Why One Should Not Exit ULIP as soon as the Lock-in Period Ends

In year 2010, IRDAI has made some regulatory changes related to ULIPs, where it has increased its lock-in period from three years to five years, thereby making them long term financial instruments. ULIPs, the lock-in period is set as the first 5 policy years, during which you don’t have the flexibility to withdraw the money completely or partially. However, after completion of the lock-in period you are allowed to withdraw the money.

People who invest in Unit Linked Insurance Plans (ULIP) for medium term may be looking to exit immediately after completion of the lock-in period. Investing in ULIP plans for a short term, say for 5 years, would not help you achieve the financial goals. It is hereby advised you to invest in these plans for a long term.

Exiting Before Completion of the Policy Term

Let’s see what happens if you exit before completion of the policy term.

Effect on Fund Value:

Various charges in ULIPs are front-loaded that means you will get very little, in case you exit during the initial years under the policy.

Let’s assume, you have purchased Bajaj Allianz Future Gain ULIP policy, which is charged with a premium allocation charge of 5.5% during the 1st policy year and 3.75% during 2nd to 5th policy year. No premium allocation charge is levied after 5th policy year. Not just premium allocation charge, various other charges are also levied such as Policy administration charge, Mortality Charge, Fund Management Charge, etc.

Most of the insurance companies charge heavily during the lock-in period and charges tend to reduce after completion of this period.

So, if you exit after 5th policy year you will receive the fund value with poor returns. In case, you apply to surrender the policy within the first 5 policy years, the fund value will be payable after deducting the applicable surrender charges.

No Additional Benefits:

Some ULIP investment plans offer Loyalty Additions/Guaranteed Additions that starts adding to your fund value after completion of the first 5 years. Upon opting for Future Generali Easy Invest Online ULIP Plan, you can avail Loyalty Additions that starts from the end of the 10th policy year. In case you invest in BSLI Wealth Max Plan, you can receive Guaranteed Additions that starts from 6th policy year onwards.

So, if you exit immediately after the lock-in period, you will receive only the fund value basis the current NAV, as on the date of surrendering the policy.

Impact on Fund Performance:

If you are exiting after 5th policy year, your fund may not perform up to your expectations. In case, you have opted for equity oriented ULIP, the returns may be quite low, if the market dips. To tackle this scenario, it is advisable to track the performance of your chosen ULIP policy and if it performs well, when the market is bullish, then you should stay invested and wait for the bullish phase to receive higher returns.

Exiting After Completion of Lock-in Period

Exiting from ULIP plan immediately after completion of the lock-in period is not the right decision. During the first 5 years, you have paid a major part of the total charges levied and when there is a time to enhance the fund value, an exit is not justified at all.

On surrendering the policy after the lock-in period of 5 years, you will get lower returns that may put financial goals in jeopardy. So, making an exit from the ULIP policy is not recommended, until you have any immediate fund requirement.

A ULIP insurance cum investment plan suits those who are seeking to maximize their wealth. It also provides a combination of investment and insurance component. These plans are best for those who are looking to meet the long-term financial goals.When you make a ULIP investment, link it to a long-term financial goal and stay invested till its maturity. If you hold policy for 15 years, the maximum impact of charges would be around 2.25% and thus, it would be a right move to invest in a ULIP plan for a long term. A ULIP plan also provides you the flexibility to invest in any of the fund options available that will help you maximize your investment.

Stay invested and earn high returns.

Harjot Singh Narula

Harjot Narula is founder and CEO of ComparePolicy.com, an IRDAI approved insurance web aggregator focussed on selling online insurance for companies. Harjot has more than a decade of experience in software development and has also spent 5 years in US working for the mortgage and risk management industry.

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