ULIPs (Unit Linked Insurance Plans) have become a popular choice among people as it provides both life insurance cover and investment opportunities. ULIPs are insurance policies where your premium is invested into equity, debts, or other money market instruments along with the advantage of tax saving.
In the working procedure of ULIPs, the premium paid is deducted for the Premium Allocation Charge and the remaining is invested for you to avail the benefits. Allocation of funds is done and the mortality charges are deducted by the cancellation of units. The fund management charge can be recovered through a reduction of the applicable NAV.
Why Invest in ULIPs?
- ULIPs are quite popular as they are very transparent and flexible. You can choose the fund option in which you want to invest according to the level of risk you wish to undergo
- By ULIPs, you can switch your portfolio conveniently in between equity and debt funds. The most interesting aspect about this switch is that it is completely tax-free!
- You can avail of the benefits of life insurance cover and also the investment options help you in achieving your financial goals.
- You must invest in ULIPs to avail of the tax benefits under both Sections 80C and Section 10(10D) of the Income Tax Act, 1961.
Lock-in Period in ULIP
The Lock-in period in ULIP is defined as the specific period during which you should not either discontinue or surrender your policy. If you surrender or discontinue your policy within the Lock-in period then you would not be able to receive the payout. In ULIP, the lock-in period is 5 years after which you would receive your payout from the policy.
Reasons to Exit ULIP after the Lock-in Period
Before 2020, the lock-in period for ULIPs was 3 years and it has been changed to 5 years now.
After the lock-in period is over, you might consider exiting the ULIP and obtaining the payout. There can be two major reasons to choose about exiting from the policy after the lock-in period is over.
a. The Fund Value Might be Looking Good
It might be the scenario that your fund value would be looking quite good. There have been good market conditions and your initial fund invested might have reached up higher value. However, you should not forget the actual reason due to which you had purchased the ULIP. You had purchased the ULIP since you wanted to create a corpus which would help you in meeting some huge requirements in the future. So, if you are deciding on withdrawal now then you are going to compromise on the bigger dream which you have seen for the future.
b. You Might Think that the Funds are not Performing Very Well
It might happen that you are not very happy with the way your funds have been performing. This might not be true as ULIPs are quite transparent. You can keep a track of your portfolio by checking the Net Asset Value (NAV) on a daily basis. There are certain charges like portfolio charges, administration charges, mortality charges, etc. which remain high during the initial years and are later reduced. These charges can have a severe impact on the fund value by cutting the earnings from the fund value thus, lowering the returns. This would show up the actual return on the funds to be very low.
So, it is a wiser option to continue the ULIP even after the lock-in period is over.
Why Should You not Exit ULIP After the Lock-in Period?
Let us know about the main reasons to continue the ULIP even after the lock-in period.
a. High Charges During Initial Years
In a ULIP, the charges for premium allocation are deducted even before the premium has been invested. There are various other charges mentioned earlier such as the administration fees, fund management fee, funds allocation charges, etc. which are either deducted by canceling the units or by NAV adjustment. During the first year, the deduction remains higher whereas it would reduce by time. When the lock-in period is about to end these charges become low such that their impact on the fund value is negligible. This would imply that the money which was being invested into the ULIP was low during the lock-in period in comparison to the amount that was being invested in the later years when these charges have become negligible. So, if you are exiting the policy after the lock-in period you will be getting very low returns. You would obtain the actual returns which would be a very high value at the end of the maturity period and not immediately after 5 years.
b. Be in the Game to Obtain the Benefits
ULIP is a long-term investment plan. You can exit the plan immediately after 5 years but it is not advisable to do so. You must stay invested for around 15 years-20 years to obtain the real benefits. In case you feel that your funds are having low performance then you have the option of fund switching without any income tax implications!
The performance of your ULIP is mainly dependent on market fluctuations. If the market conditions are unstable, you can remain invested for a longer period until the market starts performing well again rather than just withdrawal from the ULIP. Also, if the condition of the market is not so good currently you can follow the statistics to understand the ULIP performance when the market was in the bull phase.
So, if you have already invested in ULIP you should link them to your long-term goals and continue it until it matures. ULIPs are designed to help you in achieving your long-term goals and must continue for at least 10 years. Even if there is a financial crisis and you need some funds, ULIPs offer partial withdrawals which can resolve your financial emergency. Hence, if you wish to have high returns from your ULIP make sure that you stay invested till the end of the policy tenure.