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Understanding ULIP Charges and Fees: A Beginner's Guide

Understanding ULIP Charges and Fees
February 23, 2024

 

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 the Various ULIP Charges?

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

  • 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.

  • 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.

  • 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.

  • 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.

  • 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.

  • 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.

  • 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.

  • 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.

  • 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.

  • 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.

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.

Related Article

ARN - MC/04/23/1787

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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Author Profile Written By:
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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Reviewed by Life Insurance Experts

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.

# 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.