What is the Minimum Lock-In Period for ULIP?

source: livemint

Unit-Linked Insurance Plans, or ULIPs, are specialised policies that bring investment and insurance under a standard roof. Financial experts consider these life insurance schemes balanced as they help the policyholders save tax and capitalise on current market trends.

However, if you are determined to enter these plans, you must be clear on this financial instrument and know details about the lock-in period in ULIPs. Read on to learn more about the lock-in period and further information about it.

The lock-in period refers to a set number of years during which you cannot liquidate a portion or whole of your insured sum. Though it is always advised not to resort to an early exit, ULIPs are flexible schemes. Therefore, you can withdraw the accumulated wealth upon paying a surrender fee.

The lock-in period makes a ULIP an ideal long-term investment instrument. Previously the locking period of a ULIP plan was set as three years by the Insurance Regulatory and Development Authority of India (IRDAI), which got updated to a five years-window after 2010.

In ULIPs, the lock-in period serves the following purpose:

• The lock-in phase comes in handy when a policyholder wants to claim tax deductions from the generated income related to their life insurance investment.
• Also, it ensures adequate financial stability while preserving liquidation alternatives simultaneously.
• It motivates a person to begin a goal-based investment.
• Finally, a lock-in window helps you reap the advantages of long-term investing.

When you withdraw funds or discontinue being a policyholder of an authorised ULIP, the concerned insurer will shift your sum to a DP fund. Your insured amount is now in a pool of funds dedicated to discontinuing investors.

A surrender fee will be deducted from the disbursal sum. Designated agents would already convey the details of this amount to you before you enter an agreement with an insurance company.

Again if a ULIP investor surrenders after the lock-in tenure, they are entitled to receive the fund value in terms of NAV or Net Asset Value. Also, no discontinuation charges are applicable in that case.

1. Deprivation From Compounding Benefits

ULIPs fairly distribute investments into many equity and debt funds. Therefore, if you intend to withdraw the amount shortly after the completion of the lock-in period, then the chances of receiving below-par returns are high.

The capital appreciates much faster after five years when the compounding factor kicks in. Let us understand with an example. Suppose you invested ₹2 Lakhs at an interest margin of 7.5%. This investment will reap a cumulative interest of ₹90,658 in five years, but the annual interest will sum up to ₹4,13,890 in fifteen years.

2. Front Loading of Charges

You are liable to pay the following charges if you immediately exit a ULIP following its 5-year lock-in period:

• Premium allocation charges
• Policy administration charges applicable in the initial years
• Fund allocation charges

Either these deductions are adjusted from your Net Asset Value, or some units are nullified. The charges mentioned reduce considerably with time. In addition, certain loyalty additions are allocated to every policyholder creating favourable conditions for steady capital growth in the long run.

3. Effect of Fluctuating Market Conditions

As ULIPs invest in equity markets, it would be better not to choose this financial product if your goal is a short-term investment. A negatively performing market can affect your gains if you stick with your plan of immediate withdrawal after the lock-in period, as volatility is the most significant factor hampering consistent returns.

Financial experts often praise the lock-in period for supporting the interests of ULIP investors. However, as a budding investor, it is obvious to have queries like “what is the minimum lock-in period for ULIP” schemes or “why the lock-in window is even necessary”. Smart individuals will abide by the policy to ensure they are not being charged any surrender fees and benefit from the compounding factors of this investment mode.