How ULIP Charges Reduce Returns!

Published: June 16, 2016 at 7:29 am

The charges associated with a Unit linked Insurance Plan (ULIP) can significantly impact the returns from the policy. A two-part discussion on ULIPS: first how charges reduce returns and then a category-wise study of ULIP returns and how to compare them with mutual funds.

This post is entirely due to an interesting thread started by Guru Rudagi at Facebook group Asan Ideas for Wealth with key comments from Ramesh Mangal (one of my personal finance influencers) and Butan Mohapatra who took the trouble of sending me his ULIP statement with a detailed explanation.

A ULIP which is active has four key charges:

  1. Premium allocation charge
  2. Policy administration charge
  3. Fund Management Charge
  4. Mortality Charge

Premium allocation charge will be deducted from the premium before investing.

Policy administration charge will be levied by deducting units accumulated at the start of each month.


The fund management charge will be removed from the NAV like good old mutual funds.

The mortality charge will be removed from units accumulated once a month. Thanks to Ramesh for pointing this out. This charge will change depending on the age and insurance cover opted for.

This charge will change depending on the age and insurance cover opted for.

All these charges will vary from insurer to insurer, and are subject to service tax and applicable cess!

Here is an example from HDFC Life

Premium allocation charge:

Year 1: 2.5%

Year 2: 2%

Year 3+: 0%

Butuan showed me charges of a Canara HSBC ‘smart future plan’ which was much higher and zero only after 10 years!

Policy administration charge:

Year 1 to 5: 0.42%

Year 6 to 10: 0.83%

Year 11 to 15: Nil

Year 16 onwards: 0.83%

These will be deducted monthly and is subject to a maximum charge of Rs 500 per month.

Fund management charge (expense ratio)  1.35% a year.

Mortality charge is the cost of the life cover.

HDFC Life uses the following formula

Annual mortality charge =

(Mortality rate x Sum insured) /1000

The mortality rate changes with age as shown below

ULIP-mortality-charge
Source: HDFC click-2-invest ulip

Notice how the insurer perceives higher risk (of paying out the sum insured) for children and naturally to senior citizens.

How ULIP Charges Reduce Returns!

For the sake of argument, we will assume Rs. 1000 as the one-time premium of a ULIP.

Step 1 If the return from change in NAV is 10%, the impact of the mortality charges alone is shown below

ULIP-mortality-charge-2
Policy start age 24: impact of mortality charges alone

The NAV return is assumed to be always 10% for simplicity. This data is for a person who started to invest in the ULIP at age 24.

For a person who started to invest at age 34, the impact due to mortality charges alone would be greater.

ULIP-mortality-charge-3
Policy start age 34: impact of mortality charges alone

The NAV return of 10% is after taking into account the fund management charge.

Step 2 Now if we take into account Policy administration charges  for the ULIP started at age 24, the return drops further.

ULIP-mortality-charge-4
Policy start age 24: impact of mortality charges and policy administration charges alone

For ULIP return calculation, premium allocation charges should not be factored in as they are deducted before investment. However if we wish to compare returns to a mutual fund, then it becomes like an entry load.

Step 3 For the policy started at age 24, after taking into account the premium allocation charges (only for the first year, since it is a one-time premium).

ULIP-mortality-charge-6
Policy start age 24: impact of mortality charges, policy administration charges and premium allocation charges

Step 4  Factor in service tax for steps 1,2 and 3!! Too tired to do this. Just we reduce another 0.5%?

The purpose of this post is two-fold

1 To illustrate how ULIP charges reduce returns (done)

2 To determine a reasonable number by which we should reduce the ULIP NAV returns reported if we have to compare them with mutual funds.

If the mutual fund return (after taking into account the much higher expense ratio ~ 2.5%)  is 10%, the corresponding ULIP return (after expenses)

for a 10 year policy started at age 24 would be _____ (only an estimate)

for a 10 year policy started at age 34 would be _____ (only an estimate)

Can you please fill in the blanks by looking at the tables above? Thank you.

Do share if you found this useful

We now publish both equity fund and debt fund (+ hybrid fund) screeners each month!
Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video!  More than 415 investors and advisors use this!
Unlock the secrets of successful financial advisors and entrepreneurs with our new course!
My new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, if we had to groom one ability in our children that is key not only to money management and investing but for any aspect of life, what would it be? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parent’s plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Did you know? We have more than 1000+ videos on YouTube to explore! Join our YouTube Community!

Join our courses in exclusive Facebook Groups!

  • 550+ members are now part of our new course: How to get people to pay for your skills! (watch 1st lecture for free). Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show how to achieve by showcasing your skills and building a community that trusts you and pays you!
  • Goal-based portfolio management! Join 2220+ members and get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment of Rs. 3000 only. No recurring fees! Life-long access to videos (10+ hours content)  in an exclusive Facebook Group! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.

Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps