ULIP Charges Comparison

Insurance Companies were in a race to launch new “ULIPs” for the first 10 years till IRDA came out with certain restrictions in this sector. Agents are still enjoying a decent commission in ULIPs, but from where did these companies offer such high commission to agents? Naturally,they are deducting various charges from the policyholder’s account and use it to give attractive commission and still make profits. Before getting into ULIP charges comparison between ICICI Prulife and HDFC Life, let us see different types of charges in ULIPs and how to compare ULIP charges?

Premium Allocation Charges

This is the amount the company will deduct from your premium upfront which will reduce your investments considerably. These charges were very high when ULIPs were first introduced in India. Now, after several interventions by IRDA, ULIPs charges have come down drastically. But still these charges reduce the investment of the customers and bring down returns.

Let us analyse the impact by way of an example. Take the annual premium as Rs.1,00,000/- and term of the policy as 20 years. In one of the most common ULIP policy, now available in the market, these charges are given as below.

Year 1 – 5%, Years 2 & 3 -4%, Years 4 & 5-3%, Years 6 & 7 -2%,Thereafter -1%

You can see the charges works out to be 36% in the 20 years. In our example, the company will deduct Rs.36,000/- as premium allocation charges in 20 years and only the balance will be invested.

Also Read and Download: How much insurance do in need calculator

Policy Administration Charges

Most of the companies charge between Rs.400- Rs.500 per month, by way of cancellation of units. But some companies charge this as a percentage of the premium. In this case, the cost will be very high. Some companies use this as a way to advertise as having no premium allocation charges, but charges heavily under this head.

In the above example, we discussed, the company charges Rs.500/- per month from the beginning by way of cancellation of units. This comes to yearly Rs.6000/- or 6% of the annual premium. This cost from the beginning to the 20^th Year comes to Rs. 1,20,000/-(6000 x 20).

The total of the above 2 charges comes to Rs.1,56,000/- (Rs.36,000 plus Rs.1,20,00). This is 156% of the annual premium or around 7.8% of the total premium paid in 20 years.

Fund Management Charges

This is the amount charged by the company to manage the fund. These charges are not on the premium paid but on the fund value and are the major source of revenue for the company. These charges are in the range of 0.75% per annum to 1.35% per annum depending on the nature of the fund.

Also Read : Why endowment policies are bad for investments?

Mortality Charges

These are reasonable charges because this is what the real charge for insurance is – what they take to give you the sum assured in case you die.

Discontinuance Charges

There are exit charges in ULIPs, if you want to close the policy earlier than the maturity date.

1st Year – Lower of 1% of (SP or FV), subject to a maximum of 6,000
2nd Year- Lower of .5% of (SP or FV), subject to a maximum of 5,000
3rd Year-Lower of .25% of (SP or FV), subject to a maximum of 4,000
4th Year -Lower of .1% of (SP or FV), subject to a maximum of 2,000
5th Year Onward – Nil

It is more or less same in all the insurance companies.

These are the 5 ways in which an insurance company charges the customer in ULIPs. The last 3 charges are reasonable and worth it from customers point of view. But the first 2 charges are on the higher side even after changes in ULIPs.

ULIPs have become very popular in the last 20 years. If you cannot manage insurance and investment separately, ULIPs are great for you else they are not. The free switches between different funds are the only attraction in ULIPs for those, who can manage it effectively.

ULIP Charges Vs Mutual Funds Charges

It is always better to invest in a long-running, diversified mutual fund because you will pay only the management fees in a mutual fund. For funds like HDFC Top 200 or HDFC Equity, the total recurring fees adds up to 1.8% per annum. While you pay 7%-8% in ULIP charges, in mutual funds the charges are zero except fund management charges are on a bit higher side.

Also buy a Term Plan for insurance cover. Online Term Plans are available at low premiums.

Yes, fund performance matters. In equity mutual funds, you can come out of a mutual fund after 1 year, without any cost or tax implication if your fund is not performing well. But in ULIPs, you can not do that.

Imagine, you have selected a Jeans priced Rs.1,500 and a T-shirt priced for Rs.1,000 from a shop. Your total bill should be Rs.2,500/-. But if the shop charges you a total of Rs.3000/- and claims that the extra Rs.500 is for matching both and packing it, will you buy it? ULIPs are like this.