ULIPs are financial products that have a mandatory 5 year lock in period mandated by the IRDAI. During this timeframe, policyholders are not allowed to withdraw funds or fully surrender the policy. This setup is designed to encourage long-term wealth creation and build financial discipline while also allowing your investments to grow. It also protects your money from short-term market fluctuations while maintaining the life insurance coverage.
Disclaimer : ˜The insurers/plans mentioned are arranged in order of highest to lowest first year premium (sum of individual single premium and individual non-single premium) offered by Policybazaar’s insurer partners offering life insurance investment plans on our platform, as per ‘first year premium of life insurers as at 31.03.2025 report’ published by IRDAI. Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. For complete list of insurers in India refer to the IRDAI website www.irdai.gov.in
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)
Timeline
Action
Financial Movement
Year 2 (Surrender Day)
Policy terminated
Fund value is ₹90,000.
Year 2 (Deduction)
Discontinuance Charge
₹3,000 charge deducted (capped by IRDAI). Net amount moved to DP Fund = ₹87,000.
Years 2 to 5
Lock-in Period
₹87,000 earns minimum 4% p.a. interest inside the DP Fund. Risk cover is zero.
End of Year 5
Final Pay Out
Accumulated corpus (₹98,000) is transferred to your bank account.
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.
What happens if I stop paying ULIP premiums during the lock-in period?
If you stop paying premiums during the ULIP lock-in period, your policy is treated as discontinued, and the fund value is moved into the discontinued policy fund. You will have no access to the fund for the remaining years until the lock-in period is complete. However, some insurers allow you to revive a discontinued policy within 3 years of the last premium paid. Note that this is only applicable for a discontinued policy and not a surrendered policy.
Does ULIP lock-in apply to every premium paid?
No, the lock-in period does not apply to every premium paid but rather starts with the commencement of the plan when you pay the first premium.
How does the ULIP lock-in period differ from the policy term?
The ULIP lock-in period is the 5-year period during which you cannot withdraw your money or surrender your plan for immediate payout. The policy term refers to the duration during which the policy remains active and matures when the policy term ends. While the lock-in period of a ULIP is predetermined, the policy term is decided by the policyholder as per the guidelines of the insurer.
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˜The insurers/plans mentioned are arranged in order of highest to lowest first year premium (sum of individual single premium and individual non-single premium) offered by Policybazaar’s insurer partners offering life insurance investment plans on our platform, as per ‘first year premium of life insurers as at 31.03.2025 report’ published by IRDAI. Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. For complete list of insurers in India refer to the IRDAI website www.irdai.gov.in *All savings are provided by the insurer as per the IRDAI approved insurance
plan.
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
+Returns Since Inception of LIC Growth Fund
¶Long-term capital gains (LTCG) tax (12.5%) is exempted on annual premiums up to 2.5 lacs. ++Source - Google Review Rating available on:- http://bit.ly/3J20bXZ
^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.
