ULIP Lock-In Period

What Happens if You Surrender the ULIP During the Lock-in Period?

It is recommended to avoid surrendering your ULIP plan during the 5-year lock-in period. However, if you do so, it is essential to keep the following in mind.

• Change in policy status: As soon as you discontinue or surrender the ULIP, your life coverage completely ceases to exist and your policy lapses
• Discontinuation Policy Fund (DPF) process: If you surrender your ULIP during the ULIP lock-in period, the following process applies
  • Discontinuation charges are deducted from your fund
  • You do not receive any liquid funds until the 5-year lock-in period is complete; rather, your fund is transferred into a discontinued policy fund which earns a minimum guaranteed return of 4% as mandated by IRDAI. 
  • You only receive the payout once the original ULIP lock-in period is over. 
• Reversal of Tax Benefits: The final payout you receive from the DPF is treated as taxable income and taxed at your income tax slab rate. In addition to taxation, any tax deductions claimed under Section 80C of the Income Tax Act are reversed, added back to your taxable income and taxed accordingly. The final payout from the DPF is subject to TDS before it is released to you.  

Example:

Surrendering in Year 2

• Annual Premium: ₹1,00,000 / year
• Decision: You pay for Year 1, but discontinue and request a surrender in Year 2.
• Fund Value at Surrender: ₹90,000 (after Year 1 market performance)

Why Should You Not Exit ULIPs After the Lock-in Period Ends? 

• A long time period of investment allows your capital to benefit from the power of compounding and grow your investment to a considerably large corpus by the end of the policy term. 
• Most ULIP charges are concentrated in the first 5 years of the plan. These charges see a significant decline when your ULIP completes the lock-in period. Additionally, most asset management companies return charges such as the mortality charge, policy administration charge, vesting charge and premium allocation charge when the policy term ends by adding units into your fund. Note that the refund of these charges depends on the ULIP’s terms and conditions and can vary with the insurer. 
• A long-term investment also smooths any short-term market fluctuations and allows your corpus to recover from market volatility in the long run. 
• Certain insurance companies also provide loyal investors with loyalty units or wealth boosters at specified intervals of time. If you choose to exit the ULIP before the end of the policy term, you might miss out on all the loyalty additions as well. 

Key Rules for ULIP Lock-in Period

A strict framework governs the ULIP lock-in period. The key rules as per the IRDAI are 

• Every ULIP, irrespective of the insurer, has a mandatory 5-year lock-in period which starts with the commencement of your plan. 
• The 5-year lock-in period of your ULIP offers you no scope for liquidity. Any partial withdrawals or surrender during the lock-in period is strictly prohibited. 
• Note that if the policyholder dies during the lock-in period, the lock-in period does not block any payment. This means that the death benefit will be paid to the nominee. 

What Happens After 5 Years of Lock in Period?

• Partial Withdrawals: You are allowed to withdraw parts of your fund value depending on the rules set by the insurer that you choose.
• Surrender/Exit: You can exit the ULIP plan completely without paying any penalties or any surrender or discontinuation charges.
• Continue Investment: You can also choose to keep the plan active and continue earning the market and power of compounding benefits and the charges will also disappear after a certain time.

Conclusion

ULIP lock-in period is essential for your investment to grow uninterrupted over time. Discontinuation during this period ultimately puts you at a loss and provides you with no liquidity whatsoever until the original lock-in period is complete. Thus, it is recommended to adhere to the regulations of the IRDAI and sustain investments at least till the lock-in period of the ULIP is complete to avoid losses and to ensure that your investment can grow over time into a healthy corpus while your family is also financially secure for the time being.