ULIP Charges

Table of Content

1. What Is ULIP?

2. What Are ULIP Charges?

3. Types of ULIP Charges

4. Quick Overview of Common ULIP Charges

5. Understanding ULIP Taxation

6. Understand the Charges under Your ULIP Policy

7. How to Minimise ULIP Charges

8. Summary

9. FAQs on ULIP Charges

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 ULIP work and how much they cost.

What Is ULIP? 

Unit Linked Insurance Plan meaning refers to a life insurance product that invests your premium in market-associated funds such as equity, debt, or hybrid funds. A part of the premium provides life cover, while the remaining is invested to assist in growing your wealth. 

Policyholders can select how their funds must be allocated depending on their risk appetite level and financial goals. ULIPs are valued using Net Asset Value (NAV) and have a five-year lock-in, making them a favourable product for long-term financial planning.

What Are ULIP Charges? 

ULIP charges are fees that insurers apply for managing both the investment and life insurance components of a Unit Linked Insurance Plan. Such charges are deducted either from the premiums you pay or directly from the fund value that accumulates over a long time. Because such deductions can lower the total ULIP returns, it is essential to be aware of how they work before you invest. 

The good news is that reformed ULIPs have introduced lower charges, making them a more viable investment option. Plans like HDFC Life Click 2 Wealth (UIN-101L133V03) now feature minimal fund management fees, zero premium allocation charges, and bonuses like loyalty benefits and wealth boosters.

However, if you are dealing with standard ULIPs, striking a comparative analysis among the ULIP plan charges is a must. Doing so can allow you to choose a plan that is more cost-effective and better in line with your financial goals.

Types of ULIP Charges

ULIPs have different charges that cover life cover, investment management, and policy servicing. Being aware of such types of charges in ULIP assists you in assessing costs and choosing a plan that suits your financial goals.

1. Premium Allocation Charges

Premium allocation charges in ULIP are deducted from the premium before any investment is made into the ULIP. Such charges cover upfront costs. These costs are agent commissions, policy issuance, medical tests and administrative setup. They are generally a fixed percentage of the premium and tend to be highest in the first year. 

In later years, they might be lower or even become negligible, depending on the insurer. For instance, if you pay a premium of ₹1 lakh and the premium allocation charge is 10 per cent, then ₹10,000 will be deducted as a charge and ₹90,000 will be invested. As this charge lowers the investable portion of your premium, it can affect your early returns.

2. Guarantee Charges

Guarantee charges are fees charged when the insurer endows a capital guarantee or assured return feature in ULIP plans. These might provide benefits such as minimum NAV, assured maturity value or return of premium. 

The charge compensates the insurer for the risk of offering these benefits, particularly during volatile market scenarios. Not all ULIPs levy this charge. And it applies just to specific assured products. It is usually deducted on a periodic basis from the fund value or built into the NAV.

3. Goods & Services Tax*

ULIP attract GST because it clubs insurance and investment, both of which have service components. GST is charged just on specific ULIP-linked charges and not on the whole premium. 

The charges where GST applies are premium allocation charges, policy administration charges, fund management charges, surrender charges and policy reinstatement charges. For each of these, GST is charged as a percentage of the charge amount. The current GST rate for ULIP service charges is 18%.

4. Fund Management Charges

Fund management charges in a ULIP are levied for the management of the underlying investment funds in a ULIP. They are deducted as a percentage of the fund’s value, usually on a daily basis. This charge cannot go over 1.35 per cent per annum. It is built into the NAV. 

So, it may not appear as a separate line item. But it still impacts your fund performance. The charge differs based on whether you opt for equity, debt or balanced funds.

5. Policy Administration Charges

Policy administration charges are month-on-month fees deducted for policy maintenance, documentation and provision of customer support service. These are deducted by cancelling units from your fund value. The amount may be fixed or increase annually. 

For example, a policy administration charge might be ₹300 per month. While the amount might appear small, it can reduce your fund value over time. The structure and amount are always disclosed in the policy brochure and follow the regulatory guidelines.

6. Mortality Charges

Mortality charges represent the expense of life cover provided under a ULIP. They are computed depending on factors such as the policyholder’s age, the sum at risk (sum assured minus fund value), policy term and sometimes gender. Older policyholders pay higher charges owing to the increased mortality risk. 

These charges are deducted on a monthly basis by cancelling units. Insurers use IRDAI-approved mortality tables to determine the amount. Higher mortality charges in later years can have a noticeable effect on the value of the fund.

7. Switching Charges

Fund switching permits policyholders to move funds between distinct fund options like equity, debt or balanced funds to align them with market conditions or goals. Most insurers offer a limited number of free switches each year, often between four and six. 

After this, a flat fee ranging anywhere from ₹100 to ₹500 per switch might apply. Switching does not create any kind of tax liability. But frequent switching can impact long-term wealth creation. It is important to know the difference between free and chargeable switches by reviewing your policy brochure.

8. Top-up Charges

A top-up is an additional investment into an active ULIP over and above the standard premium. It can be a one-time or multiple contributions in the course of the policy term. Insurers might deduct a percentage depending on the top-up charge, usually in between 1 and 3 per cent, from the top-up amount, with the remainder invested in the selected fund. 

Top-ups even increase the sum assured, which might result in higher mortality charges. Some insurers set up minimum top-up amounts and lock-ins. This option functions well for policyholders with surplus funds looking to enhance their long-term investments.

9. Premium Discontinuance Charge

ULIPs have a mandatory lock-in period of five years during which premiums must be paid on a regular basis. If premium payments stop before the lock-in ends, the policy moves to a Discontinuance Fund, where growth potential is limited. 

A premium discontinuance charge is deducted (either as a percentage of the annual premium or fund value based on the insurer's terms). Remaining invested for at least ten years is recommended to avoid such charges and get the most from your policy.

10. Premium Redirection Charges

Premium redirection allows you to change how future premiums are allocated across funds without affecting your current fund value. This is often used to move future contributions into lower-risk funds. 

Some insurers offer a few free redirections each year, while others may charge after a set limit. Premium redirection is distinct from fund switching, which changes the allocation of prevailing funds. This feature can assist in aligning your policy with changing financial goals.

11. Miscellaneous Charges

Miscellaneous charges are small administrative fees for post-issuance changes to your ULIP. Common examples are changing the premium payment frequency, updating nominee details or modifying contact information. 

Although such charges are generally small and fixed, they differ among insurers. They are deducted from your fund value and can accumulate if frequent changes are made. It is recommended to check out your policy document for a complete list of such charges.

12. Rider Charges

Riders are optional add-on benefits, such as accidental death cover or critical illness protection, that enhance your ULIP. Such benefits come at an additional cost, either increasing the premium or lowering the fund value. 

Rider charges are generally computed on an annual basis and depend on factors like the sum assured, age and policy type. While riders can add value, they must be selected only if they match your needs. Not all ULIPs offer the same riders, so always make sure to check the insurer’s list.

13.  Partial Withdrawal Charges

Partial withdrawal refers to taking out a part of your accumulated ULIP corpus before maturity. This is allowed only after the five-year lock-in and can be beneficial for needs such as medical expenses or education. Many insurers permit a fixed number of free withdrawals, post which a nominal fee applies. 

There are even limits on the minimum as well as maximum amounts that can be withdrawn, often defined as a percentage of the fund value. Frequent withdrawals can reduce your fund’s growth potential, so it is important to check the policy terms.

14. Policy Surrender Charges

Policy surrender is an occasion when you voluntarily terminate your ULIP before completing the lock-in. This leads to charges that lower the overall fund value you receive. 

The surrendered amount is moved to a Discontinuance Fund, and the payout is released only after the five-year period. Ending a policy early disrupts long-term benefits, so continuing is generally advisable.

15. Surrender or Discontinuance Charges in ULIP

Both surrender and discontinuance involve ending the policy before the lock-in is complete. In either case, the insurer deducts a surrender or discontinuance charge, lowering the payout. The consequences include loss of life cover, movement of funds to a Discontinuance Fund and delayed access to funds until the lock-in ends. 

Since ULIPs are meant for long-term wealth creation, early exits must be considered only as a last resort.

Quick Overview of Common ULIP Charges

Unit Linked Insurance Plans (ULIPs) incur different charges linked to investment management, life cover and policy administration. Such costs are deducted at distinct phases and directly impact the fund value and overall returns over time. The table given below simplifies ULIP charges with easy-to-understand examples.

Understanding ULIP Taxation

ULIPs endow both tax benefits and taxable outcomes under ULIP taxation, based on certain conditions. GST applies to specific ULIP charges while income tax provisions govern premiums and proceeds.

1. GST Applicability

ULIP charges, such as fund management and policy administration, levy a GST of 18 per cent. This tax is basically applied on top of the base charge amount deducted from your fund value.

2. Section 80C* Tax Benefit

Premiums paid toward ULIP qualify for tax deduction as per Section 80C* for an amount of up to ₹1.5 lakh per year. This benefit applies only if the premium in any policy year does not surpass 10 per cent of the sum assured.

3. Section 10(10D) * – Maturity Tax Exemption

For policies issued before 1st February 2021, maturity proceeds are exempt from tax if the annual premium is not more than 10 per cent of the sum assured. For policies issued on or post 1st February 2021, the exemption applies only if the overall premium in any year does not surpass ₹2.5 lakh. 

If aggregate premiums across all ULIP plans surpass ₹2.5 lakh in any year, then maturity proceeds from those policies will be taxed as capital gains. Policies within the ₹2.5 lakh annual premium limit tend to enjoy tax-free maturity benefits.

4. Taxation on Death Benefit

The death benefit from a ULIP is completely exempt from tax as per Section 10(10D) *, irrespective of the premium amount or issue date.

Understand the Charges under Your ULIP Policy

Before investing in any ULIP plan, it is extremely necessary to be aware of how distinct charges impact your premium and returns. Assessing documents and seeking expert guidance can assist you in making an informed choice.

1. Sales Benefit Illustration

A sales benefit illustration is a tailored document that shows how your ULIP premium is allocated on a yearly basis and the charges applied. It includes costs like fund management charges, policy administration charges and mortality charges. 

This document assists you in estimating potential returns and must be requested from the salesperson before buying the policy.

2. Product Brochure

A product brochure is a plan document on the insurer's website. It lists all ULIP charges, their purpose, frequency and conditions. While not customised to your details, it endows a clear understanding of the policy's cost structure, which is essential to review before investing.

3. Advisor

An advisor is a trained insurance professional who can explain ULIP charges. They help interpret both the sales benefit illustration and the product brochure. 

You must ask specific questions regarding charges and confirm that the professional advisor is associated with a credible insurer or platform before moving ahead.

How to Minimise ULIP Charges

ULIPs have various charges, such as premium allocation, fund management, and policy administration that can lower your returns. Opting for a long-term policy of ten years or more helps disseminate initial costs over time, improving efficiency. 

Compare charge structures before you buy and look out for plans with low or zero premium allocation charges. Avoid frequent fund switches or partial withdrawals to prevent additional costs. Zeroing in on passive or low-equity funds can lower fund management fees. Always examine the sales benefit illustration and policy brochure to understand all applicable charges. You can also use a ULIP calculator to estimate the potential returns after factoring in these charges.

Summary

ULIP plans consist of various charges such as premium allocation, fund management, policy administration and switching fees, which are deducted before units are allotted. These deductions lower the value of your investment and can affect your final returns. It is therefore very important to examine all applicable charges before buying a plan. 

You can find out accurate and detailed charge info on the insurer's official site, in the product brochure or by consulting a sales advisor. Being aware of such costs will allow you to make a confident and well-informed ULIP investment decision.

FAQs on ULIP Charges

1.  What are the fees in ULIP?

A ULIP has multiple charges. These are premium allocation charges, fund management charges, policy administration charges, mortality charges and switching charges. 

These charges are levied by the insurer to cover investment management, insurance cover and administrative expenses. Being aware of each fee assists in assessing the actual cost of your ULIP.

2. 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.

3.  How are ULIP charges deducted from my policy?

ULIP charges are deducted either by lowering the number of units in your fund (unit deduction) or by adjusting them before units are allotted from your premium. Some charges are applied on a month-on-month basis, while others are levied annually or during particular transactions.

4.  Can ULIP charges change over time?

Yes. Certain ULIP charges like fund management fees or policy administration charges can change, subject to limits set. Insurers must inform policyholders in advance before implementing any such change in the charge structure.

5.   What is a fund switching charge?

A fund switching charge is the fee that is applied when you transfer money between distinct ULIP fund options, such as from equity to debt. Many ULIPs offer a set number of free switches per year, post which a nominal fee applies.

6.  How do ULIP charges affect returns?

ULIP charges lower the invested amount or the units you hold, which has a direct impact on your fund value and returns over time. Lower charges mean more of your premium stays invested, increasing your potential for higher long-term gains.

7.  What are the regulations on ULIP charges?

Caps on certain ULIP charges have been put in place to protect investors. For instance, the thorough reduction in yield cannot surpass 3% for policies up to 10 years and 2.25% for longer terms. This ensures ULIPs stay cost-effective for policyholders.

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