Stop ULIP Before 3 Years? Penalties, Lock-in & Fund Rules

Written by : Knowledge Centre Team

2026-08-06

962 Views

7 minutes read

Introducing BSE 500 Enhanced Value 50 Fund with Promise4Wealth

50 High-Potential Companies, One Smart Decision

Name is required Name should be Valid

Mobile Number is required Mobile Number should be Valid

Email is required Email should be Valid

DOB is required DOB should be Valid

Annual Income*

< 3 3-5 5-7 7-10 > 10

Annual Income is required

I agree that even if my contact number is registered with NDNC / NCPR, I would still want the Company to contact me on the given number and email id for the clarifications/product information sought by me and agree that I have read and understood the Privacy Policy and agree to abide by the same.

Please tick to proceed further.

Thank you for your interest in our product. Our financial expert will connect with you shortly to help you choose the best plan.

ULIP, short for Unit-Linked Insurance Plan, is a unique financial product that combines insurance and investment in a single plan. If you want to stay invested for a long period, ULIP plans offer the dual benefits of life protection through insurance and the potential for long-term capital gains through investment.

Here’s how investment in ULIPs works: when you pay a premium, a part of the amount paid goes towards investing in market-linked funds (equity, debt, or a mix of both), and the rest of the amount is utilised as a premium towards your insurance cover. A ULIP plan also provides you with the flexibility to switch your investment portfolio across equity and debt based on your risk appetite, so that is a bonus!

Key Takeaways

ULIPs combine life insurance protection with market-linked investment for long-term wealth creation
A 5-year lock-in applies to ULIP plans; stopping premiums early can cause losses and deduction reversals
Insurers notify you within 15 days of the grace period's expiry; you get 30 days to revive the policy
Withdrawal proceeds are paid only after the lock-in ends, minus fund management and discontinuance charges
Instead of discontinuing, consider switching funds within your ULIP to retain coverage and benefits

The Concept of a ULIP Lock-in Period

Many investors wonder, “When can I cancel my ULIP plan?” The answer to that lies in understanding the term ‘lock-in period’. A lock-in period is the tenure for which you cannot exit the ULIP investment. This means you cannot withdraw money or avail yourself of the payouts before this period is over.

Initially, the lock-in period for a ULIP plan was three years, but the Insurance and Regulatory Development Authority of India (IRDAI) increased it from 3 to 5 years in 2010, and this 5-year lock-in continues to apply today. That said, even though you cannot withdraw the funds before the lock-in period ends, you can still surrender the policy before that. Now if you are wondering, “What happens if i surrender my ULIP policy before lock-in?” The answer is that if you surrender the plan before the lock-in period ends, the insurance cover ceases, and you receive the fund value only after the five-year lock-in period is complete.

Even so, investors have a lot to gain by staying invested in a ULIP plan for the long term. Apart from the obvious benefit of life insurance online, you have enormous flexibility in deciding your investment portfolio.

Get a Personalised ULIP Plan for Wealth Creation & Protection

Full Name* Please enter correct name Please enter the Full name

Mobile Number* Please enter valid mobile number Please enter Mobile Number

Email* Please enter valid email Please enter Email

By submitting my details, I request the company to call me and override my NDNC/ NCPR registration and authorize the Company and its representatives, including its third-party vendors, to validate, evaluate and process this proposal and also to contact me via email, phone, WhatsApp or any other mode. I also provide my consent to share my IP address & location to the company for risk assessment. I confirm that, I have read and understood the Company’s Privacy Policy and agree to abide by it

...Read more Consent is required

Why is the Lock-in Period Important for ULIP Investments?

The main purpose of the lock-in period is to promote long-term investment; as in ULIPs, the longer you stay invested, the more your profits grow. These lock-in periods help an investor learn discipline and stick to the plan due to the fear of losing capital and incurring penalties. This, in turn, helps one gain better market-linked returns, which would not be possible if they kept on making short-term withdrawals. Frequent withdrawals can not only disrupt the compounding effect of the plan but also hinder wealth accumulation.

How Does the Lock-in Period Impact Fund Returns?

Unit Linked Insurance Plans carry market risk since your returns are linked to fund performance, which can sometimes be volatile and may result in losses. However, long-term investments can give you excellent returns. Sticking with the plan (forcibly during the lock-in period) allows you to wait a few years before you can withdraw any funds, thereby increasing wealth accumulation. Now, this helps you ride out the market volatility and get the most out 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.

Did You Know?

IRDAI requires insurers to provide a Benefit Illustration showing projected ULIP returns at 4% and 8% before you buy the policy

Source: IRDAI

Promise4 Wealth Plan - Canara HSBC Life Insurance

What Happens When You Stop Paying Your ULIP Premium Before 3 Years?

Sometimes you might face financial difficulties that prevent you from paying 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 have two options. You either revive the policy or withdraw from the scheme without life insurance coverage.

Let us round up the consequences of this:

No Penal Measures: First things first, you will not be penalised for discontinuing your premiums. Your ULIP provider will not charge you any penalty if you are unable to keep up with the premium payments. The only catch is that you cannot withdraw the money before the 5-year lock-in period has passed.
Loss: If you stop paying the premium before completing one policy year, you may lose a significant portion, or even the entire, of the capital invested so far, depending on the applicable charges. Stopping your ULIP premiums early can reduce the value you ultimately receive, especially in the policy's early years.
Notice: Once you have discontinued premium payments, you will receive a notice within 15 days after the grace period expires. This serves as an option to revive the policy. Within 30 days of receiving the notice, you can notify the company that you wish to keep the policy. Reviving the policy depends on paying all the unpaid premiums and applicable charges.
Final Payout: If you do not revive the policy but instead let it lapse, you will receive the discontinuance/withdrawal amount only after the 5-year lock-in period ends. This amount, however, is not the complete fund value. Instead, it is subject to many charges and deductions, such as fund management charges, annual charges, and surrender charges.
Tax treatment : On premature discontinuance, i.e before the completion of the 5-year lock-in period, the surrender/discontinuance value becomes fully taxable, and any deduction previously claimed under Section 123 of the Income Tax Act, 2025 (earlier called Section 80C of the Income Tax Act, 1961) on the premiums paid is reversed and added back to your total income in the year of discontinuance.

Remember that if you are unhappy with your ULIP's performance, you can always adjust 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, and bear charges. Decide wisely!

Why Should You Not Discontinue Your ULIP Policy in 3 Years?

There are many reasons to keep your ULIP active beyond three years. It is financially advisable to stay invested in your ULIP for longer periods, as this allows you to achieve the results and dividends you want as an investor.

Some of the most important reasons not to discontinue your ULIP policy are:

Investing in ULIPs allows you to utilise tax deductions under Section 123 (previously 80C of the Income Tax Act 1961). The premiums you pay towards your ULIP are eligible for deduction from your taxable income. According to this section, investments of up to ₹1.5 lakh can be deducted. This is subject to the terms and conditions of the Income Tax Act, 2025.
ULIPs are market-linked products that allow you to invest across various fund options, like equity funds. ULIPs tend to offer better returns over the long term. The longer you hold your ULIP, the better the returns you will receive over the long term.

The Benefit of Continued Investments Post Lock-In Period

By the time your lock-in period ends, your investment has had time to grow in the market, and you have already been enjoying the benefit of life cover throughout the period. Keeping your policy active beyond this period opens the door to greater benefits. It helps you build financial growth, security and a more balanced portfolio over time.

Impact on Investment Growth and Insurance Cover:

If you plan to continue your plan beyond the lock-in period, the chances of accumulating growth increase. As the compounding effect increases your wealth, you also learn discipline and patience in the investment market. Moreover, you can later switch funds between equity and debt, as per your needs and understanding. This helps you broaden your portfolio and align your financial goals the way you want.

Tax Implications of Policy Discontinuance:

Since ULIPs are eligible for tax benefits under the Income Tax Act 2025, discontinuing your plan can cause a severe financial burden on you. If you had claimed deductions on your ULIP premiums paid under Section 123 (previously Section 80C), that deduction is reversed and added back to your taxable income in the year of discontinuance. Meanwhile, the final withdrawal amount or surrender value you receive after the lock-in period is also taxable, as (Schedule II(2)) (Section 10(10D) becomes null and void upon discontinuing the policy.

Conclusion

ULIPS can be quite a useful vehicle for wealth creation when used with a long-term goal in mind. It allows you to earn market-based returns on your investment while enjoying 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.

Glossary:

Surrender Value: The amount the insurance company pays to the policyholder when he/she decides to terminate the plan before maturity
Lock-In Period: The time period for which the investment or the invested amount cannot be withdrawn or sold
Investment Portfolio: A collection of investments held by an individual to achieve specific financial goals
Revival Period: Time allowed to restart a discontinued ULIP by paying overdue premiums and charges
IRDAI: India's insurance regulator that oversees insurers and protects policyholders' interests

If you discontinue your ULIP before the lock-in period ends, the insurance company transfers your fund value (after deducting applicable discontinuance charges) to the Discontinued Policy Fund and pays out the proceeds only at the end of the lock-in period.

If you decide to close your ULIP before the lock-in period ends, the insurance company deducts a discontinuance charge from your fund value and moves the remaining amount to the Discontinuance Policy Fund, where it stays invested until the lock-in period is complete.

Yes. ULIPs have a mandatory 5-year lock-in period, as prescribed by IRDAI.

Discontinuance charges in a ULIP are fees that are deducted as a percentage of your fund value (or annual premium, depending on the policy year) when you decide to stop your premium payments before the end of the lock-in period. These charges are capped by IRDAI and reduce as the policy approaches the end of the lock-in period.

If you don’t pay your ULIP premium after the grace period ends in the first policy year, your fund value (after deducting the applicable discontinuance charge) will be transferred to the Discontinued Policy Fund.

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.

ULIP Pros & Cons: Benefits, Risks & Should You Invest?

What Should be the ideal Duration for Your ULIP Plan?

How Long Should be the Term of Your ULIP Plan in India?

Recent Blogs

Unit Linked Insurance Plans - Top Selling Plans

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.

Wealth Today, Protection Always

Promise4Growth Plus

Life Cover up to 100 Years
13 Fund Options
Fund Switching Option
Waiver Of Premium

Secure Your Future with Confidence

SecureInvest

Life Cover up to 100× Annual Premium
12 Fund Choices
Automated Portfolio Strategies
Maturity Booster

Invest Smart, Live Smart

Wealth Edge:

Flexible Premium Options
Multiple Fund Allocations
Systematic Withdrawals
Premium Waiver Benefit

What Happens If You Stop Your ULIP Premiums Before 3 Years?

Introducing BSE 500 Enhanced Value 50 Fund with Promise4Wealth

Key Takeaways

The Concept of a ULIP Lock-in Period

Get a Personalised ULIP Plan for Wealth Creation & Protection

Enter OTP

Application Status

Name

Date of Birth

Plan Name

Status

Unclaimed Amount of the Policyholder as on

Name of the policy holder

Policy No.

Address of the Policyholder as per records

Unclaimed Amount

Request Registered

Why is the Lock-in Period Important for ULIP Investments?

How Does the Lock-in Period Impact Fund Returns?

Did You Know?

What Happens When You Stop Paying Your ULIP Premium Before 3 Years?

Why Should You Not Discontinue Your ULIP Policy in 3 Years?

The Benefit of Continued Investments Post Lock-In Period

Impact on Investment Growth and Insurance Cover:

Tax Implications of Policy Discontinuance:

Conclusion

Glossary:

FAQs related to ULIP Discontinuance

Recent Blogs

Why ULIPs Are Ideal for Stable Wealth Generation?

Top ULIP Investment Trends to Watch in 2026

Best ULIP Plans: How to Choose the Right Plan for You?

ULIP Facts That Will Change the Way You Invest

What Are Mortality Charges in ULIP? Meaning, Calculation & Impact

Why ULIPs are Ideal for Retirement Planning in India?

6 Best One-Time Investment Plans in India for High Returns in 2026

How to Make ₹3 Crore in 10 Years? ULIP Investment Plan

How to Plan Retirement with a ULIP Investment Plan?

Unit Linked Insurance Plans - Top Selling Plans

Wealth Today, Protection Always

Secure Your Future with Confidence

Invest Smart, Live Smart

Popular Search

Learn About Insurance

Insurance Plans

Tools and Calculators

Important Links

Customer Service

Distributors and Agents

About Us