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.
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.