Why Exiting Your ULIP After 5 Years Is Not a Good Idea?

Unit-Linked Insurance Plan (ULIP) is one of the most popular wealth generation investment instruments available in the market today. However, if you are wondering about what is ULIP policy, then allow us to explain it to you in a simple way.

ULIP is a type of life insurance policy. It is not like your traditional life insurance plan. It provides you with the dual ULIPbenefits of life insurance and investment under a single plan. With ULIP, you can grow your wealth over time by investing your hard-earned money in equity or debt funds based on your risk-bearing capacity. Besides this, your nominee will receive the death benefit in case of an unfortunate event within the policy’s tenure.

ULIPs have a mandatory lock-in duration of five years. It means that if you discontinue or surrender your policy during this period, you are not eligible to receive any payouts. You can receive payouts only after the completion of the compulsory lock-in period. If you want to make the most out of your ULIP, it is advisable to stay invested with a long-term perspective. Still, many people tend to discontinue their ULIPs soon after the lock-in term of five years.

Here, we will discuss the most common reasons that make investors exit from ULIP immediately after the lock-in tenure, and why doing this is not a wise idea.

Reasons for terminating the ULIP after the lock-in duration

Usually, investors may tend to exit from ULIPs after the necessary lock-in duration during these instances:

  • When the fund value is good

The ULIP NAV of the fund increases when the capital market is bullish. If the initial investment is growing and is at its all-time-high after completing the lock-in period, many people discontinue the plan to avail of the payouts. Here, they forget the purpose of their investment, which is to accomplish long-term life goals. The discontinuation should not hamper financial aspirations.

  • When investors are unhappy with the ULIP’s performance

The poor performance of funds during the lock-in period is one reason why people exit from ULIP soon after this tenure is over. You can keep complete track of your portfolio by checking the ULIP NAV and monitoring your fund’s performance.

Moreover, ULIP investment comes with various charges, such as mortality charges, administration expenses, and premium allocation charges, among others. Insurers levy these costs during the lock-in period, and the amount is higher during the initial years. These costs reduce with time. However, they lower the accumulated fund value, thereby decreasing the profit. As per financial experts, the return on the allocated fund is quite low during the short-term. So, investors stop the policy, as they do not get the desired returns on investment. It is essential for them to understand that ULIP can be a beneficial instrument only if they remain invested by keeping a long-term duration of 10-15 years in mind.

Impact of exiting from a ULIP just after the lock-in period

If you quit a ULIP immediately after the completion of the lock-in tenure:

  • Your returns on investment will be significantly low
  • Your payout will be subjected to deductions
  • You may not be able to achieve your future financial aspirations

Advantages of staying invested for a long period 

You can reap the maximum ULIP benefits if youremain invested in a ULIP for the long-term. Here are some significant plus points of ULIP:

  • Can generate higher returns
  • Gives the benefits of compounding
  • Ensures liquidity through partial withdrawal after the lock-in period, as per your requirements
  • Helps to develop a habit of saving
  • Provides life cover
  • Offers tax deductions under Section 80C of the Income Tax Act, 1961

There are many negative implications of exiting from a ULIP after completing the essential lock-in tenure of five years.So, it is recommended to stay invested for 10-15 years to earn worthwhile returns. Allow the power of compounding to grow your money eventually, so that you can fulfill all your monetary objectives in the long run.