With increased accessibility to knowledge on finance, the general public is no longer satisfied with a simple life insurance policy. There has been a rise in the number of people looking to invest in the stock market in the past few years, especially as a result of the pandemic. If you are someone who wants a life cover and is also looking to invest in financial instruments, then the best way to hit both the targets with one stone is to opt for a ULIP plan. Unlike many other investment products, though, there is a mandatory ULIP lock-in period of 5 years. Though you can surrender your policy before the end of 5 years, you will receive the fund value after the completion of the lock-in period only.
How does a ULIP work?
One part of the ULIP premium you pay helps create the life cover amount you have chosen, while the rest of the premium is pooled in with other premiums to be invested in financial instruments together. The returns on the investment are distributed amongst the policyholders, depending on their share of the investment. You can choose from different asset classes, such as equity funds, debt funds, or a combination of both.
As mentioned earlier, the ULIP lock-in period is 5 years. Once this period is complete, you can make partial withdrawals on the plan. However, if one wishes, they can surrender the policy and stop paying the premium even before 3 years of the policy are complete.
Consequences of premium cessation before 3 years
Your life cover ends
The most obvious consequence of such a situation is the scrapping of the life cover. With no life cover, the future of your loved ones remains in doubt in case anything unfortunate ever happens to you. In these highly uncertain times, not having a life cover is nothing short of tragic.
You get a notice period with a chance of policy revival
There may be myriad reasons you may not be able to pay the premiums on time. Insurers understand this, and therefore, send you a notice after the grace period of the policy has expired. Once you receive this notice, you can convey to the insurer that you want to discontinue the ULIP plan. Or, if you wish so, you can pay all the unpaid premiums and the relevant charges and revive the policy.
The final pay-out is obtained after 5 years only
As mentioned earlier, even if you were to stop paying the premiums and surrender your policy before the end of the lock-in period, the pay-out will be provided to you after five years only. So, even if you cease premium payment before 3 years, you will not be receiving any benefit amount at the time.
ULIP tax benefits may be lost
When you surrender the policy before the given period, the pay-out you are eligible for and the tax deductions you had previously claimed against the premiums can be counted as a part of your total income and can be taxed accordingly.
For the uninitiated, a policyholder can enjoy a multitude of ULIP tax benefits, such as deductions against premiums and exemptions on pay-outs.
You will not be subjected to any penalties
Though it may differ from insurer to insurer, for the most part, you will not have to incur any penalties if you discontinue your policy before 3 years. However, if you are surrendering your policy even before the first year of the policy is complete, then you face losing the whole amount you have invested till now.
Alternatives to surrendering your ULIP plan
Consider doing fund switches
If unsatisfactory fund performance is the main reason behind you ceasing your ULIP policy, then an ideal alternative would be to opt for fund switching. This feature allows you to move your invested amount from equity funds to debts and vice versa, depending on your understanding of the fund performance, changes in the risk appetite, and so on. One can do multiple fund switches a year and gain maximum returns with the help of a good strategy.
Have a long-term approach
To reap the maximum benefits of a ULIP plan, it is recommended to keep the money invested for as long as one can, even beyond the usual ULIP lock-in period of 5 years. Even if the fund is not performing well currently, keeping it in for the long run helps it get stabilised over short-term ups and downs of the market.
It is advisable to consult a financial expert before advancing on any major monetary decisions.