Since their inception, Unit-Linked Insurance Plans (ULIP plans) have gone through a lot of upgrades and regulatory changes. The concept remains simple – ULIP is a dual-objective product, designed to fulfill the life insurance as well as investment needs of the policyholder. However, in its early days, it was not a popular product. It gained a reputation for having a lot of front-loaded charges which ate into the amount of premium that went into investment in fund options. With regulatory changes and product upgrades, unit-linked insurance plans have become a sought-after financial product.
In the year 2010, the Insurance Regulatory and Development Authority of India (IRDAI) came up with a new set of regulations for Unit Linked Insurance Plans (ULIP plans). In this set of new regulations, the IRDAI changed the lock-in period of ULIPs from three to five years. There can be no withdrawal during this time. However, once the lock-in period is over, you can withdraw your money anytime you want. What does this mean for you as a policyholder?
Surrendering before five years
In case you disagree with the policy terms, you can cancel your ULIP policy during the free look-in period, which lasts for 15 days from the commencement of the policy. Thus policyholders can surrender their ULIP and get back their entire investment in these first 15 days. However, surrendering after the free look-in period is not recommended. If you surrender your plan after the first 15 days and before the five-year lock-in period, your insurer deducts Discontinuance Charges (DC) from the accumulated fund value. The insurer may levy further fund management charges of up to 0.5% on the amount in the Discontinued Policy Fund. Till the completion of the lock-in period, the money in the DP fund attracts interest at the rate of 4%. No discontinuance charges are applicable if you surrender your ULIP policy after the fifth policy year.
Option after surrendering
After surrendering the policy, you still have the opportunity to revive it within two years, but only before the end of the fifth year from the date of discontinuance. Additionally, you must pay the pending premiums to completely revive the policy. After revival, the discontinuance charges are added back to the Discontinued Policy fund value. Also, the policy administration charge and premium allocation charge is added in the DP fund.
What to do
The returns in a ULIP are linked to the market. Hence, it depends on the performance of underlying asset class like equity, debt, or even both. If you have ULIP, then considering your current investment, you should avoid surrendering it. There are variable ULIP charges such as Mortality charges, Premium allocation charges, fund management charges, and fund-switching charges. If your policy has regular ongoing costs that are negatively affecting your ULIP returns, then you could think of surrendering the policy. Surrender charges are very high initially. However, it comes down as your policy nears maturity. You can surrender when the surrender charges are low. However, there is no need to exit if your ULIP is performing well post expenses.
Conclusion
The different charges in a unit-linked insurance plan are mostly front-loaded and get reduced over the initial five years of the policy. Hence, if you exit immediately after the lock-in period, it might not yield optimum returns, and your long-term goals will be jeopardized. Therefore, you must link your investment in ULIP to a long-term goal for gaining the required benefits. You can monitor its performance and take steps to maximize returns. Pay the premiums regularly and run it till the originally-desired term.
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