It is highly recommended that you stay invested in a ULIP plan for at least the lock-in period of 5 years. Read on to know why you should never surrender before the completion of the lock-in period.
Unit Linked Investment Plan or ULIP, as it is called in short, offers the dual benefits of insurance and investment. Being a structured insurance product, it is designed as a long term investment option with a lock-in period of 5 years. This lock-in period has been increased from the earlier 3-year term by the new guidelines for ULIP implemented in the year 2010.
However, despite the lock-in period, it is highly recommended that investors stay invested for at least 10 to 15 years. Not that you cannot withdraw the ULIP plan before that, but it’s best that you don’t. Staying invested beyond the lock-in period enables you to achieve better capital growth.
Another reason why you should remain invested longer is that ULIPs invest in equity, equity-related and debt instruments and, therefore, the portfolio performance is heavily dependent on the volatility of the market place. Giving the portfolio more time enables it to stabilize itself and generate greater returns over a longer period of time.
While you are free to exit your ULIP plan before the lock-in period of 5 years, it will have some repercussions that you should be aware of. Let’s take a look at the fallouts here.
Plan can be surrendered, but the fund value cannot be withdrawn
Even if you surrender the policy before the completion of the lock-in period of 5 years, you will receive the surrender value only after 5 years. That’s what the term ‘lock-in’ means. You cannot reap the benefits of the plan before the end of the lock-in, even if you want to surrender the plan before its completion. So, it makes sense that you stay invested for a minimum of 5 years or not invest in it at all.
Be prepared to pay for surrender charges
When you surrender your ULIP plan before 5 years, your insurance company will deduct Discontinuance Charges from the accumulated fund value. After deduction, the corpus is then moved to the Discontinued Policy (DP) fund. To top that, your insurer may levy further fund management charges of up to 0.5% on the amount in the DP fund. The money in the DP fund will continue to attract interest at the rate of 4% till it completes the lock in period.
There are no discontinuance charges applicable when you decide to surrender your ULIP policy after the fifth policy year. On an annual premium exceeding Rs. 25,000, the discontinuance charges are usually Rs. 6,000 on surrender of the plan in the first policy year. The DC reduces by Rs. 1,000 on the lapse of every policy year. For lesser annual premiums, the DC is generally quoted as Rs. 3,000 on surrender of the first policy year, and falls by Rs. 1,000 for every policy year.
Clear unpaid premiums on policy revival
ULIPs offer investors the flexibility to revive the plan within two years of the first unpaid premium. However, all unpaid premiums will have to be paid to revive the policy. On revival, the discontinuance charges that have been deducted so far will be added to the DP fund value. In case the investor does not opt for revival of the ULIP plan, the DP fund value will be paid to him/her after the completion of 5 years.
No risk cover on surrendered ULIP policy
When an investor surrenders his/her ULIP plan, he/her will lose the risk cover on it.
To wrap it up…
ULIP is synonymous with long term investments and, therefore, should be considered only by investors interested in plans that require them to invest for a longer span of time. Unless, of course, you don’t mind coughing up the extraneous charges!
Recommended Read: How Beneficial It Is To Invest In ULIP?