Unit-Linked Insurance Plan (ULIP) is a popular and trusted investment avenue among people because it offers many benefits. ULIP insurance policies combine life cover with investment options, enabling you to earn returns in multiple ways. Even though ULIPs perform best if you keep your money invested for a long period, sometimes you may feel the need to surrender your policy and withdraw your funds.
Experts suggest that it is not a wise idea to surrender ULIPs prematurely. Here, we explain how doing this can impact your investment planning.
What is ULIP?
A ULIP is a life insurance plan that offers the additional option of investment. Once you purchase a ULIP, you have to keep it active by paying its premium timely. The insurer, after deducting applicable charges, invests your ULIP’s premium in debt, equity, or a combination of multiple funds to generate substantial wealth. You can choose how to allocate the investment as per your risk tenacity and financial targets.
Now that you know what is ULIP policy, it is time to understand its various features. Your ULIP funds are made of units, and their Net Asset Value (NAV) depends on how the financial market is performing during a given period. You can keep an eye on your updated NAV regularly to know how your units are faring.
If you ever feel the need to surrender your ULIP, the insurance company will pay you a surrender value. However, this will lead to a loss of money, as you are not completing the entire investment tenure. How much surrender value you receive depends on your timing of surrendering the policy. Keep reading to learn how it works.
Surrendering during the lock-in period
ULIPs have a lock-in tenure of five years. You are not allowed to withdraw money from the fund during this time. However, in case you surrender your ULIP before the end of the lock-in duration, the insurance provider charges you a fee. Apart from that, there are other disadvantages of surrendering ULIPs early. These include:
- UILPs are primarily life insurance policies that pay a death benefit to the policyholder’s nominees if an unfortunate event leads to his or her demise. You need to keep the policy active during its entire term to stay insured. If you surrender the ULIP insurance before the end of the lock-in period, the insurer will discontinue the life cover. You will get the surrender value only after the completion of the first five years
- Surrendering ULIPs lead to you paying additional charges. Along with a discontinuance fee, there are multiple other expenses that the insurer deducts from your fund value. So, ULIP’s surrender value is always lower compared to the worth of the ULIP fund, resulting in a significant loss
- ULIPs have multiple tax benefits under Section 80C and 10 (10D) of the Income Tax Act, 1961. However, you can avail of these deductions only if you remain invested in the policy for at least five years. If you surrender prematurely, you will miss these exemptions, and the insurer applies a Tax Deducted at Source (TDS) on the surrender value.
Surrendering the ULIP after the lock-in period
When you surrender your policy post the lock-in period, you will get the tax benefits. Moreover, you need not pay any discontinuance fee. However, the insurer will still charge you fund management, mortality, administrative, and other fees that will impact the returns. Surrendering early also means that you will lose the chance to grow your money over an extended period, which is vital for creating a large fortune.
Now that you understand why it is not wise to surrender your policy, you can create a long-term investment plan with your ULIP. With the right types of ULIP, you can accomplish your and your family members’ life goals.