A unit-linked insurance plan is considered to be a mutual fund with an insurance cover. But compared with mutual funds, ULIPs come with a long list of charges. Before investing, understanding the type of charges to be paid over time will help an investor/policyholder buy a suitable ULIP. Here are some of the key charges of ULIPs:

Types

Different insurance companies offer different ULIPS with varying returns in the market, but the costs associated with the products are more or less the same. These charges include premium allocation, policy administration, fund management and mortality charges.

Premium allocation charge is the amount deducted by the insurance company from the premium paid (every time) by the policyholder, before the allotment of units. The charge varies from product to product. This cost normally includes initial and renewal expenses and underwriting charges for the insurance companies. Usually, the premium allocation charge is high in the first five years, post which it is zero for many.

There are some products that do not charge any premium allocation costs at all. For instance, Bajaj Allianz Life’s Goal Assure, Edelweiss Tokio Life’s Wealth Plus and HDFC Life’s Click2Invest have has zero premium allocation charge. On the other hand, Aditya Birla Sun Life’s Wealth Max Plan deducts about 3 per cent from the base premium and 2 per cent from the top-up premium as premium allocation costs.

Similarly, some ULIPs in the market such as Edelweiss Tokio Life’s Wealth Plus and HDFC Life’s Click2Invest do not levy policy administration charges. On the other hand, ICICI Pru Life’s Wealth Protector levies a policy administration charge of 0.21 per cent (on the premium) per month till the premium-paying term and 0.10 per cent thereafter. This fee (not deducted from the premium but adjusted against redemption of units) goes towards policy maintenance services such as paperwork and premium payment intimation.

Fund management charge (FMC) is yet another amount insurance companies commonly deduct every year. This is a fee charged towards managing your fund and is deducted before arriving at the fund value or NAV. That is, it is levied on the accumulated amount and not deducted from the premium.

Accordingly, the charges vary with each product even of the same insurance player. For instance, in Bajaj Allianz Life’s Goal Assure, for liquid fund, the FMC is 0.95 per cent per annum, whereas for the equity growth fund II of the same product, the FMC is 1.35 per cent per annum.

The insurance regulator has capped fund management charge at a maximum of 1.35 per cent per annum.

A policyholder also has to cough up mortality charges for the insurance cover under a ULIP. This fee compensates the insurance company if the policyholder doesn’t live to the expected age. The actual amount paid as mortality charge depends mainly on the sum assured and the age, gender and health conditions of the policyholder.

It is generally payable on a monthly basis and deducted from the units allotted. For instance, take ICICI Pru Life’s Wealth Protector. The indicative annual charges per ₹1,000 of life covered for a healthy 30-year-old male at a sum assured of ₹10 lakh is ₹1.59; it is ₹2.72 for a 40-year-old male.

One-time charges

Insurance companies charge its policyholders for partial withdrawals as well. Note that partial withdrawals of ULIPs come with certain conditions that vary with each insurer and products. Even in the case of discontinuance of a policy, the policyholder will be charged, usually, from the year in which the policy is discontinued.

There are other charges such as rider costs and top-up premium costs that are specific to what a policyholder opts for while investing in a ULIP.

While looking at ULIP charges, make sure you consider the tax (GST) impact as well.

Keep in mind

ULIPs, like other insurance products, are regulated by the Insurance Regulatory and Development Authority of India (IRDAI). The body has laid down the guidelines for ULIPs (including charges and returns) to be followed by all the insurers.

As per the regulations, the charges levied should result in a reduction in yield of not more than 2.25 per cent for a policy for more than 10 years and 3 per cent if the policy duration is less than 10 years.

Yield refers to the earnings generated and realised on an investment over a period.

The difference between the gross and net yield which is capped at 2.25-3 per cent is the difference between actual returns generated and returns net of expenses (other than those deducted as units).

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