Lock-in period in ULIP plan: Aspect that is mostly missed by a policyholder

Lock-in period in ULIP plan: Aspect that is mostly missed by a policyholder

June 28, 2024

Gone are the days when financial security meant purchasing a life insurance policy to protect your family from unfortunate events. Most people are increasingly choosing life insurance options that provide both life insurance and investing opportunities. The Unit-Linked Insurance Plan (ULIP) investment comes in this category. However, before you settle for the ULIP plan, you should be aware of its minimum lock-in time before which you will not be able to withdraw your money.

What is the lock-in period in ULIP?

In any investment plan, the lock-in period refers to the time frame during which the money is locked in the fund. Simply put, the investor cannot liquidate the fund's value during this time period. The Insurance Regulatory and Development Authority of India (IRDAI) has set a five-year lock-in period for ULIP investments.

So, to liquidate or withdraw the money, one must wait five years from the date of policy issuance. These adjustments were implemented in 2010 when IRDAI modified the ULIP rules and increased the lock-in duration from three to five years.

But, what happens if you surrender the policy during the Lock-in period?

A portion of the premium paid for ULIPs is invested in the market to increase fund value. The portfolio might include either equities, debt funds, or a combination of the two. Even the best ULIP often maximise investor returns only after the lock-in period expires. As previously stated, you cannot withdraw your from your ULIP funds during the lock-in period. However, if you are experiencing financial difficulties or the ULIP policy fails to align with your objectives, you can cancel or surrender it. Here is what happens when you cancel your ULIP plans during its lock-in period:

When a policyholder decides to surrender the policy during the lock-in period and no longer can pay premiums, the insurer charges him discontinuation fees in accordance with the terms and conditions of the policy. These are the fees for cancelling the policy during its lock-in period.

After that, the fund is liquidated, and the money will be transferred to the Discontinued Policy Fund (DP Fund).

The ULIP investment is maintained for the remainder of the lock-in period at a minimum interest rate of 4%. The investor receives his money only once the five-year lock-in period expires.

After your lock-in time expires, the entire amount will be paid to your associated bank account.

Note: It turns out that leaving the policy midway not only results in losses in terms of profits or discontinuation costs, but you also do not receive your investment back immediately. Rather, you wait for the full lock-in period with your money kept at 4%, only to receive a considerably lower sum than you should have.

Benefits of continuing your ULIP investment beyond the lock-in period

Following the lock-in period, you can always surrender the policy and liquidate the fund value at any time. To get the most out of the best ULIP plans, experts recommend investing much beyond the five-year mark here the logical reasons behind doing so:

Long-term investment: ULIP investments are long-term in nature. When you use ULIP calculator, you can get to know the return value you might get. The portfolio consists of either equities or debt funds or a combination of the two. Equity is typically volatile in the short term, but it performs better over longer periods of time, such as 15-20 years.

Compounding value: While it may be intimidating to withdraw your ULIP funds as soon as your policy's lock-in period expires, it is recommended that you stay invested in order to receive the required returns which you must have estimated using ULIP calculator. Investing in ULIPs beyond the five-year lock-in period can result in significant gains. The longer the investing period, the higher the value gained.

Helps you get the recovering costs: As we all know, ULIP investments include premium and fund allocation charges, policy administration fees, and fund management fees, which often increase initially and decrease over time. As a result, returns are relatively low during the lock-in period before increasing in subsequent years. As a result, continuing the policy after the lock-in period is profitable, and the costs are easily recoverable. However, to know how much profitable it will be can be known using ULIP calculator. By using this, you will get the results that will be done with a comparative cost analysis.

ULIPs and other long-term investment insurance operate under the "purchase and forget" principle. It indicates that in order to get the most benefits, you should forget about them for a few years after investing your money in them. In other words, if you want to get the most out of your ULIP policy investment, first use ULIP calculator to compere different insurance plans, stick with it even after the lock-in term ends. Choosing the best ULIP plans available in the market can always add significant value to your portfolio and generate substantial returns. However, this is only achievable if you have enough patience!


So we are saying,

ULIPs are long-term financial products that provide policyholders with the benefits of both life insurance and investment. It is vital to remember that in order to benefit from the ULIP plan, investors must wait until the policy matures. If the ULIP is completely equity-oriented, it is crucial to wait on until the market recovers rather than exiting, so it is best to plan your investments in ULIP products over a longer time horizon to achieve your life goals.

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