Before you think about investing in ULIPs, you would want to know about how its exit options work. This is to ensure that you do not hasten through the ULIP lock-in period and end it abruptly which might hinder you from reaping the benefits in the long run.
The chances are that you may have bought ULIP keeping in mind that you do not want to stretch it into a long term plan. This may be a very subjective decision, but it does not add significant value to your financial goals. Since this item is more inclined towards the investment side than on the protection side, this calls for an extended period of association to see it come to fruition.
The ULIP or Unit Linked Insurance Plan is a bit different from other plans in which there is both the window for investment and protection and their benefits combined. This makes it more of a hybrid one but it is structured, so you need to stick to it for not less than ten years to materialize a substantial benefit out of it.
Given such a time frame, ULIPs are best suited for those who want both investment and protection at the same time. Also, those who are not in a hurry to liquidate the value that such a plan will bring along, find it the most convenient of all insurance plans in the market. The actual significance of ULIPs becomes visible as they reach their ten year mark.
What happens if you surrender the policy within the lock-in period?
Initially, the lock-in period of ULIPs was capped at three years which later was increased to five years. It will not be the fund value that you get paid at the end of five years, the usual lock-in period if you decide to withdraw exactly at the end of the fifth year of the policy.
Even if you do surrender the policy, you can renew it in two years. However, it has to be before the date of discontinuation of its fifth year. If not, be ready to pay the discontinuance fee that will be deducted from your fund value.
After this, the balance shifts to the Discontinued Policy Fund or in short, a DP Fund. Here you may need to pay 0.5% of the fund value as a charge for fund management. That will earn you an annual interest on the amount. But you need to provide a nominal return amount whose value will be decided by the plan executives and is subject to change once in a while.
This is how it Works:
Suppose you started a ULIP with lock in period of 3 years. If you stop paying your Premiums but then your Units will be sold that time and your money will be Kept in Money Terms which you will get back after the lock in period is over . So for an example, if you take policy in Jan 2008 and Stop your premiums before 3 yrs of lock in period , you will get back the amount after 3 yrs are over, but the amount will not be as per the NAV after 3 yrs, but at the time when you stopped your ULIP payments. Note that you will get back your money only if you have paid full 1 yrs premium, If you have paid anything less than 1 yrs, then you wont get back your money if you stop it .
The current value of DP fund interest is at four percent. But this erodes the premium you paid and the consequential benefits that you could have earned. The returns obtained right after fifth policy year are visibly poor.
You ge't no additional reimbursements:
Nowadays, loyalty points and related additions are inclusive for all kinds of insurance plans, and ULIPs are no such exception. But this is not applicable if you are out right after the five year period is over. Just the current NAV based on which the fund value will be handed to you on the date of the surrender of the policy. What good would that do when you have been consistently paying your premium for five years and not watch it fetch you an additional return?
ULIPs are market influenced
How much returns a ULIP may provide relies heavily on the market turnover. This is what characterizes its long term nature. There are deductive costs linked to it such as the fund management fees, mortality charges, policy administration fees, etc. In order for someone to recover these costs payable at an early exit, it takes the market to have a consistent upscale market turnover to recuperate plus a substantial return. This is only possible if the policy stays afloat for more than five years.
The fund performance may not be up to the mark:
Low returns are a sore for individuals who want to opt out of the plan at an early stage, especially for equity oriented ULIPs. This again brings you back to the market scenario where you need to wait it out for the returns to grow more. The shortcoming of ULIP schemes that you need to be aware of is their performance.
Upon underperformance within the lock-in period, the exit could cost you heavily pertaining to the several charges mentioned above in this article. If the bull phase of the market showed growth in the ULIP schemes, you should not exit the same, wait it out till the returns revive.
But if it is still an emergency:
If you still need to leave the plan because of very pressing requirements for fund raising, there is a way to waiver the charges for surrender, but this means you need to re-schedule your financial plans and not opt for hasty insurance plans but discipline yourself in investing wisely.
Sticking to creating a portfolio for large-cap or a mid-cap mutual fund investment seems a more viable option and keeping the insurance plan separate. In short, keep investments and protections separate if your fund requirements are urgent.
Briefing it out:
As a conclusion, therefore, it is best to go for the large-cap option for funds and make ULIPs your long term goal. Unless it is absolutely necessary, give ULIPs a good ten years, and you will surely be satisfied how your premiums and additional customer benefits add up your returns. And if your goal is turnover for a medium term, ULIPs may not be your best option of investment.
Naval Goel is Founder & CEO PolicyX.com