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How to Cancel ULIP Policy?

As an investor, you can choose to cancel the ULIP policy as and when required. However, financial losses are incurred depending on whether you withdraw it before maturity or after.

  • 10,666 Views | Updated on: Jan 18, 2024

We all know that Unit Linked Insurance Plan, popularly known as ULIP, is among India’s most popular insurance policies. It offers a policyholder the benefit of insurance and market-linked investment in one policy. However, there can be situations when an investor may want to surrender their policy due to uncertain reasons like emergencies, financial concerns, etc.

Ideally, ULIPs are considered investment plans for the long term; it is not wise to surrender your ULIP policy before it reaches maturity. However, before you surrender your policy, it is important to understand how to cancel it and how it can impact your finances.

What is ULIP?

A Unit Linked Insurance Plan (ULIP) is a financial product that integrates insurance and investment components. In a ULIP, a part of the premium the policyholder pays goes towards providing life insurance coverage, while the remaining portion is invested in various market-linked funds. These funds may include equity, debt, or a combination, allowing policyholders to participate in the financial markets.

Can You Cancel Your ULIP Policy?

Yes, ULIPs are flexible plans, allowing the policyholder to cancel the plan anytime. However, financial repercussions are associated with canceling a policy before its designated lock-in period concludes. Whether driven by dissatisfaction with its performance, the necessity for funds in an emergency, or an inability to continue paying premiums, individuals can consider canceling the policy and withdrawing funds from their ULIP plan.

When is the Best Time to Cancel a ULIP?

If you plan to cancel ULIP, you must do it within 15-30 days of buying it. This is because different insurers offer different free look periods. So, you must check for this feature while buying the policy if you are not confident about investing in ULIP. On the other hand, a free look period is a great option to opt out of the policy simply.

Alternatively, a ULIP plan has a minimum lock-in period of 5 years; surrendering a policy before this duration can incur losses in different charges per the policy guidelines. Also, you may have to pay taxes on the amount you will receive after surrendering the policy, as it will be considered an income.

So, financial advisors suggest that you surrender your ULIP policy only after it has crossed its minimum lock-in tenure. But, again, we would like to reiterate that it’s best to let your ULIP policy mature and then withdraw it for the best results.

Charges Involved in the Cancelation of ULIP

When you cancel a ULIP policy, you must pay some charges depending on the current policy year. These charges are called discontinuation charges, and the company levies them as a fine to manage its losses due to discontinuation.

For example, if you own a ULIP policy and pay a premium of more than ₹25,000 annually. In that case, the discontinuation charges that will be levied can be as much as ₹6,000, ₹5,000, ₹4,000, and ₹2,000, respectively, for the 1st, 2nd, 3rd, 4th policy year. On the other hand, if the premium amount is below ₹25,000, then the discontinuation charges levied by the insurance company can be ₹3,000, ₹2,000, ₹1,500, and ₹1,000, respectively, for the 1st, 2nd, 3rd, 4th policy year. However, these charges can change based on the policy documents, guidelines, and your insurance company’s policies related to surrendering the ULIP policy.

However, if you surrender the ULIP policy after five years, the insurance company will levy no such charges.

Types of ULIP Withdrawals

One of the key advantages of ULIPs is the flexibility they offer regarding withdrawals. Understanding the various types of ULIP withdrawals is essential for policyholders seeking to manage their investments strategically.

ULIP Withdrawal before the 5-Year Lock-in Period

In accordance with the regulations set forth by the Insurance Regulatory and Development Authority of India (IRDAI) in 2010, the minimum duration required to be eligible for the withdrawal of ULIP funds was extended from 3 to 5 years. This adjustment aimed to maximize the advantages derived from these long-term investment instruments. Consequently, to initiate the withdrawal of ULIP funds, a minimum period of five years must be completed.

It is crucial to emphasize that no fund liquidity is permitted in the event of surrender or discontinuation of the plan before the culmination of this 5-year timeframe.

ULIP Withdrawal Post the 5-Year Lock-In Period

Upon the completion of the lock-in period, the liquidation of ULIP funds is permissible as per the withdrawal limits specified by the insurer. Typically, when a withdrawal request is made, the first amounts withdrawn consist of top-ups paid, along with the periodic Systematic Investment Plan (SIP) premiums.

Once the top-up amount is exhausted or if no such amount is available, liquidating the base fund’s value becomes feasible.

How to Cancel ULIP?

To cancel any ULIP policy, inform your agent or visit your insurance provider’s office and the executives there that you want to discontinue the policy. The steps to cancel a ULIP policy are as follows:

  • Visit the insurance provider’s office.
  • Keep your policy documents and identification (KYC) documents ready with you.
  • Ensure you carry your bank documents like a passbook and chequebook.
  • When you inform the executive at the office about canceling your policy, they will provide you with a surrender form. Alternatively, you can fill out this form online too.
  • You can complete the form and submit all the required documents when prompted.
  • Once the team verifies all the documents, they will initiate the surrender procedure and do all the required calculations and deductions.
  • Once all calculations and deductions have been made, your money will be transferred to the Discontinued Policy (DP) Fund.
  • You can collect your money post-completion of the lock-in period.

Limits on ULIP Withdrawals

Several restrictions govern the ULIP withdrawal amount, and these limitations can be outlined as follows

  • ULIP withdrawals become accessible only after the completion of a 5-year lock-in period, coupled with the regular payment of all Systematic Investment Plan (SIP) premiums throughout this duration.
  • In the event of a partial ULIP withdrawal, the standard withdrawal limit typically ranges to 10% of the total SIP premium amount, potentially extending to a maximum of 20%.
  • Some ULIP policies may specify a limit on the remaining fund value post-withdrawal, such as a requirement that at least 1/3rd of the annual SIP premiums must be retained.
  • Certain companies may enforce a mandatory limit, specifying that the remaining amount in the fund post-withdrawal should be equivalent to one year’s premium.
  • Restrictions on the number of withdrawals that can be made before incurring fees might be imposed by some companies.
  • Withdrawals from the ULIP policy are permitted only if the policyholder is at least 18 years old.

Points to Keep in Mind Before ULIP Withdrawals

Nothing rivals the significance of well-informed decision-making. Key considerations to bear in mind before opting for a ULIP withdrawal:

  • Since a partial withdrawal from the ULIP amount diminishes the overall corpus, reserving ULIP policy withdrawals for genuine emergencies is advisable.
  • Prior to initiating any ULIP withdrawals, it is imperative to have a comprehensive understanding of the applicable rules and regulations.
  • To capitalize on the partial withdrawal feature, ensuring timely payment of Systematic Investment Plan (SIP) premiums is crucial.
  • Maintaining a sufficient base fund to cover life coverage and account maintenance requirements is advisable when contemplating ULIP withdrawals.

Final Thoughts

It is essential to understand that cancelling your ULIP policy will only result in losses if your free look-back period is over and your policy is younger than five years. Therefore, it is suggested that you do not surrender your policy unless you genuinely need it. Also, you must read about the policy documents’ discontinuation/surrender-related clauses and charges before buying one for yourself.

Key takeaways

  • ULIP combines insurance and investment components, allowing policyholders to participate in the financial markets.
  • Cancelling a ULIP before maturation incurs discontinuation charges, varying with the policy year and premium amount.
  • You can either cancel the plan within the first 15-30 days (free look period) or after the lock-in period of 5 years to avoid charges.
  • Consider withdrawal rules before cancelling the plan and ensure a sufficient base fund to cover life coverage.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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