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Lock In Period In ULIPs

Lately, a lot of people have been investing in Unit Linked Insurance Plans. It is a long-term investment instrument that offer dual benefits – benefits of life insurance coverage as well as market investments of your choice.

Here, a part of the premium amount is directed towards life coverage; whereas the remaining amount is used for investing in funds of your choice. You can either choose to invest in equity-oriented funds, debt funds, or a combination of the two. People with a high-risk appetite can invest in equity funds. If you have a low-risk appetite, then you can invest in debt funds. Also, it is noteworthy that you can switch between equity and debt whenever you want (depending on the market movement).

Apart from high returns, certain charges deducted under ULIPs are as follows –

  • Premium allocation charges

  • Mortality charges

  • Fund management charges

  • Administration charges

  • Surrender charges

  • Switching charges

Here’s an example of a ULIP investment –

Policyholder

Age: 35 years

Gender: Female

Sum Assured

INR 3 Lakh

Policy Tenure

20 Years

Annual Premium

Approx. INR 30,000

After deducting life insurance, say INR 5000, the amount left is INR 25,000 of the annual premium which is invested in a fund. Consider that the fund has NAV of INR 10, which means you will buy 2500 units of the said fund. In case the NAV increases in value over time to INR 20, then your fund value will be INR 50,000.

What Is ULIP Lock-In Period?

It is the duration within which if you (the policyholder) surrender or discontinue the plan, you will not receive the stipulated payout. Generally, the lock-in period for ULIPs is five years. After completion of the lock-in period, you will receive the necessary payout.

You Should Not Exit ULIP As Soon As the Lock-In Period Ends

Here are a few reasons why you should not exit the ULIP investment as soon as the lock-in period completes -

  1. ULIP charges are high in the initial years

The premium allocations charges are deducted before the premiums are invested. Apart from this, charges like fund allocation charges, fund management fees, and policy administration fees are deducted either through the cancellation of units or adjusting the NAV.

Generally, these deductions are done heavily during the initial years of unit linked insurance plans and reduce over time. When the lock-in period ends, and after that, these deductions come down to a point where they do not impact the fund amount.

In other words, it means that the money invested during the lock-in period is relatively low than the latter years of the policy. Likewise, terminating the plan immediately after the lock-in period ends will reap you low ULIP returns.

If you happen to terminate the investment before the lock-in period ends, you will have to pay surrender charges. However, you will receive the invested money only after the lock-in period ends.

  1. Investing in long-term ULIP will reap you benefits

Like we mentioned earlier, unit linked insurance plan is a long-term investment. Although you can exit the plan after a five-year lock-in period, it is highly advisable not to do so. If you want to benefit from your ULIP investment, you should stay invested for a long time (at least 15 to 20 years).

Depending on the market movement, if your chosen funds are not performing well, then you can make the necessary changes with an option known as a switch. In case you have invested in equity-oriented funds, then you might as well want to be invested for a long time. Equity funds reap high returns when they stay invested for a more extended period.

To Sum It Up!

In times of emergencies, instead of terminating the investment, you can make a partial withdrawal to overcome a financial crunch. Continue the ULIP plans to maturity and watch your money grow. If you want to build your wealth over time, unit linked insurance plans are the best available investment option in the market.  

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