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Why You Should Not Exit ULIP As Soon As The Lock-in Period Ends

Sumit Asrani Sumit Asrani 16 October 2017
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Unit Linked Insurance Policy (ULIP) offers both life cover and an investment opportunity. The real benefits of investing in ULIP is seen after staying invested for a longer duration. You won’t reap good returns on investment if you exit ULIP after the lock-in period ends.

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Unit Linked Insurance Policy (ULIP), is a long-term investment plan. ULIP is a life insurance product that offers insurance and an opportunity of investment in markets.

Since it provides both – insurance and investment, the premium is deducted for Premium Allocation Charge, and rest of the premium is invested in funds, so that the investor – policyholder can reap benefits. Funds are allocated and mortality charge is deducted by cancellation of units. Fund Management charge is recovered by reducing the applicable NAV. The choice of funds depends on the policyholder and can be invested in bonds, equity, debts, market funds, or hybrid, etc.

Example of ULIP:

PolicyholderSum Assured/Death BenefitPolicy TenureAnnual Premium
Age: 30 years Gender: Male Rs.2.5 lakh20 yearsApprox. Rs.25,000

On maturity, considering a projected 8% investment return, you may receive approximately an amount of Rs.20 lakh.

Lock-in period in ULIP:

It is a stipulated time during which if the policyholder surrenders or discontinues the policy, the policyholder won’t receive the liquidity or payout. Only after completion of the lock-in period, which is 5 years in ULIP, the policyholder will receive the liquidity or payout.

Why One May Think to Exit ULIP after Lock-in Period End

Earlier, the lock-in period was 3 years. However, in 2010 it was revised and now, ULIP plans have a lock-in period of 5 years.

Reason #1 Funds Value may look good.

Yes, fund value may look good. Due to sudden boost in market conditions your initial investment could have reached an all-time high, but one must not forget the purpose for which he had invested in ULIP. Remember you wanted to create a fortune for meeting a particular need in the future, if you withdraw now you are comprising the dream for which you had made the investment in the first place.


Reason #2 Policyholders may think the funds are not performing well.

Few policyholders may not be happy with the fund performance, which may not be true. ULIP is very much transparent in terms of investment. You can check the Net Asset Value (NAV) daily and keep a track on the portfolio. However, the fund value is severally impacted by various charges including mortality charge, administration charges, portfolio management charges, etc. which are high during the initial years and reduces substantially over the years. These charges cut into the earnings of the fund value, resulting in low returns. The actual return on allocated funds will be seen as very less in the short-term thereon.

And so…

Don’t You Dare Exit ULIP As Soon As the Lock-in Period Ends

Here are all the reasons you should not exit ULIP once the lock-in period (5 years in ULIP) ends.

1. Charges in the initial years of ULIP are high

In a ULIP, the premium allocation charge is deducted before investment of premium. Various charges like funds allocation charges, fund management fee, policy administration fee, are deducted through either cancellation of units or by adjusting the NAV. The deduction is higher in the first year and substantially reduces over time. By the end of lock-in period and thereon, these charges come down to a point where it doesn’t impact the funds. Which implies the money invested during the lock-in period is lower as compared to the later years of the ULIP investment when these charges are almost negligible. Consequentially, exiting after lock-in period ends, you will not reap the real benefits. You will end up getting a comparatively lower returns in ULIP. Maybe just a tip of the iceberg of total returns that you may get at the end of maturity. If you surrender ULIP before 5 years, you may have to pay surrender charges plus money will be paid to you only after completion of the lock-in period. So, discontinuing or surrendering before lock-in period ends should be out of question. So…

2. Stay in the game of ULIP to reap the benefits that ULIP offers

ULIP is a long-term investment game. You can exit from ULIP after 5 years; however, it is not advisable even after lock-in period ends. To reap the benefits, you should continue and stay invested for a long period say 15-20 years. If you think that the funds are not performing, you may want to go for switching your funds. The scheme performance is purely related to market fluctuations, as it is in the case of equity, you may want to stick around for some time till the market bounces back, instead of just the withdrawal of ULIP. Moreover, if the market is underperforming at present, you can always check statistics to see how the scheme performed when the market did well, in the bull phase. And so, you should probably stay invested for 15-20 years to get the real fruits of the seeds you have sowed.

Insider’s Guide to ULIP

Here’s what financial advisors say in case you are facing a financial crunch and need funds: In such cases, instead of terminating your ULIP, it is advisable to make a partial withdrawal to meet your financial needs. And continue the ULIP till maturity. Stay invested and give your money a chance to flourish.

Recommended Read:Five Popular Myths About Investing in ULIP

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Sumit Asrani
Written by Sumit Asrani
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