ULIP Lock-in Period

Introduction

You may have many goals and dreams in life. But sometimes, life may throw a curveball. And you or your family may be facing an unexpected financial emergency. At such junctures, a life insurance plan offers the financial protection you and your loved ones need.

Today, life insurance plans have evolved well beyond merely providing you a life cover. They also combine other benefits like retirement planning or savings for life goals. A Unit Linked Insurance Plan (ULIP) is one such life insurance plan that offers much more than just a life cover. It also gives you the opportunity to invest in market-linked funds.

How does a Unit Linked Insurance Plan work?

When you purchase a Unit Linked Insurance Plan, you can choose to invest in equity funds, debt funds, or a mix of the two based on your risk profile. ULIPs also have a fund switching feature that allows you to switch your funds based on your changing goals and risk tolerance.

In case of your demise during the ULIP policy term, your nominee will be paid the death benefits under the ULIP. But if you survive the policy term, you will receive the fund value at maturity. This is how the insurance and investment components in ULIPs work.

In addition to the fundamental workings of a ULIP explained above, there is another important feature that you should know about. And that is the ULIP lock-in period.

What is the ULIP Lock-in Period?

A lock-in period in insurance is simply the duration over which you cannot liquidate the accumulated fund value. ULIPs have a lock-in period of five years. So, you cannot liquidate your investments or withdraw the fund value before the completion of five years from the date of policy issue.

Prior to 2010, this lock-in period in ULIPs was set at three years. But in 2010, the Insurance Regulatory and Development Authority of India (IRDAI) increased the ULIP lock-in period from three years to five years.

Why Should You Not Exit Immediately After the Lock-in Period for ULIPs?

Once the lock-in period of five years is complete, you can freely withdraw your investments from your ULIP funds as per your needs. However, this may not be the most financially sound move. There are many reasons to remain invested even after the lock-in period comes to an end. Check them out below.

• ULIP Charges Are Typically Front-Loaded

There are many charges levied for a Unit Linked Insurance Plan. Some examples include premium allocation charges, fund allocation charges, fund management fee and policy administration fees. These charges are primarily front-loaded.

What this means is that the ULIP charges tend to be higher in the initial years. So, the net returns during the initial five years may be lower on account of higher ULIP charges. However, over time, the charges tend to reduce, leading to better net returns. By remaining invested beyond the ULIP lock-in period, you can recover the initial costs.

• ULIPs are meant to be long-term investments

Unit Linked Insurance Plans invest in both equity and debt markets. Equity tends to be volatile over the short term. However, over the long term, the equity market generally performs better than many assets. So, ULIP investment is a long-term commitment - one that works best over 15 to 20 years.

By remaining invested beyond the five-year lock-in period, you can also benefit from the power of compounding. As you may well know, compounding also delivers its best results the longer you remain invested. So, it is not a good idea to withdraw your funds right after the lock-in period for ULIPs.

What Happens if you Discontinue your Policy Before the Lock-in Period for ULIPs?

Although it is not advisable, you can discontinue or surrender your Unit Linked Insurance Plan before the lock-in period ends. There may be many reasons for you to do this. You may not be able to afford the premiums, for instance.

 

In case you discontinue your policy before the lock-in period for ULIPs, here is what happens.

 

• Your insurer will levy the surrender charges or the discontinuance charges as per the terms and conditions of your ULIP.

• The money will be returned to you only after the lock-in period of 5 years is complete.

• In the meantime, the fund value is transferred to a separate fund set aside for discontinued policies, known as the DP fund.

• The money in the DP fund earns interest at the minimum rate of 4% per annum till the lock-in period ends.

• At the end of the lock-in period, the money is transferred to you.

Conclusion

As you have seen above, the lock-in period is a useful feature of ULIPs. However, it is always a good idea to remain invested over the long term in the case of ULIPs. That is how you can reap the rewards of market-linked investments.

If you are still looking for the right Unit Linked Investment Plan for your portfolio, you can head to Bajaj Markets. There are many ULIPs that you can compare and choose from, based on your individual needs. Just ensure that you keep the lock-in period for ULIPs in mind before making a purchase, and remain invested for as long as you can.