various charges in a life insurance policy

What are the Various Charges in a Life Insurance Policy?

Demystifying the hidden costs of life insurance! Learn about policy charges that can impact your investment returns and make smart choices

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Written by : Daina Mathew

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Reviewed by : Raman Sharma

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Raman Sharma

BFSI Marketing Expert
Experienced BFSI content writer crafting SEO-driven, compliant, and engaging content across insurance, banking, and finance domains to boost visibility, trust, and conversions.

2026-02-10

1686 Views

7 minutes read

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A life insurance plan provides financial protection through life cover and, in some cases, also functions as an investment-cum-savings product that can offer long-term returns. By investing funds in a life insurance policy, people can plan for the safety of their loved ones during times of crisis, such as the unfortunate event of their death. However, policyholders can fully benefit from this life insurance product only when they are aware of the various fees and charges levied by insurance companies. This blog will help you better understand how much is the cost of life insurance in India and make a well-informed decision.

Key Takeaways

  • Life insurance provides financial protection to your family by offering a payout in case of the policyholder’s death during the policy term

  • Unit-linked Insurance Plans (ULIPs) combine life insurance with market-linked investments, providing growth opportunities while reducing tax liabilities

  • Life insurance policies incur various charges, including premium allocation charges, mortality charges, policy administration fees, fund management charges, and surrender fees

  • High insurance charges can significantly reduce the investible portion of the premium, affecting long-term returns

  • IRDAI sets limits on certain ULIP charges, including surrender and fund management charges, to protect policyholders from excessive fees

Why do Life Insurance Policies Have Charges?

When purchasing a life insurance policy, many people focus on the coverage benefits while overlooking the associated costs. However, life insurance charges play a crucial role in determining the overall value and sustainability of the policy. These charges are implemented by insurance providers to cover various expenses, ensuring the policy remains active and profitable for both the insurer and the policyholder. Let’s explore the reasons behind these insurance charges and why they are necessary.

  • Administrative and Operational Costs: Life insurance companies incur several operational expenses, including policy issuance, customer service, and record-keeping. The administrative fees charged within a policy help insurers manage these costs effectively, ensuring seamless operations and efficient service for policyholders.
  • Mortality and Risk Assessment Costs: One of the primary reasons for life insurance charges is the risk factor associated with insuring an individual. Insurers calculate the likelihood of a claim based on age, health, and lifestyle. The mortality charge is a key component that covers the insurer’s risk of paying out the sum assured in the event of the policyholder’s death.
  • Fund Management Fees: For policies with an investment component, such as Unit-Linked Insurance Plans (ULIPs), a portion of the premiums goes towards market-linked funds. Insurers charge a fund management fee to cover the costs of handling and investing these funds, ensuring optimal returns for policyholders. While it varies by insurance sum, under IRDAI's fixed limit, life insurance companies cannot charge fund management charges exceeding 1.35% per year.
  • Surrender and Policy Maintenance Fees: Insurers impose surrender charges if a policyholder decides to surrender their policy before maturity. These charges compensate for the loss of expected premium payments. Additionally, some policies have periodic maintenance fees to ensure continued servicing and benefits.

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5 Charges Associated with Life Insurance Policies 

As a competent investor, it is crucial to set aside a portion of your earnings each month for goal-based investments. This awareness amongst people led to the introduction of several life insurance products to help you invest funds for your long-term and short-term life goals.

However, insurance companies have usually found themselves at the receiving end of stiff life insurance charges, as these costs shrink the investible part of the premium sum paid. Also, in many cases, these insurance charges are not openly communicated to policy customers and may not be explicitly highlighted in the policy documents.

Therefore, to help customers and investors make informed decisions, it is essential to understand these fees. Below are the different types of charges commonly associated with life insurance policies.

  • Premium Sum Allocation Charges: Premium sum allocation charges are upfront fees subtracted from the policyholder's life insurance premium. It gets imposed as a portion of the insurance premium. Also, these costs are calculated based on the principal expenses incurred by the insurance company in allotting the life insurance policy.

Examples of this include medicals, distributor charges, underwriting costs, and more. Moreover, after deducting these charges, the outstanding premium is reinvested in the funds the insured prefers.

  • Surrender or Discontinuance Charges: A surrender charge in a life insurance policy applies when a policy is exited or stopped, before the minimum required period is completed. This life insurance surrender charge is determined by the type of policy.

Moreover, IRDAI sets guidelines on the maximum charges that life insurance companies may impose, and insurers must clearly disclose them in the policy document and benefit illustration.

You must likewise understand that the IRDAI has established guidelines to curb the influence of these modifications on the overall gain from the investible part of your premium.

  • Mortality Charges: These mortality charges are imposed to equip you with insurance coverage. When a life insurance policy is issued, the insurance company considers that the person insured will live to a specific age based on their prevailing age, health conditions, and gender.

    These life insurance fees and charges (levied monthly) compensate the insurance company if the insured person does not live to the expected age. Moreover, the actual sum spent under this head depends on the amount of life cover requested, the policyholder's age, and other such information.

    This method of calculating mortality charges, along with the death charge table, is usually included in the policy document. Also, when people purchase an insurance-cum-investment life insurance product like a ULIP, their principal purpose is an investment. While they might get sufficient coverage, they still have to pay the mortality charges in insurance.
  • Premium Redirection Charges: These charges apply when a policyholder changes the allocation of future premiums among the fund options available under a ULIP. Unlike fund switching, which affects the existing fund value, premium redirection affects only how future premiums are invested.

    Insurance companies may charge each time a premium redirection request is made, although some policies allow a limited number of redirections at no cost. The exact charges, frequency limits, and conditions vary by insurer and are clearly specified in the policy document.

    While premium redirection offers flexibility to align future investments with changing market conditions or risk preferences, frequent redirections can increase overall costs. Therefore, policyholders should use this option judiciously and review the associated charges to ensure that the benefits of reallocating future premiums outweigh the additional expenses.
  • Insurance Policy Administration Charges: This policy administration charge gets subtracted from the organisational expenditures incurred by the firm to sustain the life insurance policy. These charges (levied once a month) usually include paperwork costs, the premium intimation, and so on.

    This charge could be even throughout the duration of the life insurance policy or could rise at a predetermined rate. Alternatively, it could be an even rate for the first 3-5 years, then multiply by a set rate each year.
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Did You Know?

Most life insurance policies come with a grace period of 30 days to make a payment without incurring a late fee or jeopardising your coverage 


Source: IRDAI

Young Term Plan - 1 Crore

How to Minimise Life Insurance Charges?

Life insurance charges can vary significantly depending on factors such as policy type, coverage amount, and insurer terms. Here are some practical ways to minimise insurance charges while ensuring adequate protection for yourself and your loved ones.

  • Choose the Right Policy Type: Selecting a policy that aligns with your specific needs can reduce life insurance charges. For example, term life insurance tends to be more affordable compared to whole life or universal life policies, as it provides coverage for a fixed period without an investment component. Evaluating your financial goals before choosing a policy can help you avoid unnecessary expenses.
  • Compare Quotes from Multiple Insurers: Premiums and life insurance charges vary between providers. You can identify the most cost-effective option by obtaining quotes from multiple insurance companies. Online comparison tools and independent financial advisors can assist in finding policies with the lowest insurance charges while maintaining comprehensive coverage.
  • Opt for a Higher Deductible: Choosing a higher deductible can lower your premium costs if your policy includes a deductible. However, this means you will need to cover additional out-of-pocket expenses before the insurance benefits apply. This strategy works well for those who have an emergency fund and can manage short-term financial risks.
  • Maintain a Healthy Lifestyle: Health conditions such as obesity, high Blood Pressure, and smoking habits can significantly increase life insurance charges. Insurers assess your health risk before determining premiums, and healthier individuals generally qualify for lower life insurance rates. Adopting a healthier lifestyle, including regular exercise and a balanced diet, can help you secure better terms on your policy.
  • Purchase Insurance at a Younger Age: Life insurance charges increase as you age due to higher health risks. Securing a policy when you are younger and healthier allows you to lock in lower rates. If you anticipate needing life insurance in the future, purchasing it sooner can save you money in the long run.

Conclusion 

To sum up, as an investor, you must remain informed about the different types of life insurance charges. Being well aware of these charges will ensure that your funds are never reduced by unnecessary premium expense charges and that you get the most profitable earnings for a long time.

Glossary:

  1. Unit-Linked Investment Plans (ULIPs): A type of life insurance policy that combines investment and insurance benefits
  2. Maturity: The date when a life insurance policy reaches the end of its term, and the death benefit or accumulated value is paid out
  3. Underwriting: The process by which an insurer evaluates an applicant's risk of death and determines the appropriate premium 
  4. Net Asset Value (NAV): The per-unit value of a fund, calculated as (assets − liabilities) ÷ total units outstanding
  5. Surrender Charge: A fee charged if you exit or discontinue the policy before maturity, as per policy terms
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Uncertain About Insurance

FAQs On Changes in Life Insurance Policy

A simple explanation of the insurance charges meaning is a general term for any fee added to your insurance premium. These charges can cover various costs associated with maintaining your policy, such as administrative fees, mortality expenses, and rider fees.

Allocation charges are specific fees associated with Unit-Linked Insurance Policies. These charges are deducted from your investment fund value, after accounting for applicable charges.  ULIPs typically have premium allocation charges.

A life insurance policy fee is another term for a charge added to your premium to cover administrative costs associated with maintaining your policy. This can be similar to an administrative fee, but it might also encompass a broader range of service and maintenance costs.

Unfortunately, there is no way to completely avoid life insurance charges. These charges cover the essential costs of running an insurance policy, such as administrative fees, mortality charges (the cost of providing the death benefit), and investment management fees (for ULIPs). However, by comparing different policies and understanding the fee structure, you can minimise the impact of these charges on your investment returns.

In general, the premiums and charges associated with traditional life insurance policies are not negotiable. These are set by the insurance company based on factors like your age, health, and the amount of coverage you choose.

Mortality charges are fees deducted by insurers (especially in ULIPs) to cover the cost of life cover and the risk of paying the death benefit. They increase with age and health risk, reduce the investible amount, and some plans may refund them at maturity under RoMC benefits.

Life insurance costs in India vary significantly based on several factors. Basic term plans offer the most affordable coverage, with daily premiums starting as low as a cup of tea for young, healthy non-smokers. However, costs increase substantially with age, pre-existing health conditions, smoking habits, and higher coverage amounts.

Life insurance premiums are calculated based on your risk profile, age, health, lifestyle, occupation, the sum assured, policy term, and plan type. Rider costs may increase the premium, while discounts can reduce it, and insurers use actuarial data, such as mortality tables, to estimate payout risk.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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