A ULIP or Unit Linked Insurance Plan is basically a hybrid product which offers dual benefits, namely Investment and protection. This well-structured instrument requires a long-term holding of at least 10 years if you‘re looking to reap investment benefits from it. Learning about the exit options before you invest in a ULIP will help you stick with it for the long term.
Additional Reading: ULIP – Should You Consider Investing Or Not?
So, what are the repercussions of surrendering your ULIP mid-way (i.e., before five years)? Read on to find out.
Early Exit
Even if you surrender your policy before five years, you’ll only receive the money after the policy actually completes five years. You won’t receive the fund value as per the surrender date. Here’s what happens to the fund value once you surrender your ULIP before the lock-in period:
Your insurer will deduct a discontinuance fee, following which the remaining fund value will be moved to the Discontinued Policy (DP) fund. During this period, a fund management charge is applicable on your fund value. This fee cannot be higher than 0.5% of the amount.
However, the good part is that you’ll still earn interest on the money lying in the DP fund. At present, the interest rate is set at 4% per annum.
Additional Reading: A Checklist On Charges Involved In ULIPS
Can you revive your policy again?
Yes. You can revive your discontinued policy within 2 years, but before the completion of 5 years from the date of discontinuance. If you do not revive it before the completion of the fifth year, you will be entitled to the DP fund value only.
Reviving your policy will then require you to pay all unpaid premiums till date. However, the discontinuance charges, which were previously applied, will be added back to your fund value. You will also be charged a policy administration fee and a premium allocation fee.
What are the Discontinuance Charges (DC)?
A discontinuation charge depends on the annual premium of your policy and the year of discontinuance. If you exit the policy in the 5th year, your insurer will not levy this charge.
| Annual Premium (Rs.) |
1st Year – DC (Rs.) |
2nd Year –DC (Rs.) |
3rd Year –DC (Rs.) |
4th Year – DC (Rs.) |
| More than 25,000 | 6,000 | 5,000 | 4,000 | 2,000 |
| Less Than 25,000 | 3,000 | 2,000 | 1,500 | 1,000 |
In conclusion
Since ULIP returns are connected to the market, the performance of the asset classes (whether equity, debt or a combination of the two) matters the most. It would take a few upward market cycles before you start to yield good returns.
Additional Reading: ULIPS – Better As A Long-Term Investment Option
So, exiting a ULIP before the lock-in period, or immediately after this period, will jeopardise your returns. It is best that you link your ULIP investments to a long-term goal and keep investing until you have enough to meet that goal.