Lock In Period For ULIP

What is the Lock in Period for ULIP?

ULIPs, or Unit-Linked Insurance Plans, combine the benefits of life insurance and market-linked returns into a single package. They have a standard lock in period of five years, during which you cannot withdraw your funds. Some ULIP plans can allow partial withdrawal after three years but impose surrender fees for the same. However, after the lock in period has expired, you can access your funds without penalty.

Withdrawal Options in ULIPs

In most ULIPs, partial withdrawals are not permitted until the five-year lock in term has expired. While some policies allow for unlimited partial withdrawals after the lock in period, others allow policyholders to withdraw a set amount each month throughout the policy tenure. However, most withdrawals are subject to costs depending on the plan bought.

Surrendering or Discontinuing Before the ULIP Lock In Period

It is now clear that you cannot withdraw your ULIP funds before five years without a penalty. But what happens if you terminate the plan during this period?

See, if you surrender a ULIP before the five-year lock in period ends, the value of your funds is moved to a Discontinued Policies fund (DP fund). Surrender or discontinuance charges may apply as per the policy terms.

The funds are only returned to you after the lock in period concludes. Until then, the money in the DP fund earns a minimum of 4% interest. This rate may vary depending on regulatory guidelines.

In the unfortunate event of your demise during the locking period of ULIP plan, the DP fund amount is paid to the nominee. Once the lock in period ends, if you choose to surrender the policy, the fund value is refunded at the prevailing ULIP NAV (Net Asset Value), and no cancellation fees are charged.

Why Should You Not Exit After the ULIP Lock in Period?

Though you can withdraw funds from the ULIP policy after the lock in period of 5 years, this may not be the best decision.

First of all, you will lose out on the compounding benefits that help your investment grow over time. While the funds received can help you meet your short-term needs, you can end up compromising on your long-term financial goals like retirement planning, funding a child’s education, or creating wealth. Many individuals even opt for ULIP renewal to extend their ULIP investments beyond the policy term and benefit from market growth.

Further, there is one more thing you should know about how ULIP works. That is, when you exit from the ULIP policy, you receive funds after deducting charges, such as premium allocation and policy administration fees. As these charges are higher in the initial years of a ULIP, you will receive lower returns if you exit early.

Tax benefits under Section 80C and tax-free maturity proceeds under Section 10(10D) of the Income Tax Act 1961 are other reasons to continue with your ULIP. Exiting early can mean losing out on these benefits of ULIP.

Conclusion

If you are looking for security as well as excellent investment returns, then ULIPs are a great choice. You can also compare different plans like ULIP vs mutual funds and select the one that suits your specific circumstances, like buying the ULIP retirement plan for post-retirement needs. However, you must be willing to commit to the plan for the long term to reap the most benefits. All you must do is master the fundamentals, understand the minimum lock in period for ULIP, comprehend the terms and conditions, deductions, and exemptions, and make a well-informed conclusion.

FAQs on Lock In Period for ULIP