A unit linked insurance policy (ULIP) is a unique plan that comes with the benefit of both investment and insurance policies in a single plan. ULIPs have gained the attention of many investors as the maturity proceedings from this plan are exempt from the capital gains tax, unlike other equity products such as equity mutual funds and ELSS.
To explain in short about the working structure of ULIPs, the policyholder has to make an investment of certain amount in the ULIP after which a part of the payment goes to the investment in shares or bonds and the remaining amount is used as premiums towards the insurance plan. As a bonus, ULIP plans offer the benefit of switching the investment options between equity and debt based on your risk appetite.
Typically, ULIPs come with the lock-in period of five years, during which the policyholder can neither receive any payouts nor can he/she make any partial withdrawal. Withdrawal of money from a ULIP plan is only allowed on the completion of the lock-in period, and the maturity proceedings are paid off at the end of the maturity period.
What is the concept of the lock-in period in ULIP?
As we discussed, the lock-in period of a ULIP is a term for which the policyholder can neither receive any returns nor withdraw the amount. This lock-in period was initially three years, which was later changed to five years by the Insurance Regulatory and Development Authority of India (IRDAI) in 2010. Although one cannot withdraw money from a ULIP during this term, the option of surrendering the funds prior to hitting this mark is open. If one does so, the insurance cover will cease to exist, and the policyholder will receive the amount after 5 years.
But what happens when you stop paying the ULIP premiums before the end of the lock-in period?
Due to any such reason, if you choose to stop the payment of premiums towards ULIP before 3 to 5 years, that is the usual lock-in period, then you are given two options by the policy lender. The first option is to revive the policy, and the second is withdrawal from the plan without life insurance cover. Let’s study the consequences of both options.
- No penalty – There is no penalty for early withdrawal of funds in a ULIP in case you discontinue paying the premiums. However, you are not allowed to withdraw money before the completion of the lock-in period.
- Loss of invested capital – If you discontinue paying premiums towards the ULIP, then you may lose the entire invested capital.
- Notice for revival – As you discontinue the payment of premiums of a ULIP, you will have to serve a notice period of 15 days after the expiry of the grace period of the policy. This period is an option to revive the policy.
- Final payout – If you choose to discontinue the policy even after the grace period, then you will receive the final amount after the lock-in period.
- Tax treatment – The surrender value along with tax deduction claimed on ULIP will be counted under total income.