The lock-in period can be the on-going tenure of every financial product. Under a Unit Linked Insurance Plan (ULIP), the lock-in period for five years. During the on-going tenure of five years, you might not be allowed to liquidate your assets from a ULIP policy.
The non-withdrawal of funds during the five years can be a concern for many. Hence, a lot of you might discontinue your ULIP policy after the lock-in period. However, discontinuance of a ULIP policy after five years might not be the right choice since it can take away many of the provided ULIP benefits. Therefore, let’s understand why you shouldn’t exit your ULIP after the lock-in period ends:
- Loss of benefits
A ULIP policy is a long-term financial product with a mix of investment and insurance. While the investment component can allow you to grow your corpus, the insurance element can safeguard your loved ones from the eventualities of life. If you stay investment in a ULIP policy for a long time, you can reap the dual-benefits at the same time. Moreover, your insurer can provide you with additional benefits when you stick to a ULIP plan until the completion of its tenure.
If you want to receive consistent flow of ULIP benefits, you should stay invested in a ULIP policy until the completion of the lock-in period. When you surrender your ULIP policy before five years, you might not qualify to protect your family members with the life cover. Since the life cover is ceased, it might be difficult to provide financial security to your family during an unfortunate event, such as death.
- Zero accumulation of funds
An investment product, such as a ULIP plan can allow you to grow your wealth. If you start investing in a ULIP policy with a small amount, the chance of building a large corpus in the future can be high. Due to compounding, you get to earn interest on your returns, which eventually impacts your invested capital. For instance, if you invest Rs. 5,000 every month, your corpus can grow to Rs. 75,000 due to the benefits of the power of compounding.
On the other hand, withdrawing your funds within a short period can lead to subdued ULIP returns as well as neutralize the benefits of power of compounding. Let’s understand the reverse impacts of compounding with the help of another example if you surrender your ULIP policy after the lock-in period. Let’s assume that your invested amount is of Rs. 1,00,000 with an applicable interest rate of 8%. While the investment can generate an annual interest of Rs. 10,884 in five years, the annual interest can double to Rs. 23,500 in the next fifteen years.
- Front loading of charges
Front loading of ULIP charges can be another reason why you should surrender your ULIP policy after five years. Under a ULIP policy, your insurer can charge you with the most common ULIP charges, such as policy administration charge, premium allocation charge, mortality charge, fund management charges, and so forth. Some of these available charges under a ULIP policy can be deducted by either cancelling the units or simply adjusting the net asset value (NAV) of the funds.
After the fifth year of the ULIP policy, these high-priced costs significantly drop down. When you discontinue a ULIP policy immediately after the completion of the lock-in period, the chances of the rapid growth of your capital can decrease. Besides, the provision of loyalty additions can also be ceased if you exit the policy after five years. When your ULIP policy matures, your insurer can provide you with loyalty additions to boost your accumulated corpus.
In a nutshell, one of the major advantage of a ULIP policy can be its long tenure. While many of you might take it negatively, you can utilise the long lock-in period to your advantage and reap the maximum benefits of a ULIP policy.