What you need to know before ending your ULIP plan prematurely

A Unit-Linked Insurance Plan, commonly called ULIP, is a combination of both insurance and investment. ULIP plans are designed to offer life cover while also focusing on wealth creation. ULIP plans take your investments and pools a certain percentage of it into life insurance. The rest of the fund is invested in a mutual debt fund or an equity mutual fund, sometimes both, to match with your long-term goals. Your long-term goal could be your child’s education, your retirement or any other important event of your life.

ULIP plans are suitable for those who find it hard to discipline them financially and struggle to keep investment and protection needs separate. Also, ULIP plans are only ideal for those who have long- term financial goals, which are at least ten years long. If an individual doesn’t have long-term goals, it is a better option to go for mutual funds than ULIP plans.

For ULIP plans, the insurance companies have fund managers who will be tracking and managing all the investments. Therefore, the investors of ULIP plans will be spared from tracking their investments. ULIP plans also offer the provision of changing your portfolio among equity and debt funds, based on how much risk you’re willing to take and also the extent of your knowledge on market performance.

Most of the ULIP plans’ buyers have no time and knowledge to understand the fluctuation of rates and how they’re supposed to maintain a balance between debt and equity funds and when to make the switch. So, if you are someone who knows about the fluctuation of interest rates and returns from equity, ULIP plans are probably the ideal product for you. It is better to invest in ULIP plans that are long-term, for better results.

ULIP plans initially had a lock-up period of three years. Then in the year 2010, IRDAI increased the lock-up period of ULIP plans from 3 to 5 years. Since the lock-in period is quite long, ULIP plans can help you inculcate a decent habit of investing. However, since insurance is usually long-term, the investors of ULIP will not be benefitting from the policy unless they keep it for the full term, which can vary between ten to fifteen years.

Mutual funds vs ULIP plans

Unlike ULIP plans, mutual funds do not offer a life cover. Apart from this, although both of them seem similar, they invest across different assets. They are also structured in different ways, and hence, the charges differ too. Mutual funds only charge you for managing your investments and penalize you with an exit fee if you sell units as soon as you invest in the scheme. So, if you want your investments to be liquid, it is always better to run with mutual funds.

On the other hand, ULIP plans have more charges on them. But in the end, higher costs tend to be put into your return. So, in the long run, your ULIP returns are usually higher than your mutual fund returns.

Tax-free withdrawals

If you’re debating on why you should go for a ULIP plan instead of mutual funds, ULIP plans offer amazing tax-savings on withdrawals that mutual fund investors cannot reap. Withdrawals can occur in any of the following circumstances:

  • The Maturity of the policy
  • Death of the policyholder
  • Partial withdrawal at the discretion of the policyholder

Death benefit paid under a ULIP plan is completely free of tax. The payout can be higher than the sum assured based on the returns generated by the unit-linked investments.

ULIP plans offer many benefits. The premium that you pay for a ULIP plans can be used to claim for tax deduction, as per Section 80C of the Income Tax Act. Also, on maturity, the returns from the policy are not subject to income tax according to Section 10D of the 1961 Income Tax Act.

For all your long-term plans like getting a new house, a car, getting married, etc., ULIP plans are an excellent choice since the money will get compounded. Due to this, the net returns will be more than compared to what you would gain by just investing it in an FD, even in case you choose to terminate the plan after the 5-year lock-up period. However, with ULIP plans, it is always good to keep the plan for a longer term, to reap the benefits. As mentioned earlier, ULIP plans allow switching of portfolios. A certain number of switches in ULIP plans can be made free of cost.

Types of ULIP plans

Funds that ULIP plans invest in

  • Equity funds – Here, the money that you invest is put into equities and the risk is higher.
  • Debt funds –In debt funds, the money collected is invested in stock markets, and the risk is less. However, the return is also less.
  • Balanced funds –This is for investors who do not want to take risks. The money is put into both equity and debt funds.

The Scope of ULIP funds

  • Retirement planning – This is for people who plan on investing for post-retirement days while they’re still employed
  • Child’s education – This is an investment made for a longer duration to fund a child’s education in the future.
  • Wealth creation – Investments are made in ULIP plans to utilize the returns to achieve financial goals

Death benefit to the taxpayers

  • Type I ULIP plans –In case of demise of the taxpayers, Type I ULIP plans pay the nominee higher than the sum value that was assured
  • Type II ULIP Plans – In case of death of policyholders, Type II ULIP plans pay the nominee the sum value that was assured and the fund value.

If you’re thinking about investing in ULIP Plans, you’ll first need to understand all its exit options. This is to make sure that you don’t take any hasty decisions and withdraw from the plan as soon as the lock-in period is over. When you do this, you don’t reap the benefits that ULIP plans were meant to offer in the first place. Here are a few things that you need to know about ULIP plans before you decide on ending them prematurely.

What happens when you surrender ULIP plans before their lock-in period is over

If you’re wondering, yes, it is possible to surrender ULIP plans before the duration of lock-in is over. However, this does not mean that you’ll be receiving your money when you do so. The investors will be given the money only after the lock-in period is over. They only discontinue paying premiums.

For ULIP plans, once the individual decides to surrender their ULIP, the insurer will be transferring their funds to a discontinued policy fund. Here, the fund manager can charge a fee of up to 0.5% of the amount to manage the terminated policy fund. On the bright side, you continue to earn interest even when your money is in the discontinued policy fund. But the amount will be much lesser than the initial ULIP plans. Note that investors of ULIP plans will get back their money only if they have paid a premium for a whole year. ULIP plans don’t return the money if the premium is for less than a year.

In the case of ULIP plans, you can decide to revoke your decision even after you surrender the policy. You have two years to do this, but also, it should happen before the end of the fifth year (the lock-in period) of the policy. However, on the revival of their ULIP plans, individuals will have to pay up all the premiums that are due, together with premium allocation and administration charges. After this, the insurer is going to refund the charges of discontinuance back to your fund.

To surrender ULIP plans, individuals are asked to sign a few documents and then surrender the documents related to their ULIP plans. Another thing to note is that, once ULIP plans are surrendered, the insurance will also be terminated.

Some Reasons why policyholders may consider exiting ULIP plans right after the lock-in period is over

  • Fund value may look good. There are possibilities of sudden boosts in market conditions, and investors might think that their initial investments in the ULIP plans have now reached an all- time high. However, it is important to remember why they decided to invest in ULIP plans in the first place. People invest in ULIP plans mainly for wealth creation, to meet long-term goals. By exiting ULIP plans, they will be compromising their dreams.
  • Policyholders might also sometimes conclude that the funds aren’t really performing well. It is highly likely that they are wrong most of the times. ULIP plans are very transparent regarding investments and policyholders can check the Net Asset Value Everyday and keep tabs on the portfolio. It is important to note that the fund value is affected by many charges like portfolio management charges, administration charges, and mortality charges. Although these charges are pretty high during the initial years, they considerably reduce through the course of years.

Charges on ULIP plans are high only in the initial years

As mentioned above, ULIP plans have a lot of charges on them. Before the investment of premium, premium allocation charges are deducted from ULIP plans. Other charges like funds allocation charges, policy administration fee, fund management fee, etc., will be deducted from ULIP plans either through cancellation of units or by adjusting the Net Asset Value.

These deductions, as mentioned earlier, are only high in the first few years and gradually reduce over time. By the time ULIP plans reach their lock-in periods, these charges would have decreased so much that they don’t impact the funds. Having spent a large portion on charges during the lock-in period, the fund value starts to improve after the period is over. So, exiting the plan at this time would make no sense. Therefore, by exiting ULIP plans right after the lock-in period, policyholders will not reap the real benefits. They will get fewer returns compared to what they would’ve gotten after full maturity.

Keeping the ULIP plans will reap real benefits

One of the reasons that policyholders decide to exit ULIP plans, as mentioned above, is the performance of funds. One should always remember that ULIP plans are long-term investment plans. To reap the real benefits, one has to stay for around 15 to 20 years. If you think that the funds are performing badly, consider switching. The performance is related to market fluctuations, and instead of exiting, policyholders can check the statistics of the performance of their ULIP plans when the market did well (the bull phase). Low returns are very frustrating for individuals who want to opt out of the plan early. So, it is efficient to wait it out and let the returns grow. Moreover, if you want to exit before the lock-in period and the funds are performing badly, it will cost you heavily, considering all the charges that you would have paid. If the bull phase of the ULIP plans shows positive results, policyholders should wait till the returns revive.

You will not get any additional reimbursements

These days, most insurance plans come inclusive of loyalty points and related additions. ULIP plans are no exception to this. However, these will not be apply to policyholders if they choose to opt out right after the five-year lock-in period is over. Only the current Net Asset Value, based on which the fund value will be given to you on the date of surrender of the policy. How is this in any way beneficial when you have been paying your premium for the whole of five years and then you don’t get to sit back and let it bring you additional returns.

ULIP plans are market influenced

The returns from ULIP plans greatly depend on market turnover. This is why ULIP plans are long-term. As mentioned multiple times, ULIP plans have many charges associated with them. For policyholders to recover these costs payable, there has to be a consistent upscale market turnover. And this can only be possible if the scheme stays on for throughout five years.

To conclude, you must go for ULIP plans only if you have long-term goals. Unless it is essential, always give your ULIP a good ten years to reap the benefits. This way, you will be satisfied with the returns and also the additional customer benefits that you receive.

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