From exotic wines to building a great body to your mom’s delicious biryani. All good things take time.
If chosen well, A ULIP promises you the world - a remarkable blend of high quality fund management, financial security and tax benefits, but of course like all good things, it comes with a few important terms that you must be aware of before you get all excited and jump in. One such condition is the lock-in period.
What Is ULIP Lockin Period?
It is the duration or the time frame in which you cannot withdraw the fund value that has been accumulated.
Unit-linked insurance plans have a lock-in period of 5 years. In simpler terms, you cannot liquidate or withdraw the fund value before the completion of five years - from the date of the policy issuance.
Why Is A Lock-in Period Important?
1. Equity Investments Work Best When You Stay Invested In The Long Run
Investment gurus around the world have consistently linked good returns in the stock market with patience aka the holding capacity of the investor.
The idea of the lock in period is to hold the funds for a certain period of time, thus giving adequate time to the fund manager to strategically invest in the long term without worrying about adhoc withdrawals all the time.
2. ULIP Charges Are High In The Initial Years
A ULIP plan comes with many charges -
Premium allocation charges | Deducted before the investment of premiums |
Mortality charges | Levied for insurance protection upon death, depends on the ‘sum at risk’ |
Fund management fees | Levied for managing your funds |
Policy administration fees | Deducted towards administrative expenses and maintenance of the policy. |
ULIP charges tend to be higher in the initial period, thereby lowering the net returns during the first five years. However, by the end of the lock in period and thereon (if you hold on to the policy), these charges start reducing, leading to better returns.
Therefore, if withdrawal would have been possible earlier than the lock-in, you would have to bear all the top-ended charges and reap only suboptimal benefits. On the other hand, if you hold, and stay invested beyond the five-year period, you end up spreading the initial high expenses over a larger period of time, thus recovering the initial costs and generating better returns.
What Happens If You Discontinue A ULIP Before The Lock-in Period?
Sometimes, you might face financial distress that makes you unable to pay the premium. Or you might feel that a ULIP doesn’t serve your specific financial goals. In such cases, you would want to discontinue your current policy and look for something better.
Whatever the reason may be, if you withdraw before the lock-in period ends, here’s what happens -
- The insurance company will levy the surrender or discontinuance charges as mentioned in the terms and conditions of your ULIP. - Charges are not levied if the policy is surrendered after the lock-in period.
- Your fund value after deducting the surrender or discontinuance charges is transferred to a separate fund kept aside for discontinued policies, called - the Discontinued Policy Fund.
- This money will be returned only after the lock-in period of 5 years is complete.
- The money in the Discontinued Policy Fund earns an interest of 4% per annum, at the minimum rate, till the lock-in period ends.
- On the other hand, if you surrender the policy after the lock-in period, you will be paid the fund value at the net asset value (NAV) of your original fund - applied at that point in time. This means much better returns.
- In the unfortunate event of death during the lock-in period, the Discontinued Policy Fund amount is given to your nominee.
The ULIP lock-in period allows the growth of your wealth in a substantial manner over a prolonged period. These 5 years allow you to keep control over the funds into which your premiums are being invested. Remember, if you are unhappy with your plan’s performance, you can always make tweaks and switch funds. To reap the most benefits, plan your finances to avoid withdrawal before or immediately after the lock-in period. Hold on a little longer, things always get better.
Now, another thing you need to be aware of before investing in a ULIP is the various charges, i.e., fees that are associated with it. Go to our next article to know more!