ULIPs are an ideal option for those looking to get life insurance coverage and investment opportunities under one product. The last few years, especially, have seen the popularity of ULIPs, and insurance products in general, grow. Policyholders these days seek a chance to invest and gain returns as well. This requirement can be met through an insurance product such as a ULIP. To enjoy the returns of a ULIP, one has to wait for the duration of the lock-in period, which is five years. Should a policyholder exit after the lock-in period, or should they continue the policy? According to experts, continuing would be the preferable option. Here’s why.
What is a ULIP policy, and how does it work?
The premium of your ULIP plan covers three areas – the life coverage, the investment amount, and the various charges of administering the policy. You can choose from low-risk debt funds, high-risk equity funds, or both. You can select from low-risk debt funds, high-risk equity funds, or both. The investment amount is pooled along with the money from other policyholders and invested into the instruments of your choice. The returns accumulate over time and are made accessible to you only after completing the five years.
Reasons to continue after the end of the ULIP lock-in period
Your funds can tide over short-term market volatility
ULIPs, in general, are meant to be long-term products, significantly if you are investing in equity funds. As experts believe, equity investments perform better when held on to for a long time. Investing in the market for a short period such as five years may lead to the funds and the returns being impacted by market volatility negatively. Exiting the policy is not advised, especially when the market is not performing well.
If you are exiting the ULIP because you have calculated that the market will be low for quite a while, you can opt for fund switching. This option allows you to switch your investment from equity funds to debt funds and vice versa.
The charges for the initial years are adjusted
Depending on the insurer, you may incur several charges, such as fund management charges, premium allocation charges, administration fees, etc. These charges are levied primarily in the first few years and reduce considerably as the years go by. By the fifth and sixth years, the costs are almost negligible. Some of these charges are not added to the premium but are instead subtracted from your funds’ NAV (Net Asset Value).
By continuing the policy after the ULIP lock-in period, you get to compensate for these charges with an increase in returns during the later years. Exiting right after five years would mean that the returns you receive are highly affected by ULIP charges and are thus comparatively lower in amount.
You lose the compounding benefits
For the unaware, compounding is essentially a concept wherein the interest generated on it in the year before is reinvested along with the principal amount. The draw for the next year is then calculated on the principal amount and the interest generated previously. Though the lock-in period of five years may also prove advantageous due to compounding, its ultimate benefits are best observed when the ULIP investment is kept for a longer term.
You are left without a life cover
A ULIP is, after all, an insurance product. If you do not have any other life insurance policy, then exiting a ULIP policy would leave you without a life cover. If anything unfortunate were to happen to you, the future of your financial dependents would be uncertain. They may face monetary difficulties due to the sudden loss of a regular income. Furthermore, the investments you would have made in the form of premiums would also go to waste. A wiser option would be to continue with your policy until its maturity. You get the dual benefits of wealth creation and life coverage for an extended period.
However, note that if you are in an urgent requirement of funds, you consult with a financial expert and liquidate your ULIP funds. You may also consider partially withdrawing your returns. It is also advisable to get their expert opinion on what a ULIP is and how a ULIP plan can be customised to suit your short-term as well as long-term needs.