ULIP, short for Unit-Linked Insurance Plan, is a unique financial product that offers both insurance and investment under a single plan. If you want to stay invested for a long period of time, ULIP plans provide the dual benefits of protection in the form of insurance and investment for long-term capital gains.
Here’s how investment in ULIPs works: you make an investment in a ULIP, and a part of the amount paid goes towards the investment in shares/bonds, and the rest of the amount is utilised as a premium towards an insurance cover. A ULIP plan provides you with the flexibility to switch your investment portfolio across equity and debt based on your risk appetite, so that is a bonus!
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A lot of investors wonder, “When can I cancel my ULIP plan?” The answer to that is in understanding the term, ‘lock-in period’. A lock-in period is a tenure for which you cannot get out of the ULIP investment. This means you cannot withdraw money before this period is over, and you cannot avail yourself of the payouts before this period is over.
Initially, the lock-in period for a ULIP plan was three years, but this was recently increased from 3 to 5 years by the Insurance and Regulatory Development Authority of India (IRDAI) in 2010. Yet, even though you cannot withdraw the funds before the expiry of the lock-in period, you can still surrender the funds before hitting this time mark. If you surrender the plan prior, the insurance cover will cease to exist, and you will receive the money only after the end of the five years.
Having said that, investors still have a lot to gain from being invested in a ULIP plan. Apart from the obvious factor of life insurance online, you have enormous flexibility in deciding the investment portfolio.
The main purpose of the lock-in period is to promote long-term investment because in ULIPs, the longer you stay invested, the more your profits are. These lock-in periods help an investor to learn discipline and stick to the plan due to the fear of losing the capital and facing deductions. It, in turn, helps one gain better market-linked returns, which would not be possible if you kept on making short-term withdrawals. It can not only disrupt the compounding effect of the plan but also sever your chances of wealth accumulation.
Unit Linked Insurance Plans are dependent on market fluctuations, which can sometimes be pretty risky, and you may face losses. However, long-term investments can give you excellent returns. Sticking with the plan (forcibly during the lock-in period) allows you to wait for a few years before you can withdraw any funds; it increases the accumulation of wealth. Now, this helps you ride out of the market volatility and earn most of your investment. As time passes, your equity investment in the ULIPs can even suppress the returns of short-term investments in the market. Therefore, it is important to be patient and consistent.
ULIPs account for 12% of the insurance industry’s assets under management in India.
Source: CafeMutual
Sometimes, you might face financial difficulty that makes you unable to pay the premium. Or you might realise that a ULIP doesn’t serve your financial goals. When you are in this situation, you might ask, “What if I don’t pay ULIP premium?” If you choose to stop paying your ULIP premiums before 3 or 5 years (of the usual lock-in period), you are presented with two options. You either revive the policy or withdraw from the scheme without life insurance coverage.
Let us round up the consequences of this:
Remember that if you are unhappy with the performance of your ULIP investment, you can always make tweaks to the fund allocation. Exiting a ULIP plan means you will need to find a replacement in the form of life insurance online, a robust investment avenue, as well as bear charges. Decide wisely!
There are many reasons to keep your ULIP active after three years. It is financially advisable to keep your ULIP investments for longer time periods, as this allows you to get the results and dividends you want as an investor.
Some of the most important reasons you do not want to discontinue your ULIP policy are:
By the time your lock-in period ends, your investment is already thriving in the market; meanwhile, you already enjoy the benefits of a life cover. Keeping it active after this period unlocks doors to maximum benefits. It helps you in terms of financial growth, security and also a balanced portfolio over time.
ULIPS become quite a useful form of wealth creation if used with a long-term goal in mind. It allows you to get market-based returns on your investment while letting you enjoy the tax benefits and coverage for a long time. If withdrawing or surrendering from a ULIP is not necessary for you, it is better for you to benefit from the various benefits a ULIP provides.
If you discontinue your ULIP, the insurance company will reimburse the proceeds of the discontinued policy at the end of the lock-in period.
If you decide to close your ULIP before maturity, the insurance company deducts a discontinuance fee from your total amount and moves the rest to a Discontinuance fund.
ULIPs have a mandatory lock-in period of 5 years.
Discontinuance charges in ULIPs are fees that are deducted as a percentage of the total ULIP in case you decide to stop your premium payments before the lock-in period.
If you don’t pay the ULIP premium after one year, the value you invest into the ULIP will be transferred to a discontinued policy fund.
If the ULIP policy lapses, the ULIP funds will be transferred to a discontinued policy fund. The investor will be provided a revival period of 3 years to revive the ULIP.
Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.
Canara HSBC Life Insurance offers online ULIP plans that blend life insurance protection with investment growth, helping you build wealth while securing your family's future.
