In your financial journey, you seek to match your life objectives with the appropriate amount of funding at the right time. One of the most common objectives is to create wealth through investing your savings. A Unit Linked Insurance Plan (ULIP) is ideal for this purpose as it helps build wealth in a systematic manner.
Along with this, a ULIP insurance cover ensures that your family will receive sufficient funds to fulfil their financial needs even when you are not around anymore.
How are ULIP returns computed?
A ULIP policy offers the twin benefits of insurance and investment. In any ULIP plan, the contribution paid is allocated partly towards insurance premium and the remaining part is invested in the securities market. The type of investment made depends on your risk appetite: if you are risk-averse, you can choose a fund that invests in debt-based instruments whereas if you have a higher risk appetite, you can choose an equity fund. You can also opt for hybrid funds that invest in debt and equity in a balanced ratio.
The funds in a ULIP are managed by professional asset managers and the returns of a ULIP policy depend on the total market value of the assets held which is known as the Net Asset Value (NAV). This value keeps fluctuating based on the market’s performance.
What is the lock-in period for ULIPs?
As the primary aim of ULIP plans is to build wealth for the investor, the plan duration is 10, 15, or 20 years. The aforementioned plans also stipulate that you should hold your units for at least a certain minimum period which is called the ULIP lock-in period.
Therefore, the lock-in period of a ULIP is the time during which you cannot withdraw from the plan; this period may extend to five years.
The main reason why ULIPs come with a lock-in period is their objective of creating wealth which is possible only with a long-term investment.
Why you should not exit your ULIP after the lock-in period
Here are the main reasons why you should not exit from your ULIP investment after the lock-in period has finished.
- The ideal combination of investment and insurance: ULIPs are ideal as a systematic investment avenue for building wealth that also provides adequate insurance coverage. Based on your risk appetite, you can choose the type of fund—equity, debt, or hybrid. For instance, one of India’s leading insurance companies, Tata AIA, offers 11 different fund options under their wealth creation plans. You can also switch between funds as permissible under the plan.
- The ease of investing in securities: You can invest easily in securities through ULIPs as the fund will take care of the market-related activities. For instance, companies like Tata AIA life are flexible as you can pay the premium in one lump sum or on a periodic basis.
- Professional management of the portfolio: For a novice investor, a ULIP is a safe way to earn high returns as the fund is managed by professional asset managers. They track the market and make changes to the portfolio with your interest in mind.
- Better post-tax returns: The yield to maturity under ULIP is better than the returns from fixed deposits or other fixed-term securities. You can get the benefit of indexation for capital gains purposes. Your financial advisor will be able to advise you about the comparative returns after factoring in the tax impact.
Can I withdraw from ULIP after five years?
You can make a partial withdrawal from a ULIP after five years. In some ULIP policies, the withdrawal can also be tailored as a monthly payout. Some plans even allow a partial withdrawal after three years but they also charge a certain percentage as the exit load fees.
What if I stop paying the ULIP premium?
A ULIP is a long-term investment and brings substantial returns only if you remain in the plan for the long term. Therefore, ideally, you should not exit the plan based on short-term phenomena or market movements. However, if you do not pay the ULIP premium during the lock-in period, the insurance company will treat it as a discontinued policy and the fund value will be treated as the amount paid up for the policy.
If you stop paying your ULIP premium after the lock-in period, it will be converted to the paid-up amount as the value of the sum assured under the policy.
The returns from ULIP are substantially higher than other investment avenues but only if you stay in the plan for a long period. Considering the adjustments for inflation and the taxation effect, you should remain invested in your ULIP even after the lock-in period of 5 years has expired.