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Demystifying Life Insurance Charges: A Comprehensive Guide

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Life Insurance Charge a Comprehensive Guide
November 07, 2023

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In this policy, the investment risks in the investment portfolio is borne by the policyholder

When it comes to securing your loved ones’ future, having life insurance is indeed a relief. In addition, if you purchase a Unit Linked Insurance Plan (ULIP), it doesn’t just operate as a life insurance, but opens up a lucrative investment opportunity as well. In these policies, a part of the premium you pay is dedicated to the life cover, while the remaining is invested in a portfolio of your choice, to fetch returns from the market. So, while your family gets the death benefit in the event of your untimely demise, the fund value is available as the maturity benefit if you survive the whole term. But wait, is the entire amount you pay, available for investment? The answer is no. The insurance company levies these five types of charges on different occasions, which you need to be aware of.

In most cases, these five charges associated with your life insurance policy are not communicated openly to you. Neither are they elaborated on in the policy document. So, let us guide you on how and where your money gets deducted.

Premium Sum Allocation charges

A part of your premium gets deducted as the fee for allocating the same. This amount of money compensates for the major costs incurred by the insurer in allotting your policy. Heads like distributor charges, cost of underwriting etc. fall in this category. 

Surrender or Discontinuation charges

Suppose you wish to discontinue your policy before its maturity or decide to make a partial withdrawal of your fund. In this case, the insurer may charges a surrender value which is a percentage of the annualised premium funds. .

Mortality charges

The premium and sum assured in a life insurance policy is calculated based on the life expectancy of the policyholder depending on his age, gender, overall health and lifestyle. However, in case Policyholder dies an untimely death, the sum assured needs to be paid to the nominee. To compensate for this, a portion of the premium is deducted every month as mortality charges. Even though a ULIP is primarily considered an investment, mortality charges are deducted.

Fund Management charge

The investment component of the premium of a ULIP policy is put into equities, bonds, or a mix of both depending on the policyholder’s financial goals and risk appetite. Based on the funds’ performance, evolving life goals or risk preferences, the portfolio gets restructured to fetch optimum returns. The insurance company imposes a fund management charge levied upon the accrued fund value. However, according to the IRDAI guidelines, the upper limit for this charge is 1.35% per year. 

Insurance Policy Administration charge

The insurance company charges a monthly fee to ensure proper administration of your Ulip policy. This charge is basically the organisational expenditure towards your policy, which includes the cost of paperwork, premium payment notification etc. These charges can be deducted at a fixed percentage throughout the policy term or can get increased at a specified rate over time.

A detailed read of the policy document might inform you of the charges payable from your premium or fund value. But in most cases, we all skip the process. Needless to say, being well aware of these hidden costs can always help you optimise the gains from your investment.  

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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HDFC LIFE IS A TRUSTED LIFE INSURANCE PARTNER

We at HDFC Life are committed to offer innovative products and services that enable individuals live a ‘Life of Pride’. For over two decades we have been providing life insurance plans - protection, pension, savings, investment, annuity and health.

The Unit Linked Insurance products do not offer any liquidity during the first five years of the contract. The policyholders will not be able to surrender or withdraw the monies invested in Unit Linked Insurance Products completely or partially till the end of fifth year.

For more details on risk factors, associated terms and conditions and exclusions please read sales brochure carefully before concluding a sale. Unit Linked Life Insurance products are different from the traditional insurance products and are subject to the risk factors. The premium paid in Unit Linked Life Insurance policies are subject to investment risks associated with capital markets and the NAVs of the units may go up or down based on the performance of fund and factors influencing the capital market and the insured is responsible for his/her decisions. HDFC Life Insurance Company Limited is only the name of the Insurance Company, The name of the company, name of the contract does not in any way indicate the quality of the contract, its future prospects or returns. Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document of the insurer. The various funds offered under this contract are the names of the funds and do not in any way indicate the quality of these plans, their future prospects and returns.

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