Know Everything about Lock-in Periods for ULIPs

A Unit Linked Insurance Plan or a ULIP plan is amongst the most favoured long-term financial investments for wealth creation. ULIP insurance comes with an enticing financial proposition: dual benefit of insurance paired with investment. Additionally, the tax-saving benefits of investing in a ULIP policy have further advanced its popularity.

With the ease brought by the internet, investors can search for the best ULIP plans online by comparing different policies. They can also make use of the free ULIP calculator to determine the premium amount and the expected returns before making a purchase decision.

However, the first step is to understand the concept of ULIP and what comes under its purview.

What is a ULIP Plan?     

A ULIP plan combines the benefits of wealth creation and life insurance under a single financial product. The idea behind ULIP is to build long-term wealth for the investor.

Contrary to popular belief, the concept of ULIP is easy to understand. When an individual decides to invest in a ULIP policy, they are expected to pay a specified premium amount. Using a ULIP calculator, investors can analyse the expected returns based on their premium.  A part of the premium goes towards providing ULIP insurance, whereas the other is invested in ULIP funds.

The funds can be chosen to align with your goals which could range from planning for your retirement, saving for your child’s education, or for building your house. Your funds can be invested in equity, or debt, or a combination of both.

There are different types of ULIP funds to choose from:

·         Equity: Equity funds are for high-risk and high-return investment as the premium is invested in equity-oriented assets such as company stocks. 

·         Debt: Ideal for low-risk appetite, the premium here is invested in debt and market instruments, government securities, and bonds. Although safe, this is a low-return investment. 

·         Combination: Here, the funds are invested in a combination of equity and debt funds, and it is meant for individuals with a medium-risk profile.

In the initial years of your investments, you can invest in equity funds to help you gain higher returns. After your financial goals have been achieved, you can shift your funds to debt or combination for greater security in the later years of your investment.

The flexibility is one of the most helpful features of ULIPs as it is sensitive to the financial needs of the investor. As ULIP investment is meant to achieve long-term financial goals, it comes in with a lock-in period of five years.

Lock-In Period for ULIPs 

In 2010, the Insurance Regulatory and Development Authority of India (IRDAI) increased the lock-in period for the ULIP plan from the formerly approved three years to the current requirement of five years.

During this five-year lock-in period, the investor can neither withdraw nor liquidate their accumulated fund value. However, the benefits from even the best ULIP plans can only be reaped if you hold it for the duration of the policy, which is usually 10 to 15 years.

·         Withdrawal Options: Most ULIPs don’t permit withdrawal until the conclusion of the lock-in period. In case of emergency, a ULIP policy permits partial withdrawal after the lock-in period of five years ends. The conditions for partial withdrawal differ between insurance providers.

Some plans allow unlimited withdrawals after the lock-in period, whereas some others allow monthly withdrawal of a specific amount. Certain insurance providers even allow withdrawals after three years. The withdrawal conditions depend on the plan chosen.

·         Policy Discontinuance Before Lock-in Period Ends: An investor might decide to discontinue their ULIP plan either because they are unhappy with the investment or because they are unable to make a timely premium payment. If the investor wishes to surrender the policy before the conclusion of the lock-in period, their fund value is transferred under the discontinued policy. The investor is also expected to pay the surrender charges for discontinuing their ULIP plan. The proceeds are returned to the policyholder only after the five-year lock-in period is over.

Until then, the accumulated funds gain a 4% interest; however, this interest rate is subject to change based on the regulator’s policies. In the unfortunate event of the death of the policyholder during this time, the proceeds are payable to the nominee.

If the policy is discontinued after the lock-in period, the policyholder will have paid the fund value (Net Asset Value) existing during that time, and in such cases, the discontinuation charges may not apply.

A discontinued ULIP can be revived within two years of surrender. To revive a discontinued policy, the investor is expected to clear all premium dues, and any applicable charges levied. After the conclusion of two years, the policy is deemed terminated. 

Benefits of the ULIP Lock-In Period 

ULIPs are recommended for long-term investments, as they empower attainment of your financial aspirations better. Here are the reasons why the lock-in period is a blessing in disguise:

·         It instils the discipline of saving. Every long-term financial goal can be attained with monetary discipline. It encourages the habit of setting aside a specified amount monthly instead of spending it. Without the lock-in period, the rising expenses might keep you from saving adequately.

·         ULIP charges are high in the initial years, encouraging the investors to stay during the term to reap the benefits offered by the best ULIP plans. These charges are lower in the long run.

Edelweiss Tokio Life Insurance offers a range of Unit Linked Insurance Plans to cater to your specific financial needs and risk profile. Edelweiss ULIP is a saving-cum-investment plan that is designed to create a stress-free financial future. It comes with insurance covers until the age of 100 and several booster additions that enhance your savings for better returns.

To conclude 

ULIPs are meant for long-term investment, and so even the best ULIP plans’ returns come after the fund reaches maturity. You can use the ULIP calculator to determine the expected returns, basis the premium payable. When you continue with the ULIP policy, you can watch your money steadily grow. Instead of surrendering the policy in case of emergencies, you can make a partial withdrawal to overcome the financial crunch.   

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