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ULIP Charges

ULIPs allow investors to allocate their premiums between insurance and market-linked investments in equity, debt, or balanced funds. While ULIPs offer the advantage of combining investment and insurance, it's crucial for potential investors to understand the various charges associated with these plans. ...Read More

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Understanding ULIP Charges and Fees: A Beginner's Guide

Understanding ULIP Charges and Fees
December 24, 2024

Table of Content

 

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

Most young people today invest and build a corpus for their future financial goals. Investing enables you to make your money work for you. Unit-Linked Insurance Plans (ULIPs) have become a common investment avenue since they offer the dual benefits of investment returns and insurance coverage. If you're looking for a way to build a corpus for the future, a ULIP might be the right option for you. Before investing, you should understand how ULIPs work and how much they cost.

What Is a ULIP?

A ULIP policy helps you invest for the future while providing life insurance coverage. The investment-cum-insurance plan uses a part of the premium for insurance, and the rest gets invested in equity, debt or balanced funds. As the investor, you select how your money should get invested. You can choose the allocation of funds based on your risk appetite and future financial goals. ULIPs have a five-year lock-in period, making them ideal for long-term financial goals.

What are ULIP Charges?

Before investing in ULIP plans you should be aware of the charges. The insurance company collects the charges from the premium or the fund value. Either way, it impacts the returns. The various charges are:

  • The premium allocation charge is a one-time fee collected from the first premium at the time of policy purchase.
  • Mortality charges for providing life cover to the policyholder depend on the policyholder's age and health conditions.
  • Fund management charges to manage the ULIP funds and do not exceed 1.35% of the fund value.
  • Policy administration charges are collected monthly.
  • Part withdrawal charges for withdrawing funds after the lock-in period. The charges vary with the insurance company.

Types of ULIP Charges

Before investing, you should learn about the costs associated with your ULIP policy. Almost every ULIP plan comes with the following charges:

1. Premium Allocation Charges

The charge covers the initial cost borne by the company to allocate the policy to you. It takes care of their underwriting costs, commission charges, medical test costs and more. Most insurance companies deduct a fixed percentage from your first year's premium as the premium allocation charge. Let's assume a company has a 10% premium allocation charge. On a premium amount of Rs. 1,00,000, the company will deduct Rs. 10,000 as the premium allocation charge and invest the remaining Rs. 90,000. The premium allocation charge is a one-time fee.

2. Guarantee Charges

The returns from ULIP depend on market conditions. However, some insurance companies give a guarantee of high returns after a specific investment period. For this guarantee, the insurance company levies a charge which is a guarantee charge. For example, if a ULIP plan promises 125% returns after 12 years, you have to pay guarantee charges if it delivers on its promise.

3. Goods & Services Tax

ULIP plan is a combination of two different components– life cover and investments in various market funds according to your preference. You need to pay Goods and Services Tax (GST)# on the services provided to maintain your investment. GST is collected for:

    a. Premium allocation

    b. Policy administration

    c. Fund management

    d. Surrender of funds

    e. Policy reinstatement

4. Fund Management Charges

The insurance company levies the fund management charge to take care of the cost of managing your ULIP policy. The Insurance Regulatory and Development Authority of India (IRDAI) does not allow insurance companies to levy a fund management fee of more than 1.35% per year.

5. Policy Administration Charges

The monthly policy administration charge helps with the company's administrative costs. It gets levied automatically by cancelling some units from the fund value. They generally stay the same through the policy term.

6. Mortality Charges

The mortality charge helps the insurance company provide ULIP insurance. The amount depends on the policyholder's age and sum assured. It gets deducted from the funds the policyholder invests every month.

7. Switching Charges

When you invest in a ULIP policy, you can switch your fund allocation to maximise market returns. Insurance companies may levy a fee every time you make a switch. Some plans allow a limited number of fund changes each year or across the policy tenure, while others charge for each. Always check the policy documents and terms before you select a plan.

8. Top-up Charge

Top-up is one of the unique features of ULIP plans where the insurance company allows you to invest your surplus money either multiple times or one time in your policy. Top-ups can be made at any time while your policy is active. It helps you to grow your wealth by increasing the investment amount. Insurance companies may deduct a certain percentage from the top-up amount as charges.

9. Premium Discontinuance Charge

In case you decide to stop your premium payments before the lock-in period of 5 years, the insurer will lock your funds in a Discontinuance Fund. As mentioned in the terms of your ULIP plan, a premium discontinuance charge will be deducted as a percentage of the premium or as a percentage of the fund value.

So staying invested for at least 10 years is recommended to get the maximum benefits offered by your ULIP plan.

10. Premium Redirection Charges

You may want to redirect future premiums towards a low-risk fund to help you meet your future financial requirements. If you do this without tweaking your fund structure, the company levies a premium direction charge.

11. Miscellaneous Charges

Insurance companies may levy other charges whenever you make amendments or changes to your ULIP policy. For example, if you want to change your premium payment frequency, you may have to pay an additional fee.

12. Rider Charges

You can boost your ULIP insurance coverage by opting for riders or add-on covers. Every insurance company offers riders that enhance your insurance coverage. Each add-on comes at a charge that gets added to your total premium.

13. Partial Withdrawal Charges

ULIP policyholders can partially withdraw funds from the accumulated corpus in emergencies. Insurance companies may charge a small fee to facilitate the money transfer, depending on the reason and the number of withdrawals already completed during the policy term.

14. Policy Surrender Charges

ULIPs have a lock-in period of five years. You must pay a surrender charge or fee to discontinue the policy during the lock-in period.

15. Surrender or Discontinuance Charges in ULIP

While Unit Linked Insurance Plans (ULIPs) are designed for long-term investment, life's uncertainties may require you to exit early. Before making this decision, it's important to understand the financial implications.
If you surrender or discontinue your ULIP before completing the lock-in period, the insurance company will deduct certain charges from your fund value. These deductions, known as surrender or discontinuance charges, can significantly impact your returns.

Understanding ULIP Taxation

Your ULIP charges are subject to Goods and Services Tax (GST) at the rate of 18% (as applicable now). You also enjoy several tax benefits when you invest in ULIP policies. The premium amount is tax-deductible under Section 80C# of the Income Tax Act.

Proceeds received on maturity of ULIP plan are exempt from tax subject to provisions mentioned in Section 10(10D) i.e if the premium payable for any of the years during the policy term does not exceeds 10% of the death sum assured.

In addition to the above, for policies issued after 1st Feb 2021 tax exemption on maturity proceeds will be available if premium paid in any of the years towards such matured polices does not exceed Rs.2,50,000. Out of the total matured policies in a financial year, exemption u/s 10(10D) will be available only towards those polices who’s aggregate premium in any years does not exceed Rs. 2,50,000/.

Rest policies exceeding the mentioned limit will be chargeable as capital gains.

Death proceeds shall be exempt from tax for all ULIP plans.

Understanding the various charges associated with ULIP policies allows you to make an informed decision about your investment. While selecting a ULIP, ensure you choose a plan that helps you invest to meet your future financial goals. Always read the terms and conditions carefully and consult a financial advisor if necessary.

Understand the Charges under Your ULIP Policy

To get the accurate details of the charges applicable, you may check these sources:

  • Sales Benefit Illustration: 

To get accurate details about the charges under your ULIP policy you may ask your salesperson for a sales benefit illustration. This document includes all of your ULIP charges. It includes all important information about the exact amount which the company will invest in your choice of funds and the charges applicable to your ULIP policy.

  • Product Brochure: 

A product brochure is an all-in-one document where you can find all the important details about why and how the charges will be deducted from your plan. To get a product brochure, you can visit the official page of your insurer or you may ask your sales representative to give you a copy of the document. 

  • Advisor:

You can also discuss with your insurance advisor to guide you about all the charges applicable to your ULIP plan. The advisor can help you better clear your doubts regarding ULIP charges.

Summary

ULIP plans carry a list of charges that are deducted from your premium before you are allotted units of the plan. It is very important to know about the ULIP charges you are going to pay as it affects the returns you will receive from the plan. You can find detailed information on the charges of a ULIP policy on the insurer’s website, policy brochure or from a sales representative.

FAQs on ULIP Charges

Q1. What are the charges of ULIP?

There are several different charges which you have to pay depending on your ULIP plan and purchase decisions. The most common charges of ULIP are– premium allocation charges, fund management charges, partial withdrawal charges, fund management, mortality charges, guarantee charges, etc.

Q2. What are FMC charges in ULIP?

FMC is a fund management charge that an insurance company deducts as a percentage of the fund's value. The FMC is deducted before the computation of the daily NAV (Net Asset Value) of a fund. An insurance company can charge a maximum FMC of up to 1.35% p.a. on the fund’s value for fund management. 

Q3. What is the surrender charge in ULIP?

A surrender charge is taken by the insurance company in case you decide to terminate your ULIP plan before the maturity date. If you surrender your plan before the lock-in period, the insurer will deduct the surrender charge from your current investment value. 

Q4. What is a premium allocation charge?

A specific percentage of premiums that an insurance company deducts from your ULIP plan is known as the premium allocation charge. It includes initial charges, renewal charges, and commission charges.

Q5. What is a mortality charge?

An insurer takes this charge for providing life insurance coverage in case of the death of the policyholder and it also covers other expenses. It is the mortality charge that the insurer deducts along with other charges before investing your money.

Q6. How are ULIP charges deducted from my policy?

The deduction for ULIP charges depends on the type of charge. Premium allocation charges will be deducted from the first premium at the time of policy purchase, and the other charges will be deducted from the fund value.

Q7. Can ULIP charges change over time?

Yes. Some charges change over time. The premium allocation charges are higher initially and reduce gradually over time. Mortality charges increase with age. Fund management charges depend on the fund’s performance. Part withdrawal charges are higher during the lock-in period.

Q8. What is a fund-switching charge?

This charge is taken by your insurer if you choose to switch your fund. However, fund-switching charges may vary between different insurance companies. Some insurance companies do not take any charges to switch your funds.

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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 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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Here's all you should know about ULIP insurance.

We help you to make informed insurance decisions for a lifetime.

Understanding ULIP Charges and Fees: A Beginner's Guide

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ULIP charges encompass fees incurred during policy activation. Learn about the various types of charges in ULIPs that every investor must know at HDFC Life.

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ULIP Taxation on Maturity: Explore tax benefits and regulations under Section 80C and 10(10D) of the Income Tax Act, 1961 for ULIPs. Make informed decisions for financial growth.

ULIP Taxation: What Is The Taxability of ULIP On Maturity?
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Disclaimer

# Subject to conditions specified u/s 80C and u/s 10(10D) of the Income tax Act, 1961.

# The afore stated views are based on the current Income-tax law. Tax Laws are also subject to change from time to time. Also, the customer is requested to seek tax advice from his Chartered Accountant or personal tax advisor with respect to his personal tax liabilities under the Income-tax law.

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.

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.

18. Save 46,800 on taxes if the insurance premium amount is Rs.1.5 lakh per annum and you are a Regular Individual, Fall under 30% income tax slab having taxable income less than Rs. 50 lakh and Opt for Old tax regime.

** The past 5 year fund performance of HDFC Life Discovery Fund (SFIN: ULIF06618/01/18DiscvryFnd101) as on 30th November 2024. The benchmark taken into consideration here is is Nifty Mid Cap 100 which as a return of 26.77% as on 30th November 2024. HDFC Life Discovery Fund is available with HDFC Life ULIPs which comes with a life cover. Please note past fund performance is not indicative of future performance.

ARN - MC/02/24/8577

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