What Happens If You Stop Paying ULIP Premiums Before 3 Years?

Continuing a ULIP may help policyholders maintain their investment plan and life cover, subject to policy terms. However, three years is not the end of the statutory lock-in period.

• Maintaining life cover: Paying eligible premiums will help keep the insurance benefits active in a policy that is subject to terms and conditions.

• Allowing investments to grow: The funds have enough time to recover from their dips and rise in the market, regardless of the amount.

• Saves you from discontinuance charges: Discontinuing a policy during its initial years can incur certain charges that, in turn, lower the amount of the fund.

• Helps you save toward your financial goals: The policy helps you save and invest in a particular fund regularly while ensuring that the premium is affordable.

• Keeps options open: A policy allows a policyholder to switch funds and utilise other options, as per the policy terms. Such opportunities are lost when a person discontinues the policy.

A person should not continue to pay premiums to keep a policy in force to avoid discontinuance charges if their needs have changed, and they no longer require the cover. In such a scenario, a person needs to compare the benefits and other options available to them to make an informed decision.

ULIP discontinuance charges are deductions that may apply when a policy is discontinued during the lock-in period. IRDAI regulations cap these charges according to the policy year and premium category. The insurer cannot exceed the prescribed limits.

The following table outlines the maximum charges under the 2019 regulations for regular-premium policies.

These figures represent maximum permitted charges, not automatic deductions at the stated rates. The actual amount depends on the relevant premium and fund value. Single-premium policies have separate limits.

During the ULIP lock-in period, the insurer transfers the fund value after applicable charges to the discontinued policy fund. Policyholders should request a written calculation before deciding to discontinue the policy.

Stopping premiums can affect the tax benefits associated with a ULIP. The result depends on the policy's issue date, the amount of the premiums paid, applicable exemption conditions, and the reason for receiving the proceeds.

• Section 80C deductions: Termination of the contract before the end of the five-year contribution period may be subject to reversal of the previously claimed deduction under applicable provisions.

• Section 10(10D) exemption: The taxation of the proceeds depends on meeting the specified conditions, according to which the exemption applies. In particular, it is not automatically exempt from tax.

• Policy-specific provisions: The limitations on premium payments, the issue date of the contract and other terms stipulated by the law may have an impact on the exemption’s application

A ULIP premium revival may help restore an eligible policy and its associated benefits. According to the 2019 regulations, the general rule for policyholders is that they have three years from the first unpaid premium to revive a lapsed policy during the lock-in period. The insurer should confirm the conditions.

Step 1: Contact the insurer

The policyholder should check the status of the policy, the first unpaid premium date, and the last date for revival.

Step 2: Check the outstanding premiums

The policyholder should request a statement of unpaid premiums and applicable charges. During revival within the lock-in period, outstanding premiums must be collected without interest or fees under the 2019 regulations.

Step 3: Submit the revival request

The policyholder should complete the insurer's revival application and provide the required documents. Additional declarations or medical information may be necessary under the policy terms.

Step 4: Pay the outstanding premiums

Once the insurance company has informed the policyholder of the amount due, the latter should make the payment through an authorised mode of transaction and keep the receipt.

Step 5: Obtain confirmation of revival

The policyholder should get a confirmation note that the policy has been revived and check if life cover and other benefits have been restored.

Prior to terminating a ULIP, it is possible for the policyholder to explore other options which may resolve their financial issues.

• Review of the home budget: Cutting back on discretionary spending may free up funds.

• Check the grace period: In case the premium is temporarily postponed, the policyholder should find out how much time remains before termination.

• Review the allocation of funds: The policyholder could look into the permitted switching options if investment performance is not as per the expectations. Market risk is not a factor for switching choices.

• Enquire about the available policies: If any of the permitted changes could make the insurance easier to handle, the insurer can explain.

• Compare costs of continuing: The advantages, costs and other financial priorities of the policy might assist in guiding the choice.

The appropriate choice depends on personal circumstances. Prior to acting, the policyholder must check the current fund value, applicable charges, and the due impact of policy discontinuance.

It is always highly recommended that you invest in a ULIP policy for the long term. When you invest in the ULIP plan for the long term, you can benefit in the following ways:

1. The investment made in financial securities may significantly appreciate in the long term.

2. You can choose the fund option and switch between the options during the policy term in a ULIP plan and customise it based on your requirements.

3. The premium paid and the applicable maturity benefits will qualify for the tax deduction and tax exemption benefits under Section 80C and Section 10(10D) of the Income Tax Act, 1961. 

Therefore, for any reason, if you decide to refrain from paying the premium for the long-term investment plans, such as the ULIP policy, within 3 years, you will lose the applicable benefits. You will still be invested with the applicable charges and not receive the funds until the revival period or the lock-in period, whichever is applicable. 

Tata AIA Life Insurance Plans provide a wide range of customisable plan options that help you compare, choose, and customise the policy based on your specific need. 

You can utilise our Tata AIA ULIP Calculator to make a well-informed decision and buy the best ULIP plan as per your specific requirements.

The ULIP plans have a lock-in period of 5 years. If you stop paying the premiums within the first three years, the fund value will be credited to a discontinued policy fund. However, a revival period of 3 years will be provided to the investor, but the fund management charges will remain applicable during this period. Based on your decision during the revival period, the policy will either be terminated or revived, while the proceeds will be paid when the revival period or the lock-in period ends as applicable. Therefore, staying invested in the ULIP policy long term is essential to ascertain maximum benefits based on the investment.