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According to various market studies, Unit-Linked Insurance Plans or ULIPs have shot to popularity like no other market-linked investment tool in recent years. This popularity is primarily because ULIPs offer the unique proposition of combining life insurance and investment benefits into a single plan. Also, ULIP plans offer greater flexibility in fund allocation while providing significant tax benefits.

Besides these features, another aspect of ULIPs that makes them unique is the fact that they have a lock-in period of 5 years. While the lock-in is active, no liquidity is allowed, and you would have to wait till the completion of the lock-in period to make partial withdrawals.

Also, it is during this period that the insurer levies most of the policy handling and maintenance charges on your ULIP. As a result, even though the ULIP may provide the stipulated percentage of annual returns during each of the first five years, all the levied charges make a deep cut into the earnings of the fund.

Subsequently, many policyholders find it better to surrender the plan immediately after the expiration of the lock-in period rather than continuing with the same, believing that ULIP isn’t performing up to its potential.

In reality; however, nothing is worse than exiting the ULIP insurance plan just after the lock-in period expires. Not only it would mean a serious loss of investment for you, but it also implies that you quit right when the plan started to show up to its potential. It is not a wise move, and to prove the point, here are some reasons why the lock-in period shouldn’t be the end of your tryst with ULIP plans, but only the beginning.

Despite Paying All the Charges, You Have Not Reaped the Benefits

This one comes as a no-brainer. ULIPs are one of the best long-term investment tools available today for a reason: they begin to display their real potential and offer high returns on investments only after the initial lock-in period. We have mentioned before, how the insurers place a bevvy of charges on the fund within the lock-in period. As the tenure of the plan increases, the costs diminish, and the ULIPs can help you recover these charges while ensuring that you get maximum possible returns on your investments. Surrendering the plan immediately after the expiration of the lock-in period would only cut short the growth potential of the plan.

There Would Be No Loyalty Benefits

One of the more significant aspects of ULIP plans is that the insurance company declares loyalty bonuses on it every year. What do these bonuses do? They provide additional investment benefits over and above the returns from your fund earnings. When you decide to surrender the plan just after the lock-in period is over, means that you would miss out on a significant portion of investment benefits that come with these loyalty additions.

You Would Have to Pay Surrender Charges While Losing the Tax Saving and Life Cover Benefits

Some ULIP insurance plans levy hefty surrender charges on exiting the plan prematurely. When you choose to close the plan right after the lock-in period, it implies that you have already paid a significant amount of fund handling and maintenance fee during the initial five years of buying the ULIP.

Moreover, when the time had come for you to reap the benefits from the plan, you choose to leave the plan and end up paying an additional surrender charge instead. Not only this, but you will also miss out on the tax saving and life cover benefits that you were entitled to under the ULIP plan.

While the lock-in period for the ULIP is active, the insurer would deduct the premium allocation charge before investing the premium. Subsequently, a variety of charges such as funds allocation charges, policy administration fee and fund management fee, are deducted by the insurer through either adjusting the NAV or by cancelling the units.

In the first year, the deduction is higher and significantly reduces over time. Thus, after the lock-in period expires and thereon, these charges get reduced to a point where they don’t impact the funds. Overall, ULIP investments are very much transparent and offer significant returns over time.  As shown in the image below

ULIP charges Surrender Value

ULIP charges Surrender Value

Before buying the ULIP, you can use an online ULIP returns calculator to help make the right investment decisions according to your age, preferences, budget, and future financial objectives.

Further, you can keep a track on the portfolio daily and check the Net Asset Value (NAV). During the initial years of the ULIP plan; however, the fund value is much impacted by the bevy of charges including mortality charge, portfolio management charges and administration charges.

This the reason why you receive low returns during the lock-in period. Leading ULIP plan providers such as Future Generali; therefore, stress upon sticking with the ULIPs for as long as you can, and focus on the long-term benefits of the investment. It is then only that you would be able to avail the entire spectrum of investment returns from the plan including a higher maturity value, loyalty benefits, partial withdrawals and free fund switching options.

 

 

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