What Is ULIP?
Let us start by reviewing what is ULIP and the various benefits it can offer to an investor. ULIP is a life insurance product 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.
Drawbacks of Exiting a ULIP Midway
Cancelling a ULIP midway is not a decision to be made in haste. If you’re wondering what happens if I surrender my ULIP policy, here’s a list of the major drawbacks that you may face:
1. Missed Opportunity for Long-Term Wealth Creation
ULIPs yield better returns when you stay invested over the long term. Exiting just after or during the 5-year lock-in period will not help you maximise the benefit of compounding returns, and you might not get the optimum results of your investment. Additionally, you may not be able to enjoy the full benefits of rupee-cost averaging upon surrendering a ULIP midway.
2. Forfeiting Tax Advantages on Premiums and Returns
When you exit within the lock-in period, it affects your tax savings under Section 80C. You can no longer avail tax deductions on the premiums paid, and the maturity payout might also become taxable.
3. Risking Your Financial Security Goals
ULIP surrender charges are applicable if you surrender the policy during the lock-in period, diminishing your overall benefits. Exiting in the middle not only reduces your chance of building an optimal corpus for future goals, but also leaves your family financially vulnerable without the security of a life cover.
4. Alternatives to Cancelling Your ULIP
Instead of going for ULIP surrender, here are some options that you can choose to keep the plan active:
5. Accessing Funds Through Partial Withdrawals
Instead of completely exiting, you can make partial withdrawals after the ULIP lock-in period ends, if you need some corpus urgently. This can give you liquidity and you can avoid the need to surrender.
6. Optimise Returns with Fund Switching
If you feel that your ULIP is not giving as high returns as expected, you can switch between equity, debt, liquid or hybrid funds as per your goals, current market scenario, and risk appetite. So, instead of surrendering ULIP, you can consider fund switching to optimise your returns.
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.
1. During the 5-Year Lock-in Period
As per the Unit Linked Insurance Products, 2010 guidelines, the lock-in period for ULIPs has increased from 3 years to 5 years. During this lock-in period, no partial withdrawal is permitted. Can I surrender ULIP before 5 years - if this question comes to your mind, the answer is yes, but it has its own drawbacks. While you can surrender or cancel your ULIP before 5 years, you won’t be able to access the funds until the lock-in period is over. 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.
2. After 5-Year Lock-in Period
ULIP surrender after 5 years is not subject to surrender 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.
3. 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 for premiums up to 1.5 lakh. 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, ULIP surrender charges reduce your fund value. Along with these deductions, the taxability of ULIP on surrender within the lock-in period can further affect the final returns, making early exits financially less efficient.
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.
Conclusion
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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