Surrendering a ULIP in the lock-in period

Unit-linked insurance plans (ULIPs) have a lock-in period of five years. While it is not possible to realise the value of already invested money before completing the lock-in period, one can certainly decide to surrender the policy and stop paying future premiums.

What happens when you surrender a ULIP?
On surrendering a ULIP before the lock-in, the insurance company would first deduct certain charges as a penalty for discontinuing the policy mid-way. These charges vary from policy to policy and are mentioned in the fine print of your policy bond that you would have received on buying the policy. Discontinuance charges are generally quite steep and erode a significant portion of the fund value.

Discontinued policy fund
After deduction of the discontinuance charges, the remaining money is transferred to a separate fund called 'discontinued policy fund', where it will earn an annual interest of about 4 per cent till the five-year lock-in period is completed. Meanwhile, the insurance company would continue to charge a fund management fee which is usually 0.50 per cent of the fund value.

Once the lock-in period of five years is completed, the balance in the 'discontinued policy fund' (after deducting fund management charges) along with the accrued interest is paid to the policyholder.

Bring ULIP to life
Besides, insurance companies also give an option to revive the policy within three years of the first unpaid premium or complete the five-year lock-in, whichever is earlier. This generally requires paying all the unpaid premiums along with certain other charges which are in-routine applicable for staying invested in a ULIP.

However, while ULIPs do look like an amazing option that provide the dual benefit of investment and insurance, they generally fare poorly on both, and should generally be avoided. Know why you should say no to ULIPs.