Unit-linked insurance plans, commonly known as ULIPs, are distinct financial tools that provide investors with three key advantages. These plans not only offer life insurance coverage but also provide a platform for building a significant savings pool while benefiting from tax deductions. Investors can deduct the premiums they pay under section 80C and the income they make from these plans under section 10(10D).
ULIPs are meant to be treated as long-term investments with a lock-in period of 5 years. However, you might want to surrender the policy before maturity or even during the lock-in period. You may choose to surrender a ULIP for one of two reasons. Firstly, you may require funds immediately, so surrendering the plan will be inevitable. Alternatively, you may believe that the plan is not delivering appropriate returns and may wish to surrender it.
Thus, it’s crucial to discern which plans are advantageous and which ones might not be favorable. One effective method to determine the worth of ULIPs is by examining their associated costs. Let’s delve deeper.
What Makes a ULIP Plan Worthwhile?
Different Unit linked insurance plans come with various charges, and these fees differ from one plan to another. If you are looking to invest, you should choose a plan after offers the best cost-benefit ratio for your financial ambitions. To illustrate, inevitable costs such as mortality charges (covering the life insurance aspect of the plan) and fund management fees (incurred for overseeing the chosen fund) are typically considered essential.
Before committing to a policy, it’s wise to assess it based on the charges that are imposed. Lower charges are preferable. Keep in mind that over the long term, the impact of these costs on the returns is minimized.
The corpus you can accumulate over the long term is sizeable, but you may still require surrendering the policy before it reaches maturity.
Exiting a ULIP Policy Before Its Maturity Date?
If you’re contemplating discontinuing your current ULIP policy, you do have the choice to terminate it. Nevertheless, the Insurance Regulatory and Development Authority (IRDA) mandates a 5-year lock-in duration for ULIPs. If you’re eager to leave before maturity, you’ll encounter two distinct scenarios:
- Wishing to terminate before the 5-year lock-in concludes.
- Opting to terminate after the 5-year lock-in.
Let’s break down these scenarios:
Terminating ULIP Policy Before the Lock-in Expires
Suppose you resolve to end your policy before completing the lock-in. In that case, the insurance company has the right to subtract a cessation charge from your accrued ULIP returns, redirecting this money to the discontinuance policy (DP) fund.
This sum will be available to you only after the lock-in duration (5 years) has concluded. During this interval, the sum continues to yield a guaranteed income, as set by IRDAI, which is currently at 4%. The only applicable charge during this period is the fund management fee related to your discontinuance policy fund.
The exact discontinuance fee will be influenced by the specific policy you possess; you can find detailed information within your policy documents. Additionally, the amount you receive post-surrender will be included in your taxable income, and any deductions you availed under section 80C will be reversed, and you will be taxed according to your applicable rate.
Now, let’s consider the alternate scenario.
Choosing to Terminate After the Lock-in Has Passed
In this scenario, you won’t be subjected to any discontinuance fees if you decide to terminate your policy after the 5-year threshold. You’ll receive an amount equivalent to your fund unit value in addition to any accrued bonuses. Importantly, the value you receive upon surrender, in this case, is exempt from tax.
Considering both options might make the decision process seem complex. Let’s assess the two scenarios to determine the most favorable choice.
Which Alternative is More Advantageous?
The decision to terminate your policy might hinge on the duration of your participation. Generally, two situations can arise:
- You’re in the initial stages of your policy, having paid for about a year.
- You’ve completed 2-3 premium payments already.
Let’s assess both situations:
- If you’re in the initial phase of your policy, having only paid for 1-2 years, the first option (ending before the lock-in) might be more suitable. In this context, you still have an opportunity to mitigate potential losses.
- If you’ve already covered 2-3 years of premiums, it might be wiser to stay with the policy until the lock-in period concludes. Here’s why:
- You’ve already made payments for over 24 months. Exiting now would yield minimal returns (around 3-4%) on this 24-month contribution, which will subsequently be taxed.
- The discontinuation fees may offset any additional returns you could gain from other investments in the residual duration.
- Any tax benefits under section 80C that you availed will be nullified.
To make a well-informed choice, it’s advised to conduct a comprehensive analysis to decide whether to wait out the lock-in period or terminate prematurely.
In Conclusion
When the objective is long-term investment, ULIPs stand out as a prime choice. They offer a dual advantage of growing your savings and ensuring financial security for your dependents. With ULIPs, maintaining your investment often reaps more benefits than early termination. Always thoroughly research all your options before making any decision regarding your investments. Understand all associated costs and projected returns before you commit to a policy. To start off, you can check out ULIPs like Wealth Secure+ by Edelweiss Tokio Life Insurance for a comprehensive addition to your financial portfolio.
