The year 2010 was a turning point for ULIP as the insurance regulatory and development Authority of India introduced the new set of regulations for Unit linked Insurance Plans. A number of changes were made in order to promote ULIPs among middle-class Indians and also to make it more attractive to the consumers. One of the many changes made by IRDAI was the extension of the lock-in period of ULIPs. Earlier, the lock-in period was only of 3 years, but the new regulatory changes implemented since 1st September 2010, extended the lock-in period to 5 years. Now, the money you invest in a ULIP gets locked for the initial 5 years. No liquidity is offered during this time. However, after the lock-in period is over, you are allowed to withdraw your money anytime you want.
Those who have bought ULIP as a product for medium-term investment might plan to immediately exit after the completion of the lock-in period. The users get disappointed when the features of the product do not align with their personal goal. As people generally purchase insurance to reap long-term benefits, therefore it is not advised to exit the scheme early. We are well aware of the fact that ULIPs offer the dual benefits of insurance and investment. However, it is more famous as an investment product.
ULIPs are suitable for those who are not disciplined in terms of financial matters and it is quite difficult for them to manage their invested assets. Moreover, Ulips are the best plans for those who are planning for long-term goals. If you can find out these two conditions suitable for you, then you must go for ULIP.
ULIPs are considered one of the best tax-saving investment instruments after ELSS. But many people exit their plan right after the lock-in period is over. Let us see what happens if you want to exit before the end of the policy tenure.
Impact on Fund Values
Numerous charges in Ulips are majorly font-loaded. These charges are further amortized in the first five years of the policy. The NAV-to-NAV return for any particular Ulip fund may be about 9 % (yearly return) within the five years. However, this might not be reflected in the fund value itself. The reason for this is the other charges. The impact or effect of these charges diminishes with time, especially after the 5th year. In order to recover the cost, you require several upward cycles in the stock market.
You Receive no Loyalty Additions
Abrupt exit from ULIP right after the end of the lock-in period (5 years) is not considered a wise decision. Another point that you need to note is that a major part of the total charges is paid in the first five years. Further, when the fund value improves, exit at that point will not be justified. Moreover, if you do not stay invested till the maturity of the policy, you will get no loyalty additions, which are paid out along with the maturity benefit (fund value) at the end of the policy.
You certainly have an option to exit from the policy and take away the current fund that includes the top-ups, if you do not get satisfactory returns after the lock-in period. You can also do this in case you are in an emergency situation and you need money immediately. However, exiting just after completing the lock-in period is not allowed until you are in a dire need of funds.
Fund performance is the only uncertainty in ULIPs. There might be cases when the fund does not perform as expected. In such cases, the exit is quite costly. If you have purchased a complete equity-oriented Ulip scheme, then the returns tend to be quite low in case of any dip in the market. In such cases, it is advised to see the performance of the schemes, if the markets did well. It is advised not to exit from the scheme during its bull phase, which means when the scheme does well. You must hold on to the scheme in order to reap the revived results. You can stick to cap fund option of your ULIP.
Your Financial Goal may Remain Unfulfilled!
Make sure that you do not jeopardize your financial goal while making an exit midway of your investment. The ULIP holders are allowed to exit after the end of the lock-in period, i.e. the initial five years. And for this, the user does not have to pay any surrender penalty. However, they must go for a disciplined investing by beginning an SIP and try not to get returns from products that offer cover for risk as well as return. Moreover, you need to re-visit your financial plan in order to make sure that your investments, as well as risks, are properly aligned so as to attain your future goals.
Over to you!
Those who have already bought ULIP, they need to link it to their long-term goals and run it till maturity. The maximum effect of all the charges taken into account in a ULIP for 15 years is 2.23%. ULIPs are made for long-term goals that are at least ten years long, even it offers transparency as well as flexibility. Liquidity is also offered through partial withdrawals. So, if you want a high return from your insurance policy, buy a ULIP and make sure to stay invested for the entire policy tenure.
You may also like to read: ULIPs Are a Little Tricky But Easy to Make Good Money