Why You Must Not Surrender Your ULIP Policy?

• Surrendering during the lock-in period – Lock-in period is a predetermined time during which, if the policyholder surrenders their policy, they won’t receive the payout. The policyholder will receive the liquidity or payout only after completion of the lock-in period, which is usually 5 years in ULIP. In addition, the risk-cover will cease once you submit the request for policy exit, however, the surrender value is paid only at the end of the term. Moreover, the pay-out made post the lock-in period is subject to deductions such as certain discontinuance charges.

In the next step, after the remaining fund value is transferred to the Discontinued Policy (DP) fund, your funds will continue to remain there until the end of the lock-in period. During this period a fund management fee may also be charged (usually not exceeding 0.5% of the fund value). In case of premature surrender of the policy, all tax deductions claimed against ULIP is taxed as income according to your tax slab. Plus, the surrender value will also be subjected to Tax Deducted at Source (TDS).

• Surrendering after completion of lock-in period – ULIP is ideally seen as a long-term investment tool. While there are no exit charges after completion of the lock-in period, it is not advisable to surrender your policy. ULIPs yield the best returns when invested in for long periods of 15-20 years. Also, while the mortality, administrative, fund management and other associated charges are met by unit cancellation or by reducing the market value, these deductions are higher in the initial years. As a result, it is a bad idea to withdraw your funds as soon as your Lock-in period is over.

If you think that your current funds are not performing well, you may choose to switch your funds. Just like equity, the performance of a find is purely related to market fluctuations, and you may want to remain patient until the market bounces back. If the market is underperforming, you must check the statistics to see how the scheme performed previously, in the bull phase.

Reviving after surrendering the policy

When you surrendered your ULIP before completion of the lock-in period, there is an option to still reviving the same. To continue the benefits of your surrendered insurance policy, you can request renewal within a maximum of two years of surrender.

Patience is the key to experiencing positive returns through ULIPs. You shall never hurry to surrender your policy, expecting short-term gains. Remember your ULIP not only gives you life cover but also allows you to switch between funds to make the most of market movements and therefore, you should stay invested for at least 15 to 20 years to get the real fruits of the seeds you have sowed.