Surrendering ULIP and its down sides

Traditionally in India, life insurance has always been looked upon as an investment product. ULIPs were launched to satisfy investors’ needs of owning an insurance-cum-investment product.

Being an integrated plan, a ULIP is a mix of insurance and investment. A fraction of the premium paid by the policy owner goes towards the insurance cover and the balance is utilised for investments. The balance is pooled together and invested in various in equity and debt instruments in varying proportions, the way it is done in case of mutual funds. The policy-holder has the liberty of selecting the type of fund from pure debt or equity, or a blend of both, yes ULIPs give you an option of fund switching. Policy-holders are also allotted units with each having a net asset value, declared on a daily basis. NAV is the value based on which the net rate of returns on ULIPs are determined.

The net asset value depends on the investments made and the market conditions. Being a market related instrument, the state of the market has a big impact on the fund’s performance. However, not all ULIPs have performed well and have given reasonable returns to the investors. Though the market is the primary reason for ULIP’s performance, it also depends on what fees are levied. Various charges under ULIP are premium allocation charge, mortality charge, top-up allocation charge, fund management costs, policy administration charge, switching costs and surrender costs etc.

Surrender Value Calculation

If you want to know how to surrender ULIP policy, you must remember that by withdrawing the policy prematurely you stand a chance of eroding your investment value while also failing to meet your financial goals.

The surrender value is calculated as fund value minus surrender charges/discontinuance charges, if applicable (fund value = total number of units under the policy x NAV of the chosen fund). However, these charges differ amongst ULIPs. Due to these costs, the residual investment of any ULIP is not sufficient to give considerable return even if the market is doing well. Here are a few steps to think before surrendering during the lock-in period.

  • ULIPs have a lock-in period of 5 years but investors can surrender the fund before completion of the lock-in tenure. The risk-cover will cease once you submit the request for surrender, however, the surrender value incurred is paid only at the end of the 5-year lock-in period.
  • Another important consideration before going into “how to surrender ULIP policy” is that the investor is not paid the fund value as on the surrender date. The pay-out is made post the end of lock-in period. When you apply for surrendering your policy, certain discontinuance charges are levied.
  • After deducting the discontinuance charges the remaining fund value is transferred to the Discontinued Policy fund. Your funds will continue to remain in the Discontinued Policy fund until the end of the lock-in period. During this tenure a fund management fee may be charged, not exceeding 0.5% of the fund value. This fund is also eligible to earn a minimum interest of 4% per annum.
  • In case of premature surrender, all tax deductions claimed against ULIP will be accounted as income and taxed according to your tax slab. The surrender value will also be subjected to TDS.

The next question is how to surrender ULIP policy after the lock-in period? While the exit charges after completion of the lock-in period is nil, it is not advisable to surrender your plan. Staying invested for long periods of 15-20 years will enable you to reap the benefits of market regularisation as well as distribute the mortality, fund management, administrative and associated charges throughout the policy tenure.

The above mentioned associated charges are met by unit cancellation or by reducing the market value. These deductions are higher in the initial years; as a result, the investment during the 5-year period is lower than the later years. Hence by surrendering the fund post the lock-in period, you end up corroding the investment value.

While considering underperforming schemes, investors have the option to switch funds. But do consider present market volatility and long-term performance of funds before switching. If you are surrendering the policy to meet cash crunch, opt for a partial withdrawal facility instead of surrendering the plan.

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