the ULIP. Note that the current investments are not redirected, but your future investment strategy changes. 

     • When is it deducted?

     When you readjust your future investment strategy

     • How is it calculated?

     A fixed nominal fee is charged per redirection after the free redirections are exhausted by the policyholder. 

     Example: Assuming that the ULIP of your choice charges an amount of ₹250 for every redirection after 4 free redirections per year. If you redirect your funds for the 5th time in a year, ₹250 will be deducted from your fund value as a premium redirection charge.

   • Top-up Charges

     Fee for investing an additional amount of money over your fixed premium payments. 

     • When is it levied?

     At the time of making additional investments. 

     • How is it calculated?

     A predefined percentage of money is directly deducted from the top-up amount

     • Example: You invest in a ULIP with a top-up charge of 2% of the top-up amount.

     Assuming your top-up amount is ₹50,000

     Top-up charge deducted = 2% of 50,000

     Thus ₹1000 will be deducted as your top-up charge

   

3.  Additional Charges 

   • Guaranteed Charges

     Includes the cost that provides for assured benefits such as capital protection and guaranteed returns on specific types of ULIPs

     • When is it deducted?

     It is only levied on plans that assure capital protection and profit.

     • How is it calculated?

     A predetermined percentage is deducted from the fund value periodically. 

     • Example: If your fund value at the time of calculation of your charge is ₹1,00,000 and the guaranteed charge is 0.25%.

     Guaranteed Charge = 0.25% x 1,00,00= ₹250

   • Rider Charges 

     Includes the cost of extra insurance benefits that are added on top of the base coverage. Includes critical illness and accidental death benefits.

     • When is it deducted?

     Deducted directly from the premium at the time of payment or renewal. 

     • How is it calculated?

     An additional minimal cost is added to the premium. 

     • Example: If you choose an accidental death benefit rider with a sum assured of ₹ 5 lakh at a rate of ₹0.80 per ₹1,000.

     Annual rider charge = (5,00,000/1,000) × 0.80 = 500 × 0.80 = ₹400 per year

   • Medical Examination Charges 

     Fees incurred for medical tests required by the insurer to assess your health risk before issuing the policy or during a revival

     • When is it deducted?

     Incurred while the policy is issued or renewed. 

     • How is it calculated?

     It is often bundled with the allocation charges. However, if you cancel during the free look period, these costs are deducted from your premium before it is refunded to you. 

     • Example: The ULIP of your choice with an annual premium of ₹ 1 lakh requires a medical check-up before insuring the policy, which costs ₹1,500. If your premium allocation charge is 4%. Your allocation charge will sum up to 5.5% including both the allocation and the medical tests.

     Thus, the total charge at the time of allocation = 5.5% of 1lakh

     =₹5500

   • Miscellaneous charges

     Small fees for administrative changes to the policy.

     • When is it deducted?

     Generally deducted if you wish to change or update your details, such as beneficiary details or changing premium payment modes.

     • Example: If you need duplicate policy documents and the charge for the same is ₹250.

     ₹250 worth of units will be cancelled from your fund to cover the charge.

   • Reinstatement Charges

     Includes charges when a policy is reinstated or restarted after discontinuation due to non-payment of premiums. 

     • When is it deducted?

     A fee is charged when a policy which has already lapsed is restarted. 

     • How is it calculated?

     Insurers may charge a fee along with interest on the overdue premiums. This ensures that the life cover is restored to its original terms.

     • Example: You fail to pay your monthly premiums for 8 months for your ULIP with an annual premium of ₹60,000, and thus ₹40,000 in unpaid premiums is accrued.

     Assuming the reinstatement fee is ₹500

     The interest on overdue premium is 8% = ₹1,600

     Total amount payable to revive your policy = ₹42,100.

Example of ULIP Charges Calculation

For this example, we calculate the total charges by accounting only for premium allocation, policy administration, mortality, and fund management charges since these charges are generally the mandatory applicable charges in a ULIP.

How to Reduce Charges on Your ULIP Plan?

The following section presents certain recommendations which can be used to keep your charges in check. Note that these recommendations do not act as a way to not pay these charges, but can act as an effective measure to minimise your ULIP charges.

• Strategic Plan Selection
  • Online ULIP purchase: Online ULIP purchase has heavily cut down on premium allocation charges as they eliminate middlemen commissions and have low distribution and allocation costs. 
  • Choose newer reformed plans: Various modern ULIPs are created with a reduced charge structure, often offering minimal fund management cost and no policy administration charges. 
  • Compare ULIPs through fund management charges: Although IRDAI has capped FMC at 1.35% p.a, FMC can vary from plan to plan. Despite the small variation, your fund can be largely affected in the long run through these charges. 
  • Opt for low-cost fund options: Various insurers offer policyholders with less passive fund options or funds with lower expense ratios. 
• Discipline in operations and transactions 

  By committing to a long-term investment, avoiding partial withdrawals before the lock-in period, minimising switching between funds and avoiding early surrender, the policyholder can easily avoid transactional and operational charges. 

• Evaluate Benefits 
  • Before investing, carefully analyse the sales benefit illustration. This document outlines exactly how each charge will affect your return based on your investment amount and investment horizon 
  • Ensure that you only add important riders to the ULIP. Adding unnecessary riders can increase the charges on your ULIP

How to Check the ULIP Charges on Your Policy?

If you’re looking to pin down the exact fees for your ULIP, here are the best places to check:

• The Product Brochure: This is your go-to for a high-level look at the plan. It lists out all the benefits, fine print, and the standard fee structure.
• Sales Benefit Illustration: This is probably the most helpful document because it’s personalized. It shows exactly how charges and returns will look based on the specific amount you’re investing and how long you plan to stay invested.
• Your Insurance Advisor: Sit down with your agent or advisor. It’s their job to walk you through the costs and explain how they impact your long-term goals.
• Policybazaar Account: If you used a platform like Policybazaar, log in to your account. They often summarise these charges in a much cleaner way than the official documents do.
• The Policy Document Itself: When in doubt, check the actual contract. This is the final word on every charge, term, and condition linked to your money.

Charges at a Glance 

The following table presents all the charges at a glance, along with their impact on your returns and whether they are avoidable in nature. 

Conclusion

ULIP (Unit Linked Insurance Plan) charges encompass various fees such as premium allocation, policy administration, mortality, fund management, and surrender charges. Understanding these charges is crucial for making informed decisions about investment and insurance goals.