A Unit-Linked Insurance Plan [ULIP] is an investment product that offers an insurance cover and an investment opportunity. You can ensure that your wealth grows while being insured for your life. A certain amount from your policy will be invested in funds and the balance will provide a life insurance cover for you. Depending on the movement of the market, the value of your plan will vary. You can choose from various plans as per your investment purpose and financial goals. ULIP has a tax advantage and comes with a minimum lock-in period of five years. This means that you cannot opt out of this policy during the minimum lock-in period. Even partial withdrawals are not allowed. If you want to discontinue from the plan, you will have to face the consequences.
Now, if you decide to discontinue the plan and stop paying premiums so that your policy ends, or if you make a decision to surrender the policy, you will not receive the returns on investment. When this happens, the policy will move into a discontinuance fund and it will remain there until the end of your lock-in period. You need to understand how the discontinuance fund functions before you make a decision to discontinue the plan.
What is a discontinuance fund?
In case of a regular policy, you make the payment of premiums during the policy term. Hence, you will have to pay premiums on time and ensure that these payments are done throughout the entire policy tenure. In this case, you might get a 30-day grace period in case you miss a payment. You can make your payment within these 30 days to avoid any penalty or a lapse of your policy.
The insurance company will inform you about the same through a letter within a period of 15 days, by mentioning about the 30 day-window, so that you can continue the policy. Even during the grace period, the policy will remain active. By the end of the grace period, your policy will move into a discontinuance fund, as you have not paid the premium during the lock-in period. However, your money will not sit idle in the fund; you will receive a minimum 4% interest rate on the same.
What are discontinuance charges?
If you decide to exit from the policy, you will have to face the exit penalty. Hence, before you make a decision to move your money into the discontinuance fund, there will be ULIP charges associated with the same. There will be an exit penalty in this case. However, there is a limit on the different types of penalties. If yours is a regular premium policy and the premium amount is below INR 25,000, amount of discontinuance penalty will be 20% of the amount of premium or the value of the fund. However, this amount is subject to a cap of INR 3,000. In case the premium exceeds INR 25,000, then the charge is 6% of fund value or annual premium, which has a maximum cap of INR 6,000.
Depending on when you exit the policy, the charge will vary. In case you exit at the end of the second year, the charge will be slightly lower. If you surrender at the end of the fourth year, it will be the lowest. Hence, the charge for exiting the policy in the first year will be the maximum. If you exit in the fourth year, the charge will be 5% of the value of the fund or annual premium, which has a cap of INR 1,000 for policies where the annual premium is less than INR 25,000. In case the amount of annual premium is more than INR 25,000, the charge will be 2% of the annual premium or fund value, with a maximum cap of INR 2,000. In case you decide to exit the fund in the last year, you face no penalty charges.
Apart from this charge, the money parked in this fund will pay another charge known as the fund management charge. There is a cap on the same. It is 0.50% at present. Now that the policy has lapsed, there will be no cost associated with insurance; however, the insurance company will have to provide a two-year window in order to restart your ULIP policy. If by any chance, you decide to revive the policy, the discontinuance charge will be added back but your fund management charge will not be reversed. Lastly, when you revive the policy, you will be required to make payment of the revival charges on the same.
Consider the charges before discontinuing the policy
If you are not happy with the ULIP returns and are willing to surrender the policy in order to discontinue the same, you need to consider the charges associated. At times, the charges can be quite high and will bring down any returns generated over the tenure of the policy. The exit or penalty charges need to be understood well in advance before you sign up for the policy.
You also need to understand ULIP NAV before you make the decision. NAV is the ‘net asset value’ of the plan, which will change according to the changes in the market. Hence, if the market is at a high, the NAV will be high. It is advisable to consider the NAV and the portfolio value before moving into the discontinuance fund. You will still earn a minimum 4% return on the same but you need to have an in-depth knowledge of the penalties and charges when making a decision to surrender the policy.