ULIP Charges

Different types of ULIP charges

There are several types of charges in ULIP, each serving a specific purpose.

1. Premium Allocation Charge

   This is a percentage of the premium appropriated towards charges from the premium received. The allocation rate, referred to as the remaining balance, is the portion of the premium designated for purchasing units within the policy's fund. This percentage is explicitly disclosed and may fluctuate based on the policy year, premium amount, and premium type.

   
   

2. Fund Management Charge

   This fee, calculated as a percentage of asset value, is deducted by adjusting the NAV. It's applied during the daily computation of NAV. . For discontinued policy funds, the cap on fund management charges is 50 basis points per annum.

   
   

3. Policy Administration Charges

   This fee encompasses expenses beyond those covered by premium allocation charges and fund management charges. It may be a fixed amount, a percentage of the premium, or a percentage of the sum assured. Levied at the start of each policy month, it's deducted from the unit fund by redeeming units equivalent to the charge. This fee may remain constant throughout the policy term or vary at a predetermined rate of change not exceeding 5% per annum.

   
   

4. Mortality Charge

   This fee covers the cost of life insurance or health insurance and excludes any additional expense loadings. It's deducted by canceling units and is typically imposed at the start of each policy month from the fund. The computation method is explicitly outlined in the policy document, which also includes the mortality or morbidity charge table guaranteed throughout the contract period. The charges for mortality risk covered should:

   • only encompasses the pure risk charges for the offered cover, without including expenses or other factors;
   • be reasonable and align with specified mortality or morbidity tables, if provided;
   • be supported by the insurer's own experience, where applicable.
      

5. Policy Discontinuance Charge

   This fee is applied to the unit fund for individual unit-linked insurance products when the policyholder chooses to surrender or discontinues the contract in accordance with regulations. It's typically stated as a percentage of the fund or as a percentage of the annualized premiums for regular premium contracts. No discontinuance charge is imposed on top-up premiums or withdrawals after the lock-in period.

   
   

6. Other Charges

   Take a look at some other types of charges available in ULIP:

   • Partial withdrawal charge

     This fee is imposed on the unit fund when a partial withdrawal from the fund occurs within the contractual period.

   • Miscellaneous charges

     This fee is imposed for any modifications within the contract, such as increasing the sum assured, redirecting premiums, or changing the policy term. It's represented as a fixed amount and deducted by cancelling units, only occurring at the time of alteration.

   
   

7. ULIP Switching Charges

   If your ULIP plan allows switching between funds, it may come with ULIP switching charges. Most insurers offer a few free switches in a year. After that, a small charge applies. It’s best to check how many free switches your plan is to avoid paying on switching costs.

   
   

8. Top-up Charges in ULIPs

   Top-ups let you add extra money to your ULIP beyond the regular premium. But insurers may apply top-up charges on each additional amount. Some plans may waive them if you meet specific requirements, so it’s good to read the terms and conditions of your policy properly.

   
   

9. Charges for Premium Discontinuance

   If you stop paying premiums before the 5-year lock-in period, charges for premium discontinuance may apply. This fee is deducted from your fund before the balance is moved to a discontinued policy fund. The exact charge depends on how many years you’ve paid and the annual premium. It usually reduces the longer you stay invested.

   
   

10. Premium Redirection Charges

    Premium redirection charges may apply when you decide to change the allocation of future premiums to different funds. It’s different from fund switching, which deals with existing investments. Knowing your plan’s rules helps you make smarter investment calls without unexpected costs.

    
    

ULIP Taxation Explained

While ULIP charges affect how much of your premium gets invested, taxation plays a big role in what you actually earn and keep.

Premium payments under the old regime are eligible for deduction under Section 80C of up to ₹1.5 lakh, in case of old tax regime.

Maturity benefits are tax-free under Section 10(10D) if you meet a few conditions.

• Death benefit is always tax-exempt.
• If the total premium paid in a year (for policies issued after Feb 2021) exceeds ₹2.5 lakh, these are considered capital gains and may be taxed.
   

What Are the Various Ways to Optimize Your ULIP Returns?

By taking the following steps, you can increase returns and make your life insurance policy more effective in achieving your financial objectives.

1. Master the art of fund-switching

   The term fund-switching refers to shifting from one fund to another. This is one special feature that can help you in managing your fund in a way that suits your investment goals.

   ULIP fund switching is helpful when you have invested in a debt fund and want to switch to an equity fund or vice versa, owing to your risk appetite, market trends and life goals. Since there are no tax implications on switching from debt to equity or vice versa, it makes this feature very attractive and can be used to optimize the ULIP.

   
   

2. Manage the overall risk in the portfolio

   There are some specified investment strategies that help the policyholder to manage the overall risk of the portfolio based on the asset allocation, risk profile and financial goals. Opting for these strategies could be helpful for the policyholder to manage the total risk of the entire ULIP portfolio.

   
   

3. Do not delay investing

   Early investment plan can typically help optimize your ULIPs. When you start early, even with small amounts, you have a sufficient investment horizon to let the amount grow. The compound interest benefit is quite profitable in the long run.

   Also, since the mortality cost of a young individual may be lesser than that of an older person, you will be able to get a higher amount of money for investment at the same level of coverage as compared to an older individual.

   
   

4. Stay invested

   To make the most of the power of compounding, it is best to remain invested. Also, since some of the charges are front-loaded¹, ULIPs tend to become cheaper when invested for a long time.

   
   

5. Top-up the policy when possible

   You can top up your ULIP and invest any surplus amount to increase the chance of ULIP generating returns and get a proportionately higher sum assured. Just remember to keep the annualized premium including top-up premium should be less than 10% of the capital sum assured at all times in order to avail maturity tax exemptions under section 10(10D) assuming policy is on or after 1 April 2012.

   
   

6. Pay the premiums on time

   Paying the premium for ULIP is a must to continue the plan. Failing to pay the premium on time can constrain the benefits and the policy could also lapse. Also, a delay in payment or discontinuing the policy might cost you other charges and penalties.

   
   

7. Understand the tax benefits

   ULIPs offer not just an investment and life cover but tax benefits too. Under Section 80C of the Income Tax Act of 1961, a ULIP policyholder can avail tax benefit of up to INR 1.5 lakhs on the premiums under old regime of Tax. Apart from this, the death benefit is not taxable under Section 10(10D) of the Income Tax Act of 1961. You can also claim tax exemption on the maturity amount subject to satisfaction of the applicable terms and conditions under Income Tax Act.

   
   

How much should you invest in ULIP?

Every individual has a different set of needs and expectations. Even when two people invest in the same product, their requirements and their financial needs might be completely different. There isn’t any one-size-fits-all approach when it comes to dividing how much to invest in ULIPs. So, if you are wondering how much you should invest in a ULIP, there are certain aspects that you should broadly factor in:

1. Your financial needs

   Probably the first thing to consider is your financial needs from the policy. A little research will go a long way, and thus as per your goal, you can calculate how much money you would be needing.

   
   

2. Your risk appetite

   Your risk-taking capacity plays a crucial role in finalizing your investment. The funds you choose should participate in the market only as per your risk appetite.

   To understand how ULIPs work and to estimate the returns on your investment, you can make use of the ULIP calculator. The calculator will help you in making a well-informed regarding how much you should invest.

   
   

Conclusion

You can make better investment decisions if you are aware of ULIP charges. Every expense has an impact on your returns, from switching fees to premium allocation charges. When you know what you’re paying for, it’s easier to plan long-term. Select a plan that suits your objectives, financial constraints, and risk tolerance, regardless of whether your focus is wealth creation or protection. A well-managed ULIP can support both your future and your family’s financial security.

FAQs

1. How to calculate ULIP charges?

   There are various types of ULIP charges levied. In order to get an idea of the ULIP charges for your plan, you need to go through the policy document in detail.

   
   

2. What are discontinued charges in ULIP?

   Discontinue charges, also called surrender charges, are the charges levied on ULIP account holders when they stop paying the premium before the end of the 5-year lock-in period.

   
   

3. How to calculate mortality charges in ULIPs?

   A part of the ULIP premium is used to offer life insurance coverage to the policyholder. While the mortality charge is expressed as Rs. 1,000/- sum at risk for each age the charges depend on a group of factors and may differ from one plan to another.

   
   

4. Can ULIP charges change over time?

   Yes, there are some types of charges in ULIP that can change over time, such as mortality charges, surrender charges etc. Get in touch with your insurance provider to find out the specific details.

   
   

5. Can I get a breakdown of the charges associated with my ULIP?

   Depending on the plan that you have chosen, your insurance provider can help you get the specific details of the associated charges of ULIP plan.