The next time you buy a unit-linked insurance plan, you will be shelling out more money depending on the type of Ulip you buy and the company you buy from.

This is because the Finance Bill that had proposed applying the service tax (12.36 per cent) on all charges that are deducted by an insurance company in a Ulip, such as the fund management charge (FMC), premium allocation charge, policy administration charge (which is deducted on a monthly basis), switching charges and various miscellaneous charges, has been passed by both the Houses of the Parliament this month.

The chief financial officers of life insurance companies met last Wednesday and have decided to pass on the service tax burden to customers, confirmed officials of various life insurance companies.

However, sources said a few insurers have agreed to pass on the service tax on fund management charges and policy administration charges to customers, but are yet to take a call on whether to pass on the service tax on the policy administration charges.

Insurance companies will deduct the service tax amount from the premium that will be invested in the fund of your choice.

As a result, lesser amount will get invested in the fund. The service tax will be applicable not only on the first year premium, but also on subsequent renewal premiums and the lump sum amount (top-ups) you add to your fund in any year.

Therefore, you will lose more if you opt for a Ulip from a company that has higher charges.

The charge structure varies across Ulips and insurers. The premium allocation charges across insurers range from 0 per cent to as high as 100 per cent in the first year. Fund management charges vary from 0.25 per cent to 3 per cent, while insurers deduct policy administration charge (normally Rs 50) on a monthly basis.

"As a result of the service tax, Ulips with lower premium allocation charges will now become attractive. Besides, insurers will now be forced to reduce their premium allocation charges," said a senior insurance official. 

Life insurance companies clocked new business premium of Rs 92,988.71 crore (Rs 929.88 billion) in 2007-08, of which around 70 per cent came from Ulips.

The life insurance industry will be paying over Rs 3,000 crore (Rs 30 billion) as service tax.