How and when should you exit from bad-performing ULIP?
12 min read . Updated: 28 Feb 2023, 10:59 PM IST
Premium- The Unit Linked Insurance Plan (ULIP) is an insurance programme that provides both life insurance and investment advantages since its investment component enables customers to place investments in the equity, debt, and balanced asset classes.
The Unit Linked Insurance Plan (ULIP) is an insurance programme that provides both life insurance and investment advantages since its investment component enables customers to place investments in the equity, debt, and balanced asset classes. The popularity of ULIPs among investors is because the premiums paid for ULIP schemes are tax-deductible up to Rs. 1.5 lakh annually under Section 80C and the maturity proceeds of the ULIP are also tax-free, subject to certain terms and conditions mentioned under Section 10(10D) of the Income Tax Act of 1961. The lock-in period for unit-linked insurance plans, or Ulips, is typically five years, but what if an investor wishes to discontinue a ULIP before that period? Let's hear from our industry professionals.
Anup Bansal, Chief Business Officer, Scripbox
If you are unhappy with your ULIP investment, you can exit it by surrendering it. To do this, you need to contact the insurance company that issued the ULIP and fill out a surrender form.
If a person has invested in a ULIP, and if the premium has only been paid for two or three years, the best solution would be to exit these policies immediately. Earlier ULIPs had a three-year lock-in period, which has now been increased to five years in the new ULIPs. Currently, no liquidity is available. However, once the lock-in period is over, you are free to withdraw your funds whenever you want.
So for older ULIPs with a three year lock-in period, if an investor leaves an old ULIP after paying two premiums, he will lose all of his premiums. If he leaves an old ULIP after three years, he is likely to receive only the third-year premium; the ULIP’s numerous charges would eat up the rest.
So, confirm with the insurance company about the minimum duration or lock-in period for which the premiums must be paid. Pay until then, then stop. Following that, the policy will remain in effect. The insurance company will deduct its annual charges from the policy’s corpus in order to keep it alive. The paid-up policy would provide a lower sum assured, but the investor would be saved from wasting good money. You must make sure that you do not miss on any financial goals by exiting at the end of the lock in period.
However it is advised not to exit the scheme during its bull phase, which occurs when the scheme performs well. Also, if the majority portion of the premium is paid, then it is better to wait for the policy to mature to avail the full sum assured. To reap better results, you must stick with the scheme. Do study the policy document to be completely sure about the terms and conditions of the surrender and withdrawal.
Mr. Gautam Kalia, SVP and Head Super Investor at Sharekhan by BNP Paribas
Firstly, the best way to take advantage of the features and benefits of a ULIP is to stay invested in it till maturity. ULIPs, typically have a 5-year lock-in. So the earliest you can receive the funds from a ULIP is after 5 years. If your ULIP has a maturity of 20 years, you can surrender the policy and withdraw anytime after 5 years after incurring any policy-specific surrender charges. If you surrender your policy within 5 years, the payout will still happen to you only after 5 years after adjusting for surrender charges.
Mr. Rakesh Goyal Director of Probus Insurance Broker
So exiting the Ulip will be determined by the policyholders and the date they purchased the policy. Ulips typically have a five-year lock-in period, and if someone surrenders before the lock-in period, the life insurance benefits are terminated.
The investments made during the period are transferred to the discontinuance policy fund, and the policyholder receives the funds once the lock-in period expires. If the policyholder surrenders it after the lock-in period, they will only receive the surrender value. However, investors can reap the benefits of ULIPS if they stay invested for the entire term. If investors have been investing for four to five years, it is preferable to continue for the entire term.
Mayank Bhatnagar, Chief Operating Officer, FinEdge
Despite their recent reforms, most ULIP’s still have multiple costs built into them that can lead to a major drag in the long-term returns you can achieve from them. To make matters worse, very few of them are comparable to mutual funds in the same category when it comes to their long-term fund performance. The dilemma for many investors who discover that they are stuck in a bad ULIP is – should they continue paying their premiums or just walk away.
Our view is straightforward – don’t throw good money after bad. When you discover that you’re stuck in a bad ULIP, write to the insurer informing them of your intent to discontinue the policy, stop paying future premiums and divert the saved cash flow to a top-performing mutual fund instead. ULIP’s have a lock-in period of 5 years, but you can stop paying premiums even after the first tranche – in which case the accumulated money goes into a discontinuation fund and earns roughly 3.5% per annum after the deduction of charges.
While that isn’t a great return, it’s certainly not worth sinking more money into a poor investment. Don’t worry too much about the loss of the small life cover that was associated with the ULIP – you could always take up a pure term plan (if at all needed) to more than make up for it at a nominal cost - and with complete transparency.
Also, as a thumb rule, never mix insurance and investments. The two must be kept completely separate at all times – mixing them together is nothing more than a selling strategy that’s designed to confuse you!
Mr Sachin Gupta, Co-founder and Chief Product Officer, TransBnk
Exiting a bad Unit Linked Insurance Plan (ULIP) can be a daunting task, check the lock-in period and submit a written surrender request to the insurance company. The surrender value, which is the fund value minus surrender charges and fees, will be refunded. You should consider the loss as a declaration of your financial independence and a step towards better investment opportunities that align with your financial goals.
Mr. Shams Tabrej, founder of Ezeepay
You might not be happy with the return on your ULIP and be tempted to switch to a newer fund. Before switching, you should think about several things, such as how much life insurance you need and how much the investment will cost. It would be in your best interest to stick to your initial investment, as you may get your money's worth. Changing investments or exiting may be detrimental. Exiting can be costly, and you should keep in mind that ULIPs are designed to provide returns over the long term, not in the short term.
The only uncertainty associated with ULIP plans is the fund's performance. The fund's performance may fall short of expectations. If you exit in such a circumstance, you lose a substantial amount of money. If you have purchased an equity-oriented ULIP investment and the market falls, your returns may be quite low. Even if the market is experiencing a bull run, it would be prudent to maintain your position. Staying invested over the long term will yield substantial returns.
When you sell at the end of the lock-in period, you should make sure you don't fall short of your financial goal. You should look at your financial plan again to decide if you should stay invested or if it would be better to sell when the lock-up period is over.
Mr Amrit Singh, Co-Founder and CRO of Loop
Exiting a bad ULIP can be a daunting task. While ULIPs offer tax benefits, inflation-beating returns, and life cover, they also have a bad reputation for high charges. However, not all ULIPs are created equal. To differentiate between good and bad ULIPs, look for those that only charge fund management and mortality fees rather than fees like policy administration, premium allocation, and fund switching that can eat into your returns.
When it comes to exiting a bad ULIP, surrendering the policy could be a way. But before you do, consider the lock-in period. If you've paid premiums for over 2 years, continuing until the lock-in is over is better. This way, you may get back part of the premiums paid, tax-free, and your deductions may remain valid. Plus, you may even be eligible for bonuses.
Mr. Ashish Misra, Chief Operating Officer – Retail Banking at Fincare SFB
Exiting from a bad ULIP (Unit Linked Insurance Plan) can be a complex process that requires careful consideration of various factors. Here are some steps you can take to exit from a bad ULIP:
· Review the ULIP policy document: The first step is to review the policy document carefully to understand the charges, terms, and conditions of the ULIP. Pay attention to the surrender charges, which can be high in the early years of the policy.
· Check the lock-in period: ULIPs have a lock-in period of five years, after which you can surrender the policy. If your ULIP has not completed the lock-in period, you may have to pay a penalty for surrendering the policy.
· Consider a partial withdrawal: If you do not want to surrender the entire ULIP, you can consider a partial withdrawal. Most ULIPs allow partial withdrawals after the lock-in period. However, partial withdrawals can reduce the policy value, and you should carefully evaluate the impact on your returns.
· Opt for a policy switch: ULIPs offer the option to switch between funds. If you are unhappy with the fund's performance, you can opt for a policy switch. This allows you to move your investments from one fund to another, without surrendering the policy.
· Evaluate the impact on insurance coverage: ULIPs offer a combination of investment and insurance. If you surrender the policy, you may lose the insurance coverage. Consider the impact on your financial goals and insurance needs before surrendering the policy.
· Consider the tax implications: Surrendering a ULIP before the completion of five years can have tax implications. The surrender value may be subject to tax as per the Income Tax Act. It is advisable to consult a tax expert before surrendering the policy.
· Contact the insurance company: If you decide to surrender the policy, you should contact the insurance company's customer care or agent to initiate the process. You will be required to submit a surrender form along with the policy document and KYC documents.
· Keep a record: Keep a record of all communication with the insurance company, including emails and phone calls, for future reference.
Remember, exiting from a bad ULIP can be a complicated process, and it is advisable to consult a financial advisor before making any investment decisions. A certified financial advisor can help you evaluate the impact on your financial goals and suggest alternative investment options that align with your risk appetite and investment objectives.
Anand Rathi, Co-founder of MIRA Money
One of the most significant issues with ULIP is that the charges are front-loaded. The charges take out substantial capital from your first-year premium, making it difficult to recover quickly and forget generating returns. As seen in most cases, investors don’t make much returns for five years. ULIPs come with a Premium Payment Term that the client agrees to. But if the client wishes to exit, he must wait for at least a period of 5 years, as that is when the fund value can be withdrawn without paying an exit load or surrender charges.
If the fund that ULIP invests is poorly managed, the investor should move most of the money to the debt option as that will at least guarantee no loss of capital.
If there is an index fund option, investors should look at moving their funds to index funds, provided the holding period is over three years.
The investor can also use the partial withdrawal facility to withdraw an amount equivalent to each year and redeploy the funds back. This avoids additional commitment.
These are possible ways to increase your returns in poorly managed ULIPs.
Yash Joshi , Co founder and Director, UpperCrust Wealth Pvt. Ltd
If you want to exit from a bad ULIP policy, you can follow these steps:
Review the policy documents: The first step is to review the policy documents to understand the terms and conditions of the policy, including the lock-in period and the surrender charges.
Understand the lock-in period: ULIPs have a lock-in period of 5 years, which means you cannot withdraw the funds before that period. If you try to do so, you will have to pay a surrender charge.
Evaluate the surrender charges: The surrender charges for ULIPs can be high, especially in the first few years. You need to evaluate the charges and determine whether it is worth paying them to exit the policy.
Consider the fund value: ULIPs have an investment component, and the fund value may be higher than the surrender value. You should evaluate the fund value and determine whether it is worth staying invested for a longer period to reap the benefits.
Contact the insurer: If you have decided to exit the policy, you should contact the insurer and request for surrender. The insurer will provide you with the surrender form, which you need to fill and submit along with the policy documents.
Wait for the payout: Once you have submitted the surrender form, the insurer will process the request and calculate the surrender value. The payout will be made to your registered bank account within a few days.
In summary, exiting from a bad ULIP policy requires careful evaluation of the policy terms, surrender charges, and fund value. You should consider staying invested for a longer period if the fund value is higher than the surrender value and the charges are too high. Contacting the insurer and submitting the surrender form is the final step to exit the policy.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.