Thinking Of Surrendering Your ULIP? Here’s Why You Shouldn’t
Before investing in an insurance plan of any kind, it is important to ensure that it aligns with your long-term goals and objectives. This is perhaps more true in the case of Unit-Linked Insurance Plans than most others. With the combined ULIP benefits of both investment and insurance, they are specifically suited for fulfilling the long-term goals of a variety of investors.
However, due to certain reasons, a ULIP investor might consider surrendering his policy well before its maturity date. To achieve this, a ULIP investor needs to be aware of how to cancel his ULIP policy. However, it is far more important to be aware of whether surrendering a ULIP policy is an advisable move at all. Let us delve into the topic in more detail:
What Is ULIP?
Let us start by reviewing what is ULIP and the various benefits it can offer to an investor. ULIPs are primarily designed to provide protection along with market linked returns. When you make an investment into a ULIP, It offers the policyholder dual benefit of investing in either in equity funds or debt funds or both while providing life insurance coverage. A professional fund manager handles the investment corpus and every ULIP investor is provided with a variety of fund options to choose from, ranging from debt and equity funds.
As an investor in a ULIP, you can choose a fund option that aligns with your long-term financial goal. For instance, the relatively safer debt funds might be ideal for those investing for their retirement. On the other hand, equity funds might be ideal for those that seek wealth creation. You also get the option to switch your investments between different ULIP funds based on your risk appetite and market conditions during the tenure of the policy.
How To Cancel/Surrender Your ULIP
While ULIPs may reap optimum benefits when allowed to complete its due term, an investor might consider cancelling or surrendering his ULIP policy for a variety of reasons. In such a case, it is essential to know the process of how to cancel a ULIP policy as well as the repercussions of the same.
• During the 5-Year Lock-in Period
In 2010, the Insurance Regulatory and Development Authority of India (IRDAI) increased the lock-in period for ULIPs from 3 years to 5 years. During this lock-in period, no liquidity is permitted. Therefore, while you can surrender or cancel your ULIP within the lock-in period, you cannot withdraw the fund value until the lock-in period expires. Moreover, the fund value will be subject to various charges such as discontinuance charges and hence will lower the final surrender value received. The impact of returns during that financial year is moved to a discontinued fund.
• After 5-Year Lock-in Period
After the 5-year lock-in period is complete, the fund value can be withdrawn and will not be subject to exit charges. However, it is important to note that as ULIPs are designed to be long-term products, the benefits of long-term investments can be reaped after staying invested for 15-20 years. Hence, the impact of returns during that financial year could move to discounted fund.
Reasons To Hold Onto Your ULIP Investment
There are a number of reasons that might prompt investors to consider opting out of their ULIP plans, whether within or right after the lock-in period. However, in the long-term, it is financially advisable to hold onto your ULIP investments for far longer periods as it allows them to yield the desirable results for the investor.
Firstly, making investments in ULIP plans allows you to avail tax deductions under Section 80C of the Income Tax Act, 1961. The premiums can be claimed as a deduction from your taxable income. As per this section, investments up to 1.5 lakh can be claimed as deductions, subject to provisions stated therein. They also offer tax-free maturity and death benefits are also subject to tax exemptions under Section 10 (10D) of the Income Tax Act, 1961 subject to the provisions stated therein.
Secondly, ULIPs are market-linked products and allow you to invest in various funds such as equity funds, which generally have yielded better returns over the longer term. The longer you keep your ULIP investment, the more you can benefit and contribute to your wealth creation.
Lastly, surrendering your ULIP during the lock-in period might be disadvantageous on two fronts. In terms of insurance, your coverage is discontinued when you surrender a ULIP policy, leaving you without a safety net. In terms of investment, you cannot withdraw the fund value before the completion of the lock-in period. Moreover, there are various ULIP charges that accompany the surrender or cancellation of a ULIP, thereby further corroding your fund value.
Hence, it is advisable to allow your ULIP plan to continue for a longer duration of time, so that it might provide optimum returns and allow you to fulfil your long-term goals.
ULIPs serve their purpose when they are utilised for a long-term goal. This allows them to build market-linked returns on investment and allows the investor to enjoy the accompanying tax benefits and coverage for a longer duration of time. Therefore, if a withdrawal or surrendering from a ULIP is not urgent or necessary, it is recommended that the ULIP be allowed to benefit from investment compounding and yield its returns at the end of the policy tenure.
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