Saving in ULIP insurance must always be a far-headed goal. Any investment made for market-linked returns should be for the longer term. The changes in the investment fund value due to any market volatility situation will get corrected during the longer investment period. Therefore, the fund value will increase and help in wealth creation based on your type of fund option. However, if you choose to surrender your ULIP plan, you will lose out on a certain fund based on the discontinuation charges. Here is a detail about that for your reference.
Before we get started, let us understand what ULIP life insurance means.
What is a ULIP Policy?
A ULIP policy is a comprehensive life insurance plan that provides dual benefits, life cover and market-linked returns. The life cover will provide the death benefit to your family in the event of your unexpected death. And the insurer will provide the market-linked returns at the end of the policy term. Thus, the ULIP policy safeguards your family's financial future while increasing your wealth during the long-term investment.
You can choose the ULIP funds for investment based on your risk appetite, whether equity, debt or hybrid funds. The Net Asset Value(NAV) of the fund will be based on the extent of your investment and the market conditions. There are various charges associated with managing your ULIP investment, such as mortality charges, fund management charges, premium allocation charges, etc. Furthermore, if you have wanted to know how to withdraw the ULIP policy, you can do so after the 5-year lock-in period.
Surrendering ULIP Policy
For any definite reason, if you have decided to surrender your ULIP life insurance investment, you need to understand the financial implications.
Let us consider two scenarios.
- Surrendering before ULIP plans lock-in period
- You can surrender the policy before the ULIP lock-in period. The life cover will cease to exist once you surrender the policy. However, the surrender value based on the investment is paid only after the lock-in period of five years.
- The surrender value of the ULIP policy is not based on the fund value as on the surrender date. Instead, it is calculated after deducting certain applicable discontinuation charges.
- The surrender value of the ULIP policy will depend on the individual insurer's policy conditions. It will be based on the ratio of ULIP insurance and investment, mortality charges, fund management charges, etc.
- The investment fund value post deducting the discontinuation charges is transferred to a separate fund referred to as the Discontinued Policy(DP) fund.
- The fund will remain the DP fund until the ULIP reaches the lock-in period.
- A minimum fund management charge not exceeding 0.5% of the fund value applies to the DP fund.
- The DP will earn an interest of 4% per annum until paid for the ULIP after the lock-in period. The interest rate is subject to change based on the IRDAI regulations.
- One other important aspect to note is the taxability* of ULIP on surrender. When you surrender a ULIP policy before the lock-in period, all the tax* deductions you had claimed earlier will be accounted for as income and become applicable for the tax* calculation based on the income tax* slab. Moreover, the surrender value will be subject to the TDS(Tax* Deducted At Source).
- Surrendering ULIP plans after the lock-in period
- The exit charges for ULIP policies are nil post the five-year lock-in period.
- The charges associated with the ULIP life insurance, such as the mortality charges, policy administration charges, fund management charges, etc., are more during the initial period and further managed by the market value earned. Therefore, it is important to consider ULIP as a long-term investment and stay invested for a longer term, such as 10 to 15 years, to increase the investment fund value.
- The ULIP policy allows switching between the fund options during economic downturns. Therefore, if you have invested in an equity fund and want to change it to a debt fund, considering the risk associated with market volatility, you can always choose to do so.
- As the ULIP policy allows you to choose the type of investment, consider your financial status and future financial commitments to decide on the risk appetite and invest in it accordingly. Our Tata AIA Life insurance offers 11 fund options for the different categories of investors. You can take the help of expert fund managers to decide on the right investment choice and manage it further.
- Purchase the online ULIP plan to keep monitoring the fund value and make the necessary changes as required timely to safeguard your investment fund value.
- Have an emergency fund that is liquid to manage temporary financial difficulties and avoid withdrawing your ULIP investment fund.
Tips On ULIP Investment
If you have decided to surrender your ULIP policy due to underperforming investment fund values, you can consider these tips to stay invested.
Reviving Surrendered ULIP policy
Insurance providers offer the option to revive your ULIP policy if you have surrendered it before the lock-in period. The maximum time allowed is within two years of surrendering it. In such cases, the ULIP policy will continue to provide market-linked returns. Also, the deducted discontinuation charges will be added back to your investment fund, and the unpaid premiums will be deducted to start the investment