Insurance companies have often found themselves at the receiving end for imposing stiff fees or costs since these charges shrink the investible portion of the premium paid. This battle raged prominently in the case of unit linked insurance plans, or ULIPs, for years.
More importantly, these charges are often not plainly communicated to the policy buyers.
We help you understand the key charges that tag along with ULIPs.
1) Premium allocation charge
This is deducted from the premium upfront. It is a percentage of the premium appropriated towards charges before allocating the units under the policy.
This charge is levied to recover the initial expense incurred towards issuing the policy such as the distributor fee and the cost of underwriting. The balance is the investible amount used to purchase units of the funds chosen by the policyholder.
Though the Insurance and Regulatory and Development Authority, or IRDA, has set guidelines that ensure a cap on these charges from the fifth year onwards, the premium allocation charges in the first few years continues to remain significantly high.
2) Policy administration charge
This charge is deducted towards the administrative expenses incurred by the company towards the maintenance of the policy. So the costs towards the paperwork, the premium intimation, and so on and so forth will be covered under this head.
It is usually levied on a monthly basis. This charge could either be flat throughout the policy term or could increase at a pre-determined rate. Alternatively, it could be a flat rate during the initial 3-5 years and then increase by a fixed percentage every year.
3) Fund management charge
This charge is towards managing the fund and is levied as a percentage of the value of assets. This fee is deducted before arriving at the net asset value, or NAV.
Though it differs from fund to fund, as per the IRDA cap, life insurance companies cannot charge fund management fees more than 1.35% per annum. Usually, the debt-oriented ULIPs will have a much lower fund management fee than their equity-oriented counterparts.
What investors must bear in mind is that the fund management costs are levied on the accumulated amount, not just the premium paid. Therefore, in real terms, as the corpus grows, the actual amount deducted as fund management fee goes up.
4) Mortality charges
This is charged towards providing you the insurance cover. When a policy is issued, the insurance company assumes the insured person will live to a certain age based on their current age, gender and health conditions. This charge compensates the insurance company in case the insured person doesn’t live to the assumed age. It is generally charged once a month.
The actual amount paid under this head depends on the amount of life cover sought, the age of the policy holder and other such details. The methodology of computing the mortality charges along with the mortality charge table is generally a part of the policy document.
When insurance buyers purchase an insurance-cum-investment product, such as a ULIP, their primary objective is investment. In fact, they may be sufficiently well covered with an additional term policy. However, they still have to pay the mortality charge that comes with the plan.
5) Surrender charges or discontinuance charge
A surrender charge may be deducted for premature encashment of units, either partial or full. This charge is usually calculated as a percentage of the fund or of the annualised premiums.
IRDA has laid down guidelines on the maximum surrender charges that can be levied by life insurance companies. The surrender charge or the discontinuance charge shall not exceed 50 basis points per annum on the unit fund value and no other charge apart from this shall be levied by the insurer on surrender of the policy.
Having understood these charges, what you also need to understand is that IRDA has set guidelines to limit the impact of these charges on the overall return from the investible portion of your premium.
From the completion of the fifth year – which is the lock-in period, the cost needs to be spread over the period in such a way that the difference between gross yield (what the plan would have earned if no charges were deducted) and net yield (what the plan earns after deduction of charges) should not exceed more than that mentioned in the table below.
| Number of years elapsed since inception |
Maximum reduction in yield* |
| 5 |
4.00% |
| 6 |
3.75% |
| 7 |
3.50% |
| 8 |
3.30% |
| 9 |
3.15% |
| 10 |
3.00% |
| 11 and 12 |
2.75% |
| 13 and 14 |
2.50% |
| 15+ |
2.25% |
* Difference between gross and net yield in term of percent per annum
For example, if you hold the policy for 10 years and if the investments in your policy's stock bucket have reaped 15% return, you should get at least 12% (maximum permissible charges are 3%) at the 10th policy anniversary. This ensures that the difference between the gross yield and the net yield is not huge.