Premium Allocation charges in ULIP

What is Premium Allocation Charge?

Premium Allocation Charges meaning, a fee deducted from the premium you pay before allocating the remaining amount to your investment or insurance policy. This charge is typically expressed as a percentage of your premium.

Key Points

• How it Works: When you pay your premium, the insurer first deducts the premium allocation charge. The remaining balance is then invested in your chosen funds or used to provide life cover.
• Purpose: It covers initial costs like setting up the policy, processing your application, and paying agent commissions.
• Amount: The percentage deducted can vary by insurer, policy type, and premium payment mode. It is often higher in the first policy year and reduces in subsequent years. Some insurers may apply it only for the first few years (e.g., 5–7 years)
• Applicability: This charge may also apply to additional rider premiums and sometimes to renewal premiums, but the deduction typically reduces over time.

Example: If the premium allocation charge is 12% on a Rs. 1 lakh premium, ₹12,000 is deducted as a charge, and ₹88,000 is allocated to your policy or investment.

Is there any charge similar to this in Mutual Funds?

While Premium Allocation Charge is unique to ULIPs. Mutual funds previously charged an entry load (a fee deducted upfront when you invested), which was similar in effect to a premium allocation charge. However, SEBI abolished entry loads in 2009, so currently, no upfront charge is deducted from your investment in mutual funds

Due to this the Investment amount get's reduced and it will have a huge impact on your returns. Since ULIPs have 5 year Lock-In, This will have even greater impact on your returns.

Example: Mr. X invests Rs. 1 lakh each in an ULIP and MF for 5 years. Due to premium allocation charge of 12% in ULIP only Rs. 88,000 gets invested in the fund. 

Let's say the fund given 12% return (CAGR). After 10 years:

ULIP fund : Rs. 11,03,467 Tax Free.

Mutual Fund : Rs. 12,53,939 Post tax (LTCG) Rs. 11,59,697

So, due to premium allocation charges in ULIP, MF gives better returns. I.e. Rs. 56,230.

Is Premium Allocation charge mandatory?

It is not mandatory charge and it varies among the ULIPs (not necessarily 12% as mentioned in the above example). There are few ULIP funds available online, doesn't charge Premium Allocation charge. 

At Honvest, we advice doesn't have this charge thereby maximising your benefits which are tax free. We suggest only those ULIPs which are not just the top ones in the market but also better than MFs. check them here.

Summary

The premium allocation charge is essentially the “entry cost” of your insurance policy, ensuring the insurer covers its initial administrative and distribution expenses before your money is put to work for insurance or investment. But for any online ULIP you can completely avoid this, Please do go through the policy document to find out this charge.

Top ULIPs (with no extra charges) for 2025 in India

• Max Life Online Savings plan
• Canara HSBC Promise 4 Wealth
• HDFC Life Click 2 Wealth
• Aditya Birla Capital - Wealth Smart Plus

Regards,

Honvest Team.