How to diversify your portfolio in today’s highly volatile market?
By Khyati Mashru
Investing
Apr 15, 2024
The case against the old unit-linked insurance plan (ULIP) was about cost, and on cost the industry delivered. A direct online “4G” ULIP sold today has no premium allocation charge and no policy administration charge. Switching between funds is free. So are surrender after the lock-in and partial withdrawals.
One charge was not removed. It was capped. That charge is the fund management charge (FMC), and over a 20-year policy it consumes about 13% of the corpus a low-cost index fund would have built with the same money.
What “4G” actually means
4G is a marketing label, not a regulatory category. It describes the fourth generation of ULIP design that emerged after the 2010 reforms, with the latest version shaped by the Insurance Regulatory and Development Authority of India’s (IRDAI) Insurance Products Regulations, 2024.
The cuts apply in full only to the direct online versions. Agent-sold and bancassurance ULIPs still carry a premium allocation charge of 4% to 8% in the first two policy years to pay distribution commissions. Everything below uses the direct online terms. That is the cheapest version of the product, so it is the hardest case to argue against.
What changed for a ₹2 lakh premium
The clearest way to see the redesign is to follow a single year’s premium.
| First-year charge on ₹2 lakh | Traditional ULIP | Direct 4G ULIP |
|---|---|---|
| Premium allocation charge | ₹30,000 | Nil |
| Policy administration charge | ₹6,000 | Nil |
| Amount that reached the fund | ₹1.64 lakh | ₹2 lakh |
Figures are representative of a ₹2 lakh annual premium policy under pre-2010 traditional ULIP structures.
A buyer who would have lost about ₹36,000 of their first year’s outlay before a rupee was invested now loses nothing upfront. That is a real improvement.
The charge that stayed
The allocation and administration charges were front-loaded or flat. Once their period ended, they stopped mattering.
The FMC works differently on three counts:
- It is charged every year, for the entire policy term.
- It is charged on the whole fund value, not on the premium.
- So in rupee terms it grows as the corpus grows. In the later years of a long policy it takes far more money than the old front-loaded charges ever did.
IRDAI’s 2024 regulations cap the FMC on equity funds at 1.35% a year, down from a typical 1.5%. On a product designed to compete on visible cost, the equity FMC usually sits at or very close to that cap.
Compare that with the alternative. A low-cost index mutual fund in the same equity category charges between 0.10% and 0.25% a year on its direct plan. That is well inside the 0.90% base expense ratio cap the SEBI Mutual Fund Regulations, 2026 set for index funds. The 4G redesign never touched the gap between roughly 0.20% and 1.35%.
The regulator does cap total drag. A ULIP’s net reduction in yield cannot exceed 3% by policy year 10, or 2.25% from year 15. On a direct product where the FMC is close to the only charge, that ceiling is never reached. It exists, but it does not protect the buyer.
Same money, same return, only the fee differs
To isolate the fee, the comparison strips out everything else:
- The buyer: 35 years old, paying a constant annual premium for 20 years.
- The returns: both the ULIP’s equity fund and the index fund earn the same gross market return of 11.5% a year. That is the long-run average of the broad Indian equity market over the past two decades.
- What is left out: insurance and tax are kept out of this test.
- The fees: the index fund charges 0.20%, the realised expense ratio on direct plans of large passive funds. The ULIP fund charges 1.35%.
| Annual premium | Index fund at 0.20% | 4G ULIP at 1.35% | Wealth consumed by the fee | Share of index corpus |
|---|---|---|---|---|
| ₹2 lakh | ₹1.48 crore | ₹1.28 crore | ₹19.6 lakh | 13.2% |
| ₹5 lakh | ₹3.7 crore | ₹3.2 crore | ₹49 lakh | 13.2% |
20-year horizon, 11.5% gross return.
The share is identical at both premium levels, and this is the point to notice. The drag is structural. A larger premium raises the rupee loss but not the percentage. A 1.15 percentage point annual gap, compounded on a balance that grows every year, ends up costing more than a rupee in every eight of the final corpus.
The two features that partly offset it
Direct 4G ULIPs have two features that work in the buyer’s favour.
- Mortality charges are refunded at maturity. The amount is small. With a sum assured of ten times the annual premium, the fund value overtakes the cover around the seventh year. After that the sum at risk falls to nothing and the mortality charge all but disappears.
- Fund additions. 1% of the premium is added to the fund in each of the first five years. This is real money, but it stops after year five.
Together, the two recover roughly ₹0.65 lakh by maturity on a ₹2 lakh premium, and about ₹1.6 lakh on a ₹5 lakh premium. Most of that comes from the fund additions compounding for 20 years. Against the shortfall, they move the net cost from 13.2% to about 12.9% of the index fund’s corpus. That is a dent, not an offset.
The finding is not about the return assumption
If the drag depended on the 11.5% assumption, it would be easy to dismiss. It does not. At a 9% gross return the fee consumes 12.9% of the index corpus. At 13% it consumes 13.4%. Across that whole range, the band is narrow.
The finding is also not about fund management skill. Both sides get the same gross return on purpose. Outperformance does not persist reliably from one period to the next, so neither product is credited with an edge it cannot be relied on to repeat. The test measures what the product structure does to the corpus, whoever runs the fund.
Why the brochure will not show this
The FMC sits inside the regulator’s cap, so a ULIP illustration has no reason to flag it. Both 1.35% and 0.20% sound small. The cost only becomes visible when you compound the difference over the policy term on a growing balance. Do that and the buyer has lost about 13% of the corpus, however compliant every individual charge is.
What to check before buying a ULIP
- The FMC on the fund you will hold. Expect it at or near 1.35% for equity funds.
- The index fund comparison. Compare that FMC with the expense ratio of a direct-plan index fund in the same category.
- The channel. If you are being sold the policy through an agent or a bank, ask about the allocation charge in years one and two.
- The tax threshold. Check whether your total ULIP premium stays within ₹2.5 lakh a year. Tax is the one place a ULIP can still win back most of this gap, but only below that line.
The 4G redesign fixed the charges the industry was asked to fix. The charge that compounds for twenty years was never on that list.
Source: “The New ULIP and the Old Problem”, 1 Finance Magazine, June 2026 (Issue 11). Charge inputs from IRDAI Insurance Products Regulations, 2024; expense ratio norms from SEBI.
