In short
ULIP charges are the fees a unit linked plan deducts from premiums or the fund, such as premium allocation, fund management, administration and mortality charges, each capped by IRDAI.
Also called: unit linked plan charges, ULIP fees, fund management charge, FMC, premium allocation charge, discontinuance charge, reduction in yield
What are ULIP charges?
ULIP charges are the deductions a unit linked insurance plan makes to pay for its costs: distribution, administration, fund management, life cover and any guarantees. Some are taken from the premium before units are bought. Others are taken from the fund, either by cancelling units each month or by adjusting the daily NAV. Together they decide how much of what the customer pays actually gets invested and how much the fund grows.
IRDAI requires every ULIP to use uniform definitions for its charges, to state them explicitly, and to keep each one within a cap. The rules are in Schedule I of the IRDAI (Insurance Products) Regulations, 2024, with more detail in the Master Circular on Life Insurance Products (June 2024).
The main ULIP charges and their caps
As of October 2026:
| Charge | How it is taken | Cap |
|---|---|---|
| Premium allocation charge | Deducted from each premium before units are allotted | 12.5% of annualised premium in any year |
| Fund management charge (FMC) | Built into the daily NAV | 1.35% a year per fund; 0.50% a year on the discontinued policy fund |
| Policy administration charge | Units cancelled at the start of each policy month | ₹500 a month; may rise by up to 5% a year |
| Mortality or morbidity charge | Units cancelled monthly, per ₹1,000 sum at risk | No expense loading; guaranteed table (see mortality charges) |
| Guarantee charge | Built into the NAV, only if the product guarantees a benefit | 0.50% |
| Switching charge | On each switch between funds | ₹500 per switch |
| Partial withdrawal charge | On each withdrawal | ₹500 per transaction |
| Miscellaneous charge | On alterations such as a change in sum assured | ₹500 per alteration |
| Rider charge | Units cancelled monthly, or a level rider premium | Pure risk cost, no expense loading |
Discontinuance charge. If a regular premium ULIP is discontinued in the first four years, a capped charge applies:
| Year of discontinuance | Annualised premium up to ₹50,000 | Annualised premium above ₹50,000 |
|---|---|---|
| 1 | Lower of 20% of AP or fund, max ₹3,000 | Lower of 6% of AP or fund, max ₹6,000 |
| 2 | Lower of 15%, max ₹2,000 | Lower of 4%, max ₹5,000 |
| 3 | Lower of 10%, max ₹1,500 | Lower of 3%, max ₹4,000 |
| 4 | Lower of 5%, max ₹1,000 | Lower of 2%, max ₹2,000 |
| 5 onwards | Nil | Nil |
Single premium ULIPs have a separate, lower scale, and top-up premiums carry no discontinuance charge.
The cap on reduction in yield
Beyond individual caps, IRDAI limits the combined drag of charges, measured as the reduction in yield: the gap between the gross return earned by the fund and the net return the customer gets. Before launch, the insurer must show that this gap stays within these limits, tested at gross returns of 6%, 8% and 10%:
| Years since inception | Maximum reduction in yield (a year) |
|---|---|
| 5 | 4.00% |
| 10 | 3.00% |
| 15 and after | 2.25% |
Intermediate years step down between these points. Mortality, morbidity, rider and guarantee costs may be left out of this test. Charges in the first five years must also be spread evenly, with the highest year no more than three times the lowest. In addition, the illustrated fund at maturity must be at least 90% of total premiums at a 4% gross yield, after all deductions.
What ULIP charges mean for distribution
- Show the charges, not just the fund value. The benefit illustration at 4% and 8% gross returns, signed by customer and agent, already reflects charges. Walking through the allocation and FMC lines prevents the "my fund is less than what I paid" complaint in year two.
- Allocation charges and distribution costs are linked. Premium allocation charges are one of the ways an insurer recovers acquisition costs, including commission. Under the Expenses of Management and commission rules from 2023 and 2024, insurers have more freedom in how they pay distributors, so charge structures and commission design are now linked choices.
- Low-charge ULIPs change the pitch. Some ULIPs, particularly those sold online, carry no premium allocation charge. Advisers selling higher-charge versions need to explain what the customer gets for the difference, such as service or features.
- Discontinuance hurts both sides. A customer who stops in year one or two pays the discontinuance charge and loses life cover until the lock-in ends. Persistency in ULIPs is as much a customer outcome as a business metric.
- GST no longer adds to charges. From 22 September 2025, individual life policies including ULIPs were exempted from GST, so charges on individual ULIPs no longer carry 18% GST on top. Older illustrations may still show GST.
Sources
Cite this entry
Glotus456 Research. "ULIP charges." Insurance Encyclopedia (India), updated 17 October 2026. https://www.glotus456.com/research/encyclopedia/ulip-charges
About this entry. Written by the Glotus456 Research team, a BFSI distribution consultancy in Gurugram working with insurers, NBFCs and FinTechs across India. It explains how things work and is general information, not legal, tax or financial advice. Rules change: check the current IRDAI regulation or circular, or the official scheme or tax source, before acting.