ULIP (Unit Linked Insurance Plan) is a unique financial product. When you buy a ULIP plan, you get the flexibility to choose the different funds that you want to invest in based on your future goals and risk appetite.
While your funds’ value is at an all-time high, you may feel tempted to exit the policy and withdraw the funds prematurely. Similarly, if the funds do not meet your expectations, you may want to exit the policy and surrender the same. In either case, surrendering the policy may seem like a viable option, you must know that there is a flip side to it.
When you surrender the policy prematurely, there is a great risk of eroding your investment value and failing to accomplish your long-term financial goals. Let us look at the scenarios when you can surrender the policy and its repercussions.
Surrendering during the lock-in period
Many first-time investors do not understand the complexity of ULIP and wonder what is a ULIP? While it is primarily a life insurance policy, its investment component comes with a lock-in period of five years. However, you can surrender the policy before the lock-in period ends.
When you surrender the policy, you will lose the insurance cover. Also, when you surrender the policy before the lock-in period, the fund value at the time of surrendering will be paid only at the end of five years. Another critical factor you must know is that the surrender value you receive is subject to various deductions. So, the amount you receive at the end of the lock-in period may not be the same as the fund value on the date of surrendering.
The insurance companies typically deduct the discontinuance or surrender charges from the fund value and transfer the remaining amount to the discontinued policy (DP) fund. Your funds will remain in the DP fund until the end of the lock-in period, and during this period, the insurer may levy a fund management charge of not more than 0.5% of the fund value.
Also, in case of premature surrender, all the tax deductions you may have claimed will be added to your income and taxed as per your tax slab. And the surrender value will also be subject to TDS (Tax Deducted at Source).
Surrendering the policy after the lock-in period
ULIP is a long-term investment instrument. The insurer may not charge any exit fees when you surrender the policy after the lock-in period. However, it is better not to surrender the policy. When you stay invested for a more extended period of 15 years or more, you have higher chances of accomplishing your goals also you will be able to build a significant corpus.
The longer you stay invested in ULIP, the more benefits you can get. The various charges associated with ULIP like the fund management charges, mortality charges and administrative costs are distributed throughout the policy tenure. Generally, the insurance companies levy these charges by cancelling the units of funds you hold, and these deductions are higher during the initial years. As a result, if you withdraw the policy before the lock-in period, your fund value will be diminished.
Surrendering the ULIP before the end of actual tenure may not be a good idea unless it is for an emergency purpose, or you cannot afford to pay the premium. Staying invested in ULIP for a longer tenure increases your chances of getting valuable returns on your investment.