Why You should not Surrender ULIP Plan before lock-in period?

Posted in Ulip Blogs By Bajaj Markets-Mar 28,2020
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For those seeking more than just life coverage from their life insurance policies, the Unit Linked Insurance Plans are the popular product of choice. With the flexibility and the range of investment opportunities that ULIPs provide, policyholders get a chance to simultaneously pursue wealth creation along with the benefits of insurance.

Due to their structure and unique benefits, it is recommended that individuals invest in ULIPs for a longer period of time. However, due to unforeseen circumstances or change of plans, a policyholder might consider a ULIP plan surrender somewhat earlier than planned. In such a case, it is important to consider that while ULIPs do allow for the premature surrendering of policy, it is accompanied by certain important factors and repercussions.

To provide complete context, here are a few key pointers you should take into account before making the crucial decision of a ULIP policy surrender.

The ULIP Lock-in Period

ULIP is often deemed a preferred tax saving investment of choice for many, since it combines the best parts of both insurance and investments in one go. In taxation terms, a ULIP is considered an insurance product and therefore enjoys tax benefits accordingly. Meanwhile, one is also able to enjoy the returns of the investment aspect of the ULIP plan and receive an overall substantial payout.

However, the complete ULIP benefits can be enjoyed only when the policy is allowed to continue at least past its lock-in period. The lock-in period for a ULIP is a mandated amount of time which lasts for a total of 5 years from the date of purchase of the policy. During this time, if the policyholder surrenders or discontinues the policy, he is not liable to receive the stipulated payout. Only after the lock-in period has passed can the policyholder receive the necessary payouts.

Surrendering ULIP before 5 years – Repercussions

As mentioned above, it is possible to surrender one’s ULIP policy before the lock-in period of 5 years. However, not only does this result in the suspension of risk coverage for the policyholder but he will also not be able to receive his accumulated fund value on the date of ULIP surrender.

This is because if you surrender ULIP before 5 years, the fund value will be transferred to a Discontinued Policy, or DP fund. The fund amount will then remain in the DP fund until the lock-in period ends. Therefore, it is only after the end of the total stipulated 5 years that a policyholder can receive the overall value of his ULIP policy.

Another crucial point of note here is that if a policyholder surrenders ULIP before 5 years, his fund value will most likely take a major hit. This is because a Discontinuance Charge or surrender charge will be certainly levied. Moreover, the fund value will also undergo multiple deductions, including the management fees, before the final amount can be disbursed.

Surrendering a ULIP before 5 years also has certain important tax implications. If a ULIP policy is surrendered prematurely, all the tax deductions claimed against the policy will now be accounted as income. As a result, they will therefore be taxed according to your tax slab. Moreover, the fund value at surrender is also liable to be subjected to Tax Deducted at Source, or TDS.

Hence, if your gross income amounts to Rs 9 lakhs and your ULIP surrender value amounts to Rs. 2 lakhs, your total income for the year will amount to Rs. 11 lakhs. You will therefore be taxed under the appropriate slab rate of 20% (10 lakhs-12.5 lakhs).

Surrendering ULIP after 5 years – Should You Still Do It?

The challenges mentioned above can be surpassed if you wait to surrender your ULIP policy till the lock-in period, that is 5 years, have passed. At this point, you will be able to receive your surrender value without wait, and there will be no discontinuance or exit charges levied on the same.

To compare, it is also important to consider the taxability of ULIP on surrender after 5 years. This is because after the lock-in period, your ULIP value can be exempt from taxation and you can avail the appropriate tax benefits. Going by the previous example, let us assume your gross salary is Rs. 9 lakhs and your surrender value after the lock-in period ends is 3 lakhs. Your total income will still count as Rs. 9 lakhs and you will be taxed under the slab rate of 15% (7.5 lakhs-10 lakhs). Therefore, there will be no tax on ULIP after 5 years.

Having said that, it is important to remember that ULIP plans serve best when they are availed for a long term investment. Deductions with ULIPs are typically higher in the beginning and get lower over time. Therefore, the benefits of ULIP are best reaped when the policy extends for periods of about 15-20 years since its associated charges are then spread out across the long tenure of the policy. Moreover, due to the investment component involved, it is best to wait long-term to truly reap the benefits of market regularization.


Now that you have a clear perspective on the overall process and taxability of ULIP on surrender, all that remains is to avail a ULIP plan that is truly worth its value. To that end, look no further than the ULIPs available on Bajaj Markets. With the ULIP plans on Bajaj Markets, you can enjoy ample insurance coverage and focus on wealth creation. Moreover, on Bajaj Markets also allow you to choose from specific plans that can help you meet your financial goals – be it a retirement plan, child plan or investment plan.

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