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ULIP Withdrawal Conditions - Before and After 5 years

If you want to invest in a ULIP policy, you should think of it as a long-term investment to make the most out of it. Here are factors to consider before withdrawing ULIP insurance.

  • 4,378 Views | Updated on: Jan 10, 2024

ULIPs are useful financial tools that may be used to bridge the gap between different investment options while also giving significant tax incentives. Since they combine profits, coverage, and tax relief into one package, life insurance schemes such as ULIPs are a more stable long-term wealth-building choice. Nevertheless, it may cause confusion as to what exactly ULIP insurance is.

ULIP stands for Unit-Linked Insurance Plan. ULIP schemes are financial instruments that must be locked in for a minimum of five years. ULIP policy is a type of insurance that also serves as an investment tool. Only a small portion of the money invested is utilised to protect your life coverage with the rest going into the stock market. Policyholders can pay their premiums monthly or annually. Unit Linked Plans are subject to the risks associated with the financial markets. As a result, your investment selection should be based on your appetite for risk and needs.

Many people wonder if they should discontinue their ULIP insurance coverage once the mandatory lock-in period comes to an end. If you’re among them, this article will walk you through the considerations you should make if you wish to withdraw your ULIP policy after the mandatory lock-in period is completed.

If ULIP schemes are purchased as a medium-term investment instrument, exiting them immediately after the lock-in period has finished is not suggested. When there is a mismatch between the product offerings and the aim, dissatisfaction is inevitable. Insurance is a long-term investment, and thus, surrendering early is not recommended. Only if ULIPs are kept till a maturity period of 10-15 years, some profits are guaranteed.

Factors to Consider Before Withdrawing ULIP Insurance

Say Goodbye to The Loyalty Bonus

Leaving ULIP schemes as soon as the lock-in period has ended is not a wise move. It’s also worth remembering that the first five years make up the vast majority of the total costs in a Unit Linked Plan. Additionally, if the fund value grows, it will be unjustified to quit at that moment. Furthermore, you will not get any loyalty gains if you do not stay invested till the insurance matures.

High Tax Charges

In ULIP, there are a few fee payments. The premium distribution fee is collected before the premium is invested, while the fund management fee, funds allocation charge, and policy administration cost are deducted by canceling units or modifying the NAV in the case of the Unit Linked Insurance Plan. The deduction is larger in the first year and thereafter gradually decreases. By the conclusion of the lock-in period and even beyond, these fees decrease to a point wherein they have no effect on the funds. You will also miss out on the genuine benefits if you leave after the lock-in period has ended. In a ULIP, you will receive smaller returns than you would in a traditional investment if you exit immediately after 5 years.

Impact on Returns

Exiting the plan when the scheme is functioning well is not encouraged. You must commit to the scheme in order to gain full benefits. You can maintain the cap fund you choose for your ULIP.

To summarise, if you want to invest in a ULIP policy, you should think of it as a long-term investment instrument in order to make the most out of your hard-earned money.

- 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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