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Choosing ULIP? Know the minimum lock-in period and its benefits

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Choosing ULIP? Know the minimum lock-in period and its benefits
August 09, 2023

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In this policy, the investment risks in the investment portfolio is borne by the policyholder

Gone are the days when financial security meant opting for a life cover, that would be protected from the aftermath of a mishap. These days, people are increasingly opting for financial instruments that are not just life insurance, but also an investment opportunity. The Unit-Linked Insurance Plan (ULIP) investment for instance falls in the same genre. But before you decide to choose the best ULIP plan, it’s important to know its minimum lock-in period, before which you can’t withdraw your money.

What is the Lock-in period in ULIP?

The lock-in period in any investment plan refers to a time frame, in which the money stays locked in the fund. Simply put, the investor can’t liquidate the fund value within this period. In the case of ULIP investment, the lock-in period is five years, as decided by the Insurance Regulatory and Development Authority of India (IRDAI).

So, to liquidate or withdraw the money, one has to wait for five years from the date of the policy issuance. These changes were made in 2010 when IRDAI changed the guidelines relating to ULIPs and extended the lock in period from three to five years.

What happens if you surrender the policy within the Lock-in period?

A part of the premium paid towards ULIP is invested in the market to generate fund value. Here the portfolio can consist of either equities or debt funds or a mix of both. Usually, even the best ULIP plans maximize the returns for the investor only after the lock-in period is over. However, if the investor is not happy with the fund’s performance, needs to get back his money, or is unable to pay premiums, he can choose to withdraw his ULIP investment midway. Here’s what happens next:

  • Once the policyholder wishes to surrender the policy within the lock-in period and stops premium payment, the insurer charges him the discontinuation fees as per the terms and conditions of the policy.
  • The fund is liquidated and the money gets moved into the Discontinued Policy Fund (DP Fund).
  • The ULIP investment is kept there for the rest of the lock-in period at a minimum interest of 4%.
  • The investor gets back his money only after the five-year lock-in period ends.

Here, it turns out that surrendering the policy midway, not only makes you incur losses in terms of higher returns foregone or payment of discontinuation fees, but you don’t get back your investment instantly either. Rather you wait for the entire lock-in period with your money stuck at 4% and finally get back an amount much less than what it should have been.

Benefits of carrying forward your ULIP investment beyond the lock-in period

Post the lock-in period, you can always surrender the policy and liquidate your fund value at any point in time. But to reap the most from the best ULIP plans, experts advise carrying forward the investment way beyond the five-year mark. The reasons are quite logical.

Long-term investment:
ULIP investment is long-term in nature. The portfolio here is either made of equity or debt funds or a combination of the two. Usually volatile in the short term, equity performs better over a longer span like 15-20 years.

Compounding value: 
Keeping your money in the ULIP investment beyond the five-year lock-in phase, makes you gain through compounding as well. The longer the tenure of investment, the higher the value thus generated.

Recovering costs: 
ULIP investment comes with a series of charges like the premium allocation and fund allocation charges, policy administration fees and fund management fees which are usually higher in the starting years and reduce over time. Thus, returns are relatively lower in the lock-in period and get better in the later years. Therefore, continuing the policy beyond the lock-in period is profitable and you can easily recover the costs incurred.

Choosing the best ULIP plans available in the market can thus always add great value to your portfolio and earn you handsome returns. But this is possible only if you are patient enough!

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ARN - ED/07/23/3242 

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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