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Why One Should Not Exit ULIPs after the End of Lock-in Period

Why One Should Not Exit ULIPs after the End of Lock-in Period

A host of financial products are available in the market catering to people with different financial goals and return expectations. People looking to financially secure the future of their family in their absence opt for a term plan, while those seeking high returns invest in small-cap mutual funds. However, products like a unit-linked insurance plan are unique as they provide the protection of life insurance along with market-linked returns.

ULIPs are a mix of investment and insurance. A part of the premium paid is used to provide insurance, while the balance is invested in stocks, bonds and other instruments. Even though ULIPs are an insurance product, many people consider it as an investment instrument. Earlier ULIPs had a minimum investment period for three years, but in 2010 the lock-in period was extended to five years by the Insurance and Development Authority of India. The ULIP offers no liquidity in the initial years as the policyholders are not allowed to withdraw the ULIP corpus before five years. Though one is permitted to exit a ULIP after the completion of the lock-in period, should you do it?

Exiting a ULIP immediately after the completion of the mandatory five-year period could be counterproductive for your financial goals. Withdrawing the accumulated amount after the lock-in period gets over can affect the returns and subsequently your financial goals.

Loss of compounding benefits

ULIPs are long-term products and give optimum returns only in the long run. ULIPs invest in funds ranging from equity to debt. If your investment is put into equity, withdrawal in such a short time would lead to subdued returns. Early withdrawal will neutralise the benefits of compounding. In the case of compounding, the corpus grows at a faster pace in the later years. For understanding's sake, let us consider a base amount of Rs 1 lakh invested with an interest rate of 8%. The investment will generate an annual interest of Rs 10, 884 in five years, but the annual interest will jump to Rs 23, 500 in fifteen years. It is amply clear that if you exit a ULIP in just five years, you will let go of the benefits of compounding.

Impact of market cycles

ULIPs invest in a variety of funds ranging from equity to debt. Equity markets are known to be volatile in the short term but generally perform better than other assets in the long run. Investing for the long term also takes care of market cycles. While withdrawing after five years, you may get trapped in a market downcycle and get sub-par returns. On the other hand, by exiting during a bull run in the markets you will lose a substantial level of capital appreciation. Long-term investments paper over the volatility of market cycles and give relatively consistent returns.

Front-loading of charges

Another major factor for not exiting a ULIP after five years is the front-loading of charges. ULIPs generally levy most of the charges such as premium allocation charges, fund allocation charges, fund management fee and policy administration fees in the initial years. Some of the charges are deducted by cancelling the units or adjusting the NAV (Net Asset Value) of the funds

The charges are high in the first year but reduce with time. The charges become almost negligible in the fifth year. By exiting a ULIPs just after the completion of the lock-in period, you would leave an opportunity for rapid capital growth. Besides the various charges, withdrawing in five years would mean foregoing loyalty additions. The loyalty additions are paid at maturity of the ULIP along with the accumulated fund. The impact of loyalty additions varies from insurer to insurer, but it can give a substantial boost to the corpus.

Conclusion

There are various ways in which you will lose out on potential benefits by exiting a ULIP after the block-in period. Most people make investment decisions according to an investment plan. The investment plan is formulated taking into account the financial goals. When you exit a ULIP policy with lower returns, you reduce your chances of achieving the financial goals. With the Invest 4G ULIP from Canara HSBC Oriental Bank of Commerce, you can easily achieve your financial goals. The Invest 4G plan provides an option of 7 investment funds and four portfolio management strategies to improve returns.

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Annual Income (In Lacs)

FAQs

In order to understand ULIP NAV, you first need to understand how ULIPs work. In ULIPs, a portion of premium from different investors is accumulated to create one investment corpus. This money is invested in several different market instruments. So to divide the returns properly among all the investors, the fund manager divides the net asset value in to small units with a specific face value. NAV is the per market share value of a fund. To better understand the definition of NAV, take a look at the formula below -

Net Asset Value = [Assets-(Liabilities + Expenses)] / Outstanding Units

It's not risky to invest in ULIP if you chose a safer path. Risk factor in ULIPs depends on the investment option you choose. If you are not okay with sharp movements, then choosing a low risk investment is a better idea. For people with high risk appetite, it's good to choose equity funds while risk-averse investors can go for debt funds.

You can opt for settlement option if you want to take your fund value in periodic installments. With the settlement option, you can get your maturity amount in installment as per the frequency chosen by you over a maximum period of 5 years. You can choose complete withdrawal of fund value at any point of time. Although, you will not get any life cover during this period.

ULIPs are life insurance products that provide paths to invest. And just like other investment option, there's no guaranteed investment return in a ULIP. Although, if you like taking risks and want to earn more returns on your investment, then opt for equity funds.

At the time of maturity of ULIP policy, you will get the fund value on your prevailing NAV. Fund value is the number of units of policy multiplied by NAV (net asset value).

Value of the fund = Total units of policy x NAV (Net Asset Value)

Well, discontinuing your premium payment will disrupt your savings as well as financial goals. In such case, you can approach your insurance company and ask for the revival of discontinued policy within the stipulated timelines. Also, you will have to pay all the unpaid premiums.

ULIP plan is a combination of investment and insurance. Thus, one must hold this plan for a duration of at least 10 years so as to get investment benefits out of it. As an early exit will have its own consequences. ULIPs have a lock-in-period of 5 years. Thus, you may surrender your policy before the completion of 5 years, but you will be paid only after the end of 5 years.

Generally, minimum lock-in period for ULIP is 5 consecutive policy years. During this time period, if the policyholder discontinues or surrenders the policy, then he/she will not able to receive any payouts. Withdrawals are only allowed at the end of the lock-in period. In addition to this, if you surrender your policy before the lock-in period ends, then you will have to pay surrender charges as well. Also, it is advisable not to exit your plan after the completion of 5 years of lock-in period, because if you stay invested for a longer duration it will help you reap better benefits.

The amount that you pay towards the Unit Linked Insurance Policy is eligible for tax deduction as per Section 80C of the Income Tax Act, 1961. This means that the premium amount paid will be deducted under section 80C from your taxable income up to a maximum limit, which is currently ₹1.5 Lakhs. However, the aggregate amount of deductions under section 80C, section 80CCC and 80CCD (1) shall not, in any case, exceed ₹1.5 Lakhs. Also, upon the maturity of the policy, the payout amount you receive will be exempt from income tax, subject to the applicable provisions of Section 10(10D) of the Income Tax Act, 1961.

Here’re the following major benefits of buying ULIP

1. Tax Benefits – It helps you to reduce tax liabilities. This means you are liable to enjoy tax benefits on the premiums paid towards the policy as per Section 80C of the Income Tax Act.

2. Long-term growth– One of the major benefits of buying a ULIP plan is that it offers long-term benefits. ULIPs come with a lock-in period of 5 years which will keep you invested for a longer period.

3. Dual benefits – ULIPs not only offer life coverage but also come with a wide range of investment funds that will help you earn great returns. This includes balanced funds, debt funds or equity funds. You can invest in any of them depending on your need and risk appetite.

4. Flexibility – It gives you the flexibility to switch between funds basis your risk appetite. You could select multiple funds and different investment strategies.

5. Partial withdrawal option – It allows you to make partial withdrawal in case of any uncalled medical emergency or contingency after completion of lock-in period.

ULIP is a perfect investment option if you are looking for long term wealth creation. It could be buying your own house, a new car, going on a long vacation, or your child’s higher education or marriage, ULIP helps you to meet all your long-term financial goals. Moreover, it comes with a lock-in period of 5 years which keep you invested for a longer period and helps you earn better returns. The lock-in period is calculated from the date when the policy is issued.

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