What Happens If You Stop Your Ulip Premiums Before 3 Years

What Happens If You Stop Your ULIP Premiums Before 3 Years?

ULIPs are an integral way of building long-term investments while having generous tax deductions the entire time. Learn about why to invest in ULIPs.

Written by : Knowledge Center

Reviewed by : Jasmeet Bedi

Jasmeet Bedi

2022-11-25

918 Views

7 minutes read

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ULIP, short for Unit-Linked Insurance Plan, is a unique financial product that offers both insurance and investment under a single plan. If you want to stay invested for a long period of time, ULIP plans provide the dual benefits of protection in the form of insurance and investment for long-term capital gains.

Here’s how investment in ULIPs works: you make an investment in a ULIP, and a part of the amount paid goes towards the investment in shares/bonds, and the rest of the amount is utilised as a premium towards an insurance cover. A ULIP plan provides you with the flexibility to switch your investment portfolio across equity and debt based on your risk appetite, so that is a bonus!

Also Read - What is ULIP?

Table Of Content:

The Concept of a Lock-in Period

A lot of investors wonder, “When can I cancel my ULIP plan?” The answer to that is in understanding the term, ‘lock-in period’. A lock-in period is a tenure for which you cannot get out of the ULIP investment. This means you cannot withdraw money before this period is over, and you cannot avail yourself of the payouts before this period is over.

Initially, the lock-in period for a ULIP plan was three years, but this was recently increased from 3 to 5 years by the Insurance and Regulatory Development Authority of India (IRDAI) in 2010. Yet, even though you cannot withdraw the funds before the expiry of the lock-in period, you can still surrender the funds before hitting this time mark. If you surrender the plan prior, the insurance cover will cease to exist, and you will receive the money only after the end of the five years.

Having said that, investors still have a lot to gain from being invested in a ULIP plan. Apart from the obvious factor of life insurance online, you have enormous flexibility in deciding the investment portfolio.

Did You Know?

ULIPs account for 12% of the insurance industry’s assets under management in India.

Source: CafeMutual

Claim Settlement Ratio

What Happens When You Stop Paying Your ULIP Premium Before 3 Years?

Sometimes, you might face financial difficulty that makes you unable to pay the premium. Or you might realise that a ULIP doesn’t serve your financial goals. When you are in this situation, you might ask, “What if I don’t pay ULIP premium?” If you choose to stop paying your ULIP premiums before 3 or 5 years (of the usual lock-in period), you are presented with two options. You either revive the policy or withdraw from the scheme without life insurance coverage. Let us round up the consequences of this:

  • No Penal Measures: First things first, you will not be penalised for early withdrawal. Your ULIP provider will not charge any penalty if you are unable to keep up with the premium payments. The only catch is that you cannot withdraw the money before the lock-in period of 3 years (or 5 years, as the case may be) has passed.
  • Loss: If you stop paying the premium before even one year has elapsed, then you might end up losing the entire capital invested so far.
  • Notice: Once you have discontinued the premium payment, you will be served a notice within 15 days after the expiry of the grace period of the policy. This serves as an option to revive the policy. Within 30 days of getting the notice, you can convey to the company that you wish to keep the policy. The revival of the policy depends upon the payment of all the unpaid premiums and charges.
  • Final payout: If you are not reviving the policy but instead discontinuing it, you will receive the withdrawal amount only after the lock-in period. This amount, however, is not the complete fund value. Instead, it is treated to a lot of charges and deductions like fund management charges, annual charges and surrender charges.
  • Tax treatment: The surrender value and any tax deduction previously claimed against ULIP will be counted as part of the total income.

Remember that if you are unhappy with the performance of your ULIP investment, you can always make tweaks to the fund allocation. Exiting a ULIP plan means you will need to find a replacement in the form of life insurance online, a robust investment avenue as well as bear charges. Decide wisely!

Why Should You Not Discontinue Your ULIP Policy in 3 Years?

There are many reasons to keep your ULIP active after three years. It is financially advisable to keep your ULIP investments for longer time periods, as this allows you to get the results and dividends you want as an investor.

Some of the most important reasons you do not want to discontinue your ULIP policy are:

  • Investing in ULIPs allows you to utilise tax deductions under Section 80C of the Income Tax Act. The premiums you pay for the ULIPs can be deducted from your taxable income. According to this section, investments of up to ₹1.5 lakh can be claimed as deductions. This is subject to the terms and conditions of the Income Tax Act.
  • ULIPs are market-based products that allow you to invest in various funds, like equity funds. ULIPs are believed to hold better returns over a long-term period. The longer you hold over your ULIP, the better the returns you will receive over the long term.

Conclusion

ULIPS become quite a useful form of wealth creation if used with a long-term goal in mind. It allows you to get market-based returns on your investment while letting you enjoy the tax benefits and coverage for a long time. If withdrawing or surrendering from a ULIP is not necessary for you, it is better for you to benefit from the various benefits a ULIP provides.

Glossary:

  • Surrender Value: The amount the insurance company pays to the policyholder when he/she decides to terminate the plan before maturity.
  • Lock-In Period: The time period for which the investment or the invested amount cannot be withdrawn or sold.
  • Investment Portfolio: A set of financial assets an investor owns that may include bonds, stocks, currencies, cash and cash equivalents, and commodities.
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FAQs related to ULIP Discontinuance

If you discontinue your ULIP, the insurance company will reimburse the proceeds of the discontinued policy at the end of the lock-in period.

If you decide to close your ULIP before maturity, the insurance company deducts a discontinuance fee from your total amount and moves the rest to a Discontinuance fund.

ULIPs have a mandatory lock-in period of 5 years.

Discontinuance charges in ULIPs are fees that are deducted as a percentage of the total ULIP in case you decide to stop your premium payments before the lock-in period. 

If you don’t pay the ULIP premium after one year, the value you invest into the ULIP will be transferred to a discontinued policy fund.

If the ULIP policy lapses, the ULIP funds will be transferred to a discontinued policy fund. The investor will be provided a revival period of 3 years to revive the ULIP.