ULIPs are increasingly becoming popular among Indians due to their versatility and investment flexibility. They are a good choice for people with long-term wealth creation goals. However, you need to be aware of the concept of the lock-in period in ULIPs so that you can refrain from prematurely closing your ULIP without completing the lock-in period.
What is Lock-in Period?
The lock-in period refers to the duration you must mandatorily stay invested once you bought the investment product. Every tax-saving investment product has a lock-in period. The Equity-linked savings scheme has the lowest lock-in period of three years. The Public Provident Fund (PPF) has the highest lock-in period at 15 years.
How Much Lock-in Period does a ULIP Have?
Before 2010, ULIPs used to have a lock-in period of three years. However, the Insurance Regulatory Development Authority of India (IRDAI) increased this period from three to five years in 2010. So, once you have bought a ULIP plan, you need to stay invested for a minimum of five years in that plan.
Consequences of Discontinuing ULIP Before Lock-in Period
You won’t get the withdrawal amount until the lock-in period is over.
You will have to incur all the applicable ULIP charges while receiving the withdrawal amount.
Your ULIP’s NAV (Net Asset Value) will be calculated as per the last premium you paid and not the current NAV at the time of the withdrawal.
Reasons to Continue Your ULIP investment After the Lock-in Period
You can discontinue your ULIP once the five-year lock-in period is over. However, it is advisable to continue your ULIP plan after the lock-in period is over for many reasons
One-Stop Financial Product
ULIP is that rare financial product that offers the benefit of insurance coverage and investment. A portion of the ULIP premium paid by the policyholder is used for providing insurance benefits. The other part is used to invest in various market-linked investment funds to grow the policyholder’s wealth.
Benefit From Compounding
Investment in equities works best when you have a long-term investment horizon as it lowers the risk of short-term volatilities in the market. Since ULIPs invest in market-linked products, your ULIP plan is more likely to get the benefits of compounding if you stay put for extended periods, such as fifteen to twenty years.
Reduce Front-Loading Effect
ULIPs come with a slew of charges, such as fund management fees, premium allocation charges, etc. These charges are usually front-loaded, which means they tend to be higher in the initial years. As a result, you might get lower than expected net returns during the lock-in period.
But as you stay invested well beyond the lock-in period, charges tend to reduce, increasing the chances of higher returns and reducing the front-loading effect on your investments.
Simply put, don’t rush to liquidate your ULIP investments as soon as the five-year lock-in period is over. Instead, make it an integral part of your investment portfolio to build a comfortable retirement corpus.
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