Planning to exit ULIP before completing the entire tenure? Read this post to know why this is not recommended and why one should remain invested in ULIP plans throughout the full tenure.
ULIP is a hybrid product that combines life insurance with investment. ULIP investments are eligible for a tax deduction of up to Rs. 1.5 lakhs under Section 80C. The plans are available for a tenure ranging from 15 to 20 years. They have a lock-in period of 5 years, after which you are not required to pay any surrender charges for exiting the plan.
But while you might save on the surrender charges by exiting after lock-in, you will still end up losing a lot of benefits. Here are some of the reasons why should remain invested in ULIP for the full tenure-
Exiting Before Lock-in Period of 5 Years
- High Additional Charges
ULIPs have several additional charges, like fund allocation charges, fund management fees, and policy administration charges. The insurer automatically deducts these charges from the premium or by cancelling some of your ULIP units. Some insurers also adjust the NAV to make up for these charges.
These are front-loaded charges that are paid in the first few years of your purchase, mostly within the lock-in period. By exiting the ULIP within the lock-in period, all of these charges could severely impact your invested amount.
- Withdrawal Only Processed After Completion of Lock-in
You should also know that even if you decide to exit the ULIP before lock-in, you will only receive the amount you have invested through premiums along with the returns generated within this period after completion of the lock-in period.
So, no matter if you exit the ULIP in the 1st year or the 3rd year, you will only receive your money after 5 years from the date of purchasing the policy. Note that exiting before the lock-in period will also require you to pay surrender charges, which could be as high as 25% of the annual premium.
Exiting After Lock-in But Before the Full Tenure
- Lower Returns
While ULIPs are primarily life insurance products, they are often perceived as an investment product ideal for long-term wealth creation. If you too have invested in ULIP for achieving long-term financial goals, the returns can be lower than expected if you exit the policy before the full tenure.
While the additional charges are negligible after the lock-in period of 5 years and there are no surrender charges, exiting after lock-in but before the full tenure is not a financially wise decision.
- Impact on Long-Term Financial Goals
Just like SIP in mutual funds and investments in pension plans, ULIPs, too are an excellent choice for long-term financial goals. The goals could range from retirement planning, repaying home loan, or financial security of your child.
But by exiting the ULIP before completing the full investment tenure, such goals could remain unachieved. Not to forget the fact that by exiting ULIP, you will also lose the life cover and risk the financial safety of your family.
Reap the Benefits of ULIP By Remaining Invested for the Full Tenure
As can be seen above, exiting a ULIP before the tenure could have serious financial consequences. You will be required to bear the burden of additional charges if you exit in the initial years or compromise your long-term goals by exiting after lock-in.
Do consider all of these points if you are planning to exit your ULIP so that you can make a wise and informed decision.