Expenses in a ULIP-Take a look

Before selecting a ULIP go thru the list of expenses charged by them. These charges, a large extent, determine the usability and effectiveness of a ULIP.

Most of the expense types are listed below and explained:

Expenses Charged in a ULIP

Premium Allocation Charge:
A percentage of the premium is appropriated towards charges initial and renewal expenses apart from commission expenses before allocating the units under the policy.

Mortality Charges:
These are charges for the cost of insurance coverage and depend on number of factors such as age, amount of coverage, state of health etc.

Fund Management Fees:
Fees levied for management of the fund and is deducted before arriving at the NAV.

Administration Charges:
This is the charge for administration of the plan and is levied by cancellation of units.

Surrender Charges:
Deducted for premature partial or full encashment of units.

Fund Switching Charge:
Usually a limited number of fund switches are allowed each year without charge, with subsequent switches, subject to a charge.

Service Tax Deductions:
Service tax is deducted from the risk portion of the premium.

Having defined ULIP expenses, an illustration will help in understanding how they pan out as well as their impact on returns over a period of time.

ULIP expenses

Tenure Yearly Premium Expenses (%)

Initial 2 yrs Remaining tenure Fund Value Effective ROI

(pa) (pa)

10 25000 27 3 358,417 6.48
15 25000

703,694 7.53
20 25000

1,232,827 7.98
25 25000

2,042,497 8.22
30 25000

3,281,631 8.36

As u can see, in the first two years of a ULIP, the expenses account for nearly 27%, hence even if a ULIP is kept for a duration of 10 yrs, the ROI (6.48%) rarely beats that even from an FD.

Hence i re-iterate, exercise caution before u opt for one.

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