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 caps the total annualized charges of ULIPs at 3% for the first 10 years of a policy. It would be 2.25% for a policy longer than 10 years.

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

• ULIP charges are subject to Goods and Services Tax (GST).

• 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?

     It is calculated as a percentage of the premium paid by the individual 

     • Example: if there is a 10% fee on a Rs 1,00,000 premium, Rs 10,000 is taken off, and only Rs 90,000 is really invested.
   • 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. 

   • 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. 

   

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?

     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 before 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. 

   • 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. 

   • 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. 

   • 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

   

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. 

   • 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. 

   • 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. 

   • 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.

   • 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.

   • Goods and Services Tax (GST)

     A tax levied by the government on all goods and services provided to maintain the investment. This means that GST is additionally charged on other charges such as premium allocation charge, fund management charge, etc. 

     • When is it deducted?

     It is deducted at the same time the other ULIP charges are deducted. 

     • How is it calculated?

     As per current guidelines, the GST rate stands at 18% of the charge amount

     • Example

     Consider your policy administration charge is ₹500. The GST will be charged on this charge, amounting to 18% of 500 + 500. Thus, the total charge levied on you will be ₹590. 

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

Know the ULIP Plan Charges in 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.