Planning to surrender your ULIP? Know these facts before you do

A ULIP plan can be a long-term investment. The primary reason for a long-term investment can be the lock-in period of five years. While many of you may reap the benefits of a long-term investment, the rest of you might opt out of a ULIP investment for many downfalls. As a policyholder, you might surrender your ULIP policy before the completion of five years due to low returns, high charges, inability to liquidate funds, and so forth. Although all these reasons might seem valid to you at first, the discontinuance of a ULIP policy before the lock-in period might not be the right solution.

If you are planning to surrender a ULIP policy, let’s understand what the cons of discontinuing a ULIP policy before the lock-in period are:

What happens if you surrender your ULIP policy before the completion of the lock-in period?

Since a ULIP plan is a long-term investment, many of you might wish to discontinue the ULIP plan before the completion of five years. If you surrender the ULIP policy, your insurer can provide you with a payout only after five years. Typically, you might not receive the fund value that gets paid at the time of the surrender of the ULIP policy.

Before you decide to surrender your ULIP investment, let’s understand how the discountenance procedure before five year works:

Step 1: Your insurer would deduct discontinuance charge after you initiate a request for discontinuance.

Step 2: Your money can be transferred to the Discontinued Policy (DP) fund.

Step 3:  Your insurer can apply a fund management charge, which may not exceed 0.5% of the total amount after your money is shifted to the DP fund.

Step 4: You can obtain a minimum guaranteed return since your DP fund can let you earn interests. Currently, the interest rate under the DP fund might be 4% p.a.

After surrendering your ULIP policy, many of you might wonder what to do next. If you are still willing to opt-in for a ULIP plan after discontinuance, you should revive the policy. However, you might have the option to revive your ULIP policy within two years before the completion of the fifth year of your surrender. On renewing the ULIP policy, you should pay the unpaid premium amount. Moreover, the DP fund can levy all the discontinuance charges as well as deduct the policy administration charges and premium allocation charges. If you do not renew your ULIP policy within 2 years, you might be entitled to pay the DP fund value after the completion of the fifth year.

Discontinuance charges can play an essential part at the time of surrender. Let’s understand the meaning of a discontinuance charge with the help of a simple illustration:

If the annual premium amount of your selected ULIP policy exceeds Rs. 25,000, your DC amount can range between Rs.2,000-Rs.6,000 until the 4th year. If the total premium amount is lower than Rs. 25,000, the DC amount can vary from Rs. 1,000 to Rs. 3,000 until the 4th year of the ULIP policy. However, if you surrender the ULIP policy after the 5th year, there might not be any levied charges.

To conclude, exiting a ULIP insurance right after the completing of a lock-in period might not allow you to reap optimum results as well as put your long-term goals at stake. As a policyholder, you can turn the long lock-in period in your favour and realize your life goals such as purchasing a new house or a car, starting a new business, and so forth with ease. Moreover, staying invested in a ULIP policy can allow you to generate wealth as well.


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