Investment in the right avenues is critical to ensure wealth creation. However, that doesn’t mean you ignore the aspect of protection in your financial plan. While the right investments can help you grow your corpus, the right protection plans can help in times of setbacks. Life insurance policies are a type of protection cover that every individual must buy.
Among the several available life insurance plans, a ULIP or unit-linked insurance plan is a unique offering as it provides insurance and investment in one plan. There are other insurance plans that have an investment component, however, the transparency of investment in ULIPs is far greater. As a policyholder, you have complete control of your investment, unlike other insurance plans which offer investment options.
A ULIP cover is also called an insurance-cum-investment plan for the dual benefits that it provides. When looking at ULIPs as a suitable option for you, you also need to know about the terminologies and their implications. One such term is the lock-in period. A critical understanding of how the lock-in period impacts your ULIP cover is essential before you buy one.
Let’s have a look.
What is the lock-in period in a ULIP?
The lock-in period is the duration for which the policyholder cannot withdraw or liquidate their investments. This lock-in period is set at five years by the regulatory body, the Insurance Regulatory and Development Authority of India (IRDAI). This five-year period makes ULIPs a long-term investment for smoothening out any fluctuations that are associated with market-linked securities where investments are made via ULIPs.
Until 2009, this lock-in period was set to three years. However, the IRDAI changed this period and also amended a few rules regarding the charges levied on ULIPs.
What are the important things to know about the lock-in period in ULIPs?
1. Option of partial withdrawals
Generally, ULIPs do not allow any sort of withdrawal or liquidation till the lock-in period ends. Some plans, however, allow partial withdrawals but only after the lock-in period ends. On the other hand, a few plans allow withdrawal of a specified amount on a periodic basis during the policy tenure. Depending on the policy’s terms, some policies may even allow partial withdrawals after the three-year period. Although, this must be verified with your insurance company and its policy terms. In some instances, these withdrawals are free whereas some levy a charge for every such withdrawal.
2. Discontinuing the policy before the lock-in period ends
In the event a policyholder chooses to surrender the ULIP before the five-year lock-in period ends, the insurance company transfers the accumulated value of investments to an earmarked fund known as the discontinued policy (DP) fund. Further, based on the policy’s terms, surrender charges are also applicable. Only after the end of the mandatory lock-in period, any amount is paid to the policyholder. Till the interim, this amount of discontinued investment is kept in such a DP fund and earns an interest of four percent (subject to changes by the regulator, the IRDAI).
During such time, in case of an unfortunate demise of the policyholder, the amount of DP fund is paid to the beneficiaries mentioned in the ULIP. However, if the ULIP is surrendered after the end of the five-year lock-in period, the insurance company pays the fund value at its current NAV to the policyholder. Moreover, the discontinuance or surrender charges are not applicable.
In case an individual wishes to revive the policy after discontinuing at first, the policyholder gets a period of two years, during which they can choose to reinstate the policy. This period of two years is calculated from the first date of unpaid premium when it was due. Thus, a revival option is also possible after the surrender. But, after the end of such two years, the policy cannot be revived later and is deemed terminated.
In conclusion, smart investors are aware that the lock-in period is a boon. This duration allows their investment to grow exponentially if invested in the right type of funds. Moreover, fluctuations that are commonly associated with market-linked investments can be nullified over the long five-year lock-in period. Thus, as a policyholder, you can exercise control of the investments in market-linked securities while seeking the protection of a life insurance cover.
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