By Sunil Dhawan
Knowing the exit options even before you consider investing in Ulips should make you stick to them for the long term.
The unit-linked insurance plan (Ulip) is a hybrid product which combines the benefits of investment and protection in one place. Being a structured insurance product, one needs to hold it for a long term of at least ten years to reap any investment benefit out of it.
Considering an early exit by surrendering the policy mid-way will have its own repercussions, the new Ulip guidelines were introduced in 2010. Among several other changes, the lock-in period was increased from three to 5 years. Parag Mathur General Counsel and Head of Compliance, BankBazaar.com, says, “Exiting within the lock-in period of five years would mean serious erosion of premium paid while exiting immediately after the lock-in is a subjective call.” On surrendering the policy after five years, the entire fund value is paid to the policyholder. Let’s see the implication of surrendering a Ulip policy (bought after 2010 guidelines) before five years.
Surrendering before five years
Even though there is a lock-in period of five years in Ulips, one may still surrender the policy. The money, however, will be paid to the policyholder only after the end of 5 years. Importantly, it’s not the fund value as on the date of surrendering that gets paid after 5 years. Here is how it works.
After applying for the surrender of a policy, the insurer will first deduct certain discontinuance charges and then move the balance of fund value to the Discontinued Policy (DP) fund. During the period when funds lie in the DP fund, the insurer may apply a fund management charge which cannot exceed 0.5 percent of the amount. The money lying in the DP fund will continue to earn interest as insurers have to provide a minimum guaranteed return which would change from time to time. Currently, DP funds are providing interest of 4 per cent per annum.
Option after surrendering
Even after surrendering the policy, one has the option to revive it within two years, but before the end of fifth year of the date of discontinuance. To revive, all unpaid premiums may be paid and the policy continues as it is. On revival, discontinuance charges previously deducted will be added to the DP fund value, and policy administration charge and premium allocation charge, which were not collected in the DP Fund, shall however be levied.
The risk cover on the policy will not be there after submitting the request for surrendering. If the policy is not revived before completion of the fifth policy year, the policyholder will be entitled to the DP fund value after completion of the fifth policy year.
Discontinuance Charges (DC)
If the annual premium of a policy is more than Rs 25,000, the maximum DC can be Rs 6,000, Rs 5,000, Rs 4,000 or Rs 2,000 in the 1st, 2nd, 3rd, 4th policy year, respectively. For a lesser amount, it is Rs 3,000, Rs 2,000, Rs 1,500 or Rs 1,000 in the 1st, 2nd, 3rd, 4th policy year, respectively. In case the policy is discontinued in the 5th policy year, there is no such charge.
What to do
Returns in a Ulip are linked to the market and thus will depend on the performance of underlying asset class such as equity, debt or both. Mathur informs, “Ulips are long-term products that combine risk cover and returns, and therefore, the product has to be looked at with some amount of costs towards the sum assured (mortality charges), fund management charges, policy admin charges, etc., which are deductions. It would take a couple of good upward stock market cycles to recover these costs and also give you a good return.”
Conclusion
The various charges in a unit-linked insurance plan are front-loaded and largely amortized over the initial five years of the policy. Therefore, exiting immediately after the end of the lock-in period of five years might not yield optimum result and even the long-term goals could be jeopardised. Therefore, link your investments in Ulip to a long-term goal and run it till the originally-desired term by paying the premiums regularly.
