ULIPs are long-term saving options. Through continued investment in the capital market, you can accumulate funds for your life goals. The maturity proceeds can help in buying property, paying for children’s education, or building funds for retirement. Encouraging investors to stay invested ULIPs feature a lock-in period.
Knowing the lock-in feature and its implications can help you avoid losing out on the possible returns from ULIPs.
What is the lock-in period in ULIP?
In case of any emergency or in times of need, ULIPs provide the option of partial withdrawals post the minimum lock-in period. You can make partial withdrawals, as long as the total amount you withdraw in a year does not exceed 20% of the value of your fund in a policy year. Partial withdrawals are free of cost. However, ULIPs are meant for your long term goals and hence, try not to withdraw money unless absolutely necessary.
Let’s understand this better with the help of an example. Rahul is a 30-year-old male who purchased ICICI Pru Signature* with a policy term of 20 years. Rahul decided to pay ₹ 1 Lakh per year as premium for 20 years and the life cover for the plan was 10 Lakh. In the near future, Rahul completes 5 years in his ICICI Pru Signature policy. This also happens to be the year Rahul sends his son to a boarding school for further studies. Since Rahul has completed 5 years of his investment in the policy, he can now withdraw up to ₹ 1, 50,000 (20% of his fund value, assuming his current fund value is ₹ 7,50,000) in the 6th year of the policy and gets done with his son’s admission with ease.
Why should you not exit ULIPs after the lock-in period ends?
- Low charges in the long run: Your insurer allocates part of your ULIP premium towards your life cover. Another portion goes into different saving assets as per your choice. Thus, they levy a premium allocation charge. Fees for fund management and policy administration also apply.
The deductions are higher in the initial years and reduce over time. Thus, the longer you continue your policy, lower becomes the charges. Finally, at one point, the costs no longer impact your fund value.
Hence, right after the lock-in, the charges are primarily written-off, and your capital is set to grow. Therefore, exiting at this point will fetch lower returns.
- Chances of profits better on long-term investments: ULIPs should be used for long-term investment so ideally, you would need to start early and stay invested over the long-term. These have a lock-in period of five years, so they aim to instill focus and discipline in your investment journey. It is advisable, to see real benefits from your investments in ULIPs, you need to stay invested for 15-20 years
Moreover, insurers provide loyalty benefits as extra units for staying invested. Such rewards further boost your wealth.
The lock-in period allows you to reap the benefits of long-term investment. However, even after this stage, there are better options than surrendering your policy.
In an urgent need for funds, you can use ULIPs’ partial withdrawal feature. It allows you to en cash a part of your fund value instead of surrendering your policy.
You can consider a ULIP like the ICICI Pru Signature. The plan invests your entire premium into your chosen funds and returns the charges at maturity1. Also, wealth boosters2 and unlimited free switches help maximize your profits.
Besides these advantages, the systematic withdrawal plan3 allows you to redeem your fund value periodically. Along with a life cover up to 99 years of age4, this plan provides comprehensive protection and remarkable chances to grow your wealth.
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* ICICI Pru Signature is a Unit-Linked Insurance Policy (ULIP) and is different from traditional products. Investments in ULIPs are subject to investment risks. The past performance of other funds of the Company is not necessarily indicative of the future performance of these funds.
1 On maturity of the policy, you will receive the Fund Value including the Top-up Fund Value, if any. You have the option to receive the Maturity Benefit either as a lump sum or as a structured payout using Settlement Option.
2 The company will contribute to your wealth creation by allocating extra units to your policy at the end of every 5th policy year starting from the end of 10th policy year till the end of your policy term. Each Wealth Booster will be a percentage of the average Fund Values including Top-up Fund Value, if any, on the last business day of the last eight policy quarters.
3 Under Partial Withdrawal facility, you can choose to opt for Systematic Withdrawal Plan (SWP). This facility allows you to withdraw a pre-determined percentage of your fund value regularly. This can help you to meet specific needs such as child’s education or money for day-to-day expenses during retirement. Systematic Withdrawal Plan is allowed only after the first five policy years.
4 Life cover is the benefit payable on death of the life assured. Life cover for 99 years is available under the 'Whole Life Benefit' option.