A Unit-Linked Insurance Plan or ULIP is a unique hybrid policy that enables you to gain a risk cover and earn returns by investing a part of your premium. Such policies have a lock-in period of five years and no withdrawals are allowed until this period gets over. You shall receive the maturity payout at the end of the policy maturity period. So, it is common for policyholders to doubt their investment choice or come across a financial problem during this policy tenure. If you were to discontinue paying your ULIP premium, what would be the options available to you? Continue reading to find out.
What Is the Lock-In Period in ULIP?
Unit-Linked Insurance Plans have a compulsory lock-in period during which you cannot withdraw the funds or make any type of partial withdrawal. Previously, the lock-in period for ULIPs used to consist of 3 years but in 2010, the IRDAI changed the compulsory lock-in to 5 years. Hence, the policies bought after 1 September 2010 consist of a lock-in period of 5 years during which the policyholder won’t get the fund payout in case of policy lapse or surrender.
The maturity benefit is paid out once the tenure of the policy is over. You also have the option of making partial withdrawals after completing the lock-in in case of a financial emergency. But during the lock-in period, in case of a discontinued policy, you get two options. The first one is to surrender the plan and exit it and the second one is to revive the lapsed plan. So, let’s understand what happens when you stop paying your ULIP insurance premium.
In Case You Stop Paying Your Premium During the Lock-In Period
It is common to face a financial urgency where you cannot afford to pay your insurance premiums anymore, or it might so happen that the ULIP policy is no longer meeting your investment purpose. In such situations, you may consider discontinuing the policy and stopping the premium payment. Hence, you can take two routes here on. Either you exit the ULIP insurance plan without any further coverage or revive the plan in case you can pay the pending premiums and charges.
Revival of ULIP Policy
After you discontinue paying your premiums, the insurance provider shall send you a notice within 15 days after the grace period expires. Now, you can decide whether you want to revive your lapsed policy or not. After 30 days of receiving the notice, you can inform the insurer if you want to revive the plan or exit it completely. In case you choose the former, then you must pay the pending premiums and applicable fees within 2 years since discontinuance. Something you should keep in mind regarding revival is that it needs to be done before the lock-in period gets over.
Withdrawal of ULIP Policy
If you choose to exit your ULIP policy and withdraw it, then the insurance company will reimburse the fund returns after the 5-year lock-in period is completed. Thus, you shall only receive the surrender value of your policy at the time of withdrawal and not the fund value. Your investment returns will be moved to the discontinuance fund where it shall earn interest. Now, let’s understand the charges and tax applicable on withdrawing your policy before the lock-in period:
Charges applicable:
- As you have surrendered your plan before the completion of the lock-in period, a surrender charge will be levied on the payout.
- The investment fund value shall also be charged with fees such as fund management charges, annual fees, etc. You can confirm the types of ULIP charges applicable to your returns.
Taxes applicable:
- The entire surrender value payout will be treated as an income and shall be taxed as per your income tax slab.
- Due to the premature surrender of your ULIP policy, any deductions that you claimed shall be considered as part of your income
With this, you must have now learnt the implications of discontinuing your ULIP premium payment. You can easily know the available options if your policy has lapsed. Hence, it is advised to take everything into account such as the charges, loss of risk cover, loss of investment option, etc. before exiting your ULIP policy. Use an online ULIP calculator & Secure your loved ones today with a Unit-Linked Insurance Plan!
