Surrender Value of ULIP Policy

What is the Surrender of ULIP Policy?

When you terminate your ULIP before it reaches its maturity, you surrender your ULIP. This means that you stop paying the premiums of your ULIP and cash out the surrender value of the policy. As per the IRDAI, a ULIP mandatorily has a lock-in period of 5 years. While surrender during this period is allowed, you might face heavy discontinuation charges, which are not financially feasible. You can surrender your ULIP in one of the two time periods. :

1. Surrender Before the Lock-in Period (Less than 5 years):

   • Surrender is allowed before the 5-year lock-in period is complete but can attract financial loss due to discontinuation charges.
   • If you surrender your policy within the lock-in period, a discontinuation charge is deducted from your fund.
   • The remaining fund is placed in a Discontinued policy fund, allowing zero liquidity until the 5-year lock-in is complete. It earns a guaranteed interest rate (currently 4% set by IRDAI) until the lock-in period ends.
   • You have no access to the surrender value until the 5-year lock-in period is over.
   • The life cover protecting your family ceases to function as soon as the surrender is in place.

2. Surrender After the Lock-in Period (5 years and beyond):

   • No discontinuation charges are levied after the 5-year lock-in period is complete.
   • You receive the full fund, which is fully liquid.
   • The maturity benefit is tax-free if your annual premium is below ₹2.5 lakh and does not exceed 10% of the sum assured.

How to Calculate Surrender Value of a ULIP Policy?

The formula to estimate the ULIP surrender charges is mentioned below:

• Fund value is calculated as total units under the policy multiplied by the NAV of the chosen fund. You can use a ULIP calculator to calculate the fund value of your ULIP.
• Charges vary by ULIP, impacting the residual investment returns even in favourable market conditions.
• Risk cover stops upon surrender request; surrender value is paid at the lock-in period's end.
• On surrender, discontinuance charges are deducted, and the remaining fund value goes to a Discontinued Policy fund.
• Funds remain there until the lock-in period concludes, possibly incurring a fund management fee up to 0.5% and earning a minimum of 4% interest annually.
• If the payout does not qualify for exemption under Section 10(10D), it is taxed as a capital gain under Section 45(1B), i.e. 12.5% if you held the policy for more than a year, 20% if less. This is not taxed at your slab rate.
• TDS applies only if the payout is not exempt under Section 10(10D) and total payments to you in the year exceed Rs 1 lakh. Where it applies, the insurer deducts 2% on the income portion under Section 194DA.

Factors to Consider Before Surrendering a ULIP

There are some key things to consider about surrendering a ULIP plan:

• Lock-in Period: ULIP plans have a 5-year lock-in period as mandated by IRDAI. If you terminate your policy before this period, you will be charged discontinuation charges. The remaining balance is then transferred into the discontinued policy fund (DPF) until the 5-year lock-in period ends.
• Surrender value: The surrender value is calculated as the difference between the fund value and the surrender charges, which are often zero after the 5-year lock-in period is complete.
• Charges: Various charges are also deducted from a ULIP by your insurer. These can include premium allocation charges, fund management charges, etc. The surrender charges depend on the time of surrender.
• Tax implications: The tax treatment of the surrender value depends on the number of years the policy has been in effect.
• Loss of Benefits: Surrendering your policy immediately ceases your right to any of the policy benefits, like the life cover insuring your family and any market-linked growth.

Tax Implications of ULIP Policy Surrender

The tax treatment of surrendering a ULIP policy in India depends on when you surrender it:

• Surrender before 5 years: Any surrender within the lock-in period is taxed at the income tax slab rate of the individual. Along with this, any deductions claimed under Section 80C are reversed, added to your income and then taxed at your income tax slab rate. Note that you will be required to pay these taxes even though you do not receive the surrender value until the 5-year lock-in is complete.
• Surrender after 5 years: No surrender charge is levied on your fund value after the 5-year lock-in period is complete. The payout is also tax-exempt under Section 10 (10D), provided that your total annual premium is less than ₹2.5 lakh and does not exceed 10% of the sum assured. Any gains over these limits are taxable as capital gains at 12.5% LTCG.

How to Surrender Your ULIP?

You can surrender your ULIP online or offline. Follow the listed steps to surrender your policy. Note that the process can differ as per the insurer.

Step 1: Check your lock-in status and charges

• Ensure that you have passed the lock-in period before applying to surrender the policy.
• Check your current fund value and verify any discontinuance charges that might be applicable as per the policy's terms and conditions.

Step 2: Initiate surrender request

• You can initiate the process online by visiting the insurer's customer care portal, navigating to your policy and choosing the surrender option.
• You can also call the customer care service to discontinue your ULIP
• To initiate the process offline, visit the insurer’s nearest branch and request a surrender.

Step 3: Collect and fill the required form

• Obtain a ULIP surrender form and fill in the details correctly. It is important to note that your signature must match the signature in the insurer’s records.

Step 4: Submit the required documents

Submit the following documents with the form. Note that documents might vary as per your insurer.

• Original policy documents
• Identity proof
• Any proof of address
• Bank passbook or a cancelled cheque
• NEFT mandate if your bank is not registered with the insurer
• Photographs

Step 5: Follow up and receive the payout

• You will be provided with an acknowledgement slip or a reference number when you submit your documents. You will also receive an SMS or email detailing the update on your surrender within 24-48 hours.
• If your plan has completed the lock-in period, you will receive the entire fund value in your bank account within 7-15 working days.

When Should You Surrender Your ULIP Policy?

It is not recommended to surrender a ULIP plan as it is a long-term investment; however, it can be done so in the following situations:

Some of the situations where surrendering a ULIP might be considered are as follows:

• Financial emergency: If you have an urgent need for money, surrendering a ULIP may be your only option.
• Better investment opportunity: If you have a chance to invest in something with a demonstrably higher return potential, then surrendering the ULIP could be considered.

Reviving a Discontinued Policy

A surrendered policy cannot be brought back; surrender ends the contract. What can be revived is a policy that lapsed because you stopped paying.

• Time limit: The time limit to do so is 3 years.
• Payments: You pay the premiums you missed; units are then bought at the NAV applying on the revival date.

Surrender Value Vs Fund Value Vs Partial Withdrawal

While understanding surrender value, it is also essential to understand what fund value and partial withdrawals are, and to distinguish between the three for a better understanding of ULIP. The following table lists the differences between Surrender value, fund value and partial withdrawals.

Sum It Up

A ULIP is designed as a long-term investment which aims at providing an investor with life coverage as well as investment opportunities. Surrendering a ULIP within the 5-year lock-in period can be financially fatal. If you wish to surrender your ULIP, it is recommended to do so after the lock-in period is over. Ensure you read the policy terms and conditions to understand the discontinuation charges and any other terms which might hamper your final surrender value.