Varun Behl, 65, was urged to buy a 10-year unit-linked insurance policy (ULIP) policy by his relationship manager. The annual premium paid towards the ULIP was Rs. 1, 20,000. Upon receipt of the ULIP’s annual statement in the third year, Varun witnessed that the value of the premium of Rs. 2, 40,000 paid in the last two years slid down to Rs. 1,10,000. The policy had a sum assured of only Rs. 1,20,000 on surrender of a policy in its third year. Fearing further erosion of investment, he decided to surrender the policy and stop paying any further premiums.
Most people take such hasty decisions without knowing that the premium for ULIP cover increases with age and this can bear an impact on the allocated fund value. When people realise this folly in the first or second year of the ULIP term, they would want to surrender the policy - again an unworthy decision. Surrendering a ULIP abruptly only adds to the insurer’ profits at the insured’s peril.
Impact of ULIP Surrender
The consequences of surrendering a ULIP vary from insurer to insurer but it largely depends on the timing of its surrender – whether it is during the lock-in period, or after the lock-in period.
- ULIP Surrender during the lock-in tenure: ULIPs usually have a lock-in period of 5 years and a ULIP surrender before the completion of lock-in period can attract numerous miscellaneous charges affecting the surrender value payable to the policyholder. Upon request for surrender, the risk cover shall terminate with immediate effect, and the fund value on the surrender date minus the deductions shall be paid only after the end of the lock-in period. Discontinuance charges on the fund value are applicable upon the premature ULIP surrender, and post the application of these charges, the fund value is transferred to the discontinued policy (DP) fund where it shall continue to remain until the completion of lock-in tenure. ULIPs such as the Future Generali Easy Online Invest plan levy minimum discontinuance charges on ULIP surrender depending on the policy year as shown below
During this period, the DP fund is eligible to earn an interest amount at an annual rate of 3-4 percent to provide a minimum guaranteed return, and a nominal fund management fee equivalent to a fraction of the fund value which is levied by insurers.
In case of ULIP surrender before the lock-in period, the policyholder shall lose the benefit of availing benefits out of any tax deductions at source (TDS). The ULIP surrender value and any tax deductions claimed against the ULIP will be accounted as income and taxed as according to the policyholder’s tax slab rates.
- ULIP Surrender after lock-in tenure:The fund value of a ULIP is low in its initial years and grows over a period of time. Although a ULIP surrender can be done after the end of lock-in tenure of 5 years with nil exit charges, staying invested for longer periods of time such as 10 or 15 years helps the policyholder to reap rich market dividends on his investment, and to spread the burden of any associated charges evenly across the policy term. In the initial years of the ULIP term, these charges are considerably high, and a ULIP surrender immediately post the lock-in period can eat into the fund’s investment value.
ULIP surrender, owing to reasons like underperforming funds or cash crunch shall only erode the investment purpose. In such circumstances, it is advisable to switch between funds by evaluating the market situation or avail partial withdrawal facility, instead of a ULIP surrender.
Can a premature ULIP surrender be rolled back?
If the policyholder has taken a ULIP surrender during the lock-in period, he/she can still hope to revive the policy within a maximum of two years from its surrender date. To revive the ULIP, the policyholder must pay all the premiums due, since the payment of last premium along with associated charges. The surrender charges levied at the time of ULIP surrender are credited to the DP fund value, and the policyholder can continue to reap benefits upon the revival of the surrendered ULIP.
A Word of Caution
A rightly chosen ULIP is of great investment value, but there’s no yardstick to decide whether a ULIP surrender is the best-case scenario for the insured since ULIPs vary across insurance companies. However, purchasing ULIPs online such as the Future Generali Easy Invest Online plan allows a partial withdrawal facility after the lock-in period, and can minimize the additional charges like the discontinuance charges levied upon its surrender. Staying invested through its policy term enhances the returns with loyalty additions during the last five years of the policy and gives the policyholder complete control of the investment through fund switch option. While a ULIP surrender is recommended only when absolutely necessary, purchasing a ULIP online can reduce the loss of ULIP surrender value to a large extent.