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What is Lock-In Period in ULIPs?

If you have purchased a ULIP scheme but are thinking about discontinuation before the end of the lock-in period, then read this blog right away! It will help you decide better.

  • 9,612 Views | Updated on: Feb 05, 2024

ULIP Lock-in periods describe how long your money will remain invested in ULIPs. This period is important because it determines that you gain maximum benefit from your investment and enjoy the perks of insurance with it.

The number of people venturing into the realm of investment has increased at an unprecedented rate. People have begun to gravitate toward investment options that provide high returns and encourage asset growth. They have become more aware of the fact that a good financial portfolio is a combination of savings, income, and investment. United Linked Insurance Plans, or ULIPs, are the heroes of these times. These investments provide the benefit of high returns and the security of insurance within the same investment. To provide more clarity, this blog will go over the basics of ULIPs and lock-in duration of the ULIP policy in depth.

All About the ULIP Lock-in Period

The uniqueness of ULIP, or unit-linked insurance plans, is that they combine investing and insurance into one package. This life insurance policy is often regarded as the most balanced and sought-after plan because of the combination of financial stability, market investment, and tax savings.

The ULIP lock-in period refers to the time period during which you are unable to withdraw your investment. ULIPs typically have a five-year lock-in term. If you wish to withdraw your investment before the lock-in period, you will be required to pay surrender fees. However, you will be able to surrender the insurance without incurring any penalties after the lock-in term has ended. Because ULIP funds are designed to help you achieve long-term financial objectives, avoiding taking money out until it’s really required is preferable.

Key Aspects of the Lock-In Period

The lock-in period in ULIPs is a crucial aspect that policyholders need to understand before investing. This mandatory timeframe plays a significant role in shaping the nature of the investment, insurance coverage, and overall financial planning. Here are the key aspects of the ULIP policy lock-in period:

Duration of Lock-In Period

The lock-in period in ULIPs is typically up to 5 years, depending on the provider and the specific ULIP plan. This period begins from the date of commencement of the policy or the date of allocation of units, whichever is earlier.

Investment Commitment

During the lock-in period, policyholders are committed to keeping their invested funds within the ULIP without making any partial withdrawals or full surrenders. This commitment is intended to promote a long-term investment perspective and align the policyholder’s interests with the long-term growth potential of the investment.

Lock-In Period in ULIPs - Key Aspects of ULIP Lock-In Period

Limited Liquidity

One of the trade-offs of the lock-in period is limited liquidity. Policyholders cannot access their invested funds for partial withdrawals or surrenders during this time. It can be advantageous for those seeking disciplined savings and investment growth but may pose a challenge for those needing immediate access to their funds.

Flexibility in Fund Switching

While withdrawals are restricted during the lock-in period, policyholders often have the flexibility to switch between different investment funds within the ULIP. it allows them to adjust their investment strategy based on changing market conditions and their risk appetite.

Tax Implications

Investments made in ULIPs are eligible for tax benefits under Section 80C of the Income Tax Act in India. However, the tax benefits are subject to the lock-in period. Suppose the policyholder withdraws or surrenders the ULIP before the lock-in period expires. In that case, the tax benefits availed in earlier years might be revoked, and tax implications could arise.

Withdrawal Option In ULIPs

Most ULIPs do not allow partial withdrawals until the five-year lock-in period is up. After the ULIP lock-in period has ended, partial withdrawals can be made at any time. While certain schemes allow for free unlimited partial withdrawals after the lock-in period, some other options enable policyholders to withdraw a specified amount each month for the duration of the policy. Certain ULIP schemes enable partial withdrawals after three years of plan eligibility. Most withdrawals, nevertheless, are subject to fees, depending on the plan purchased.

Surrendering Or Discontinuing Before the ULIP Lock-In Period

If the ULIP is terminated or surrendered before the end of the five-year period, the ULIP funds value is transferred to a discontinued policies fund, commonly referred to as the DP fund. According to the terms and conditions of the ULIP policy, surrender or discontinuance costs may also be levied.

In addition, the money is only returned to the plan holder when the lock-in period has finished. Money in the DP fund gets a minimum of 4% interest rate until the end of the lock-in period. This interest rate may change based on the regulating authorities’ regulation framework. In addition, the DP fund amount is distributed to the nominee in the case of the policyholder’s death during the lock-in term of ULIP.

If a policyholder renounces their policy after the lock-in term, they will be reimbursed the fund value at the current net asset value or NAV. Discontinuation fees are not applicable in these situations.

Why Not Leave ULIPs After the Lock-In Period Is Over?

The lock-in period for ULIPs is typically five years. After this period ends, you can exit the ULIP or continue with it. There are a few reasons why you might consider not leaving ULIPs after the lock-in period ends:

Long-Term Investment Horizon

ULIPs are designed to be long-term investment products. Your investments have a greater chance of growth if you keep them for long. Exiting ULIP prematurely might prevent you from realizing the full growth potential of your investment.

Compounding Benefits

Compound interest is a powerful concept in investing. Staying invested in a ULIP plan allows your returns to compound over time. This means that your returns generate their own returns, which can lead to significant growth over the long term.

Cost Efficiency

ULIPs often come with various charges, such as premium allocation, policy administration, and fund management charges. These charges tend to be higher in the initial years and decrease over time. By staying invested beyond the lock-in period, you can benefit from lower charges, which can positively impact your overall returns.

Tax Efficiency

ULIPs come with tax benefits. Section 80C of the Income Tax Act (ITA) allows you to deduct the premiums you pay for ULIPs, and Section 10(10D) of the Act exempts the maturity amount from taxes, subject to some restrictions. By staying invested, you can continue to avail these tax advantages.

Flexibility

After the lock-in period, most ULIPs offer the flexibility to switch between different investment funds based on your risk tolerance and market conditions. This flexibility can help you optimize your investment strategy.

Insurance Coverage

While ULIPs are primarily investment products, they also come with a life insurance component. By keeping the policy active, you maintain insurance coverage, which can be valuable for your beneficiaries in case of an unfortunate event.

Market Volatility

Short-term market fluctuations are possible; therefore, exiting a ULIP during a market downturn could result in losses. Staying invested allows you to ride out market fluctuations and benefit from eventual recoveries potentially.

However, it’s important to note that whether you should continue with a ULIP beyond the lock-in period depends on various factors, including your financial goals, risk tolerance, investment horizon, and the performance of the ULIP itself.

Conclusion

ULIPs are a terrific option if you want life insurance and outstanding investment returns, but you must be willing to commit to the plan to reap the most rewards. It is suggested to carefully examine the terms and conditions of your ULIP, assess its performance, and consider conferring with a financial advisor before making any decisions regarding exiting or continuing with the ULIP.

Key Takeaways

  • ULIPs have a lock-in period of 5 years, during which you cannot withdraw your investment without incurring surrender charges.
  • They offer flexibility to switch between different investment funds, which can help you optimize your investment strategy.
  • ULIPs offer tax benefits under Section 80C of the Income Tax Act.
  • ULIPs are designed for long-term investment, so staying invested beyond the lock-in period is advisable to benefit from compound interest and lower charges.

- 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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