The market has a host of financial products that can cater to people with different financial goals and expectations on the returns. People wanting to ensure a financially secure future for their family in their absence usually opt for a term plan, while those seeking high returns might invest in small-cap mutual funds. What makes a unit-linked insurance plan unique is that they provide the protection of life insurance in tandem with market-linked returns.
ULIPs are long-term saving options. Via continued investment in the capital market, policyholders can accumulate funds for life goals. The maturity proceeds can go towards buying property, paying for children’s educational parties, or building funds for retirement.
For ULIPs, a part of the premium paid is used to provide insurance, with the balance amount getting invested in bonds, stocks, and other instruments. And while ULIPs are an insurance product, many consider it as an investment instrument. Earlier, ULIPs came in with a minimum investment period of three years. Eventually, this lock-in period was extended to five years.
In the initial years of investment with a ULIP, the funds are locked in and the policyholders have to pay the premiums regularly as mandated. After the completion of the ULIP lock-in period, one can exit the it. The question is – should they? To answer this question, let’s understand partial withdrawals more in detail.
What are partial withdrawals in a ULIP?
In emergencies or in times of need, one of the benefits of ULIPs is that they let you make partial withdrawals post the minimum lock-in period. 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, you can make partial withdrawals. These withdrawals are free of cost. However, ULIPs usually perform over the long term, and therefore, one should avoid withdrawing money unless it is absolutely needed.
Consider the following example:
A 30-year-old male has purchased a ULIP with a policy term of 20 years. He decides to pay ₹ 2 Lakh per year as premium for 20 years, with the life cover for the plan being ₹ 20 Lakh. In the near future, he completes 5 years of regularly paying the premiums and maintaining this policy. Now, he decides to send his son to a boarding school for further studies. Since the lock-in period of 5 years has ended, he can now withdraw up to ₹ 3,00,000 (20% of his fund value, assuming his current fund value is ₹ 15,00,000) in the 6th year of the policy and he gets done with his son’s admission without any hassles. Thus, staying put and not having the opportunity to deplete the corpus during the lock-in period lets an investor make withdrawals of high value in the future.
Why should you avoid exiting ULIPs after the lock-in period ends?
- Low charges in the years to come: A part of your ULIP premium gets allocated towards your life cover. Another portion goes into different saving assets based on your preferences. Consequentially, a premium allocation charge is levied, along with fees for fund management and policy administration. In the initial years, these deductions are higher, eventually reducing over time. Therefore, the longer you continue your policy, the lower the charges get. Finally, at one point, the costs no longer impact your fund value. Right after the lock-in, the charges are primarily written-off, and your capital gets set to grow. Hence, exiting at this point may fetch you lower returns.
- Chances of better profits over the long term: Because of their nature of benefits, ULIPs are best suited for long-term investment. Therefore, ideally, one should start early and stay invested over the long term. ULIPs have a lock-in period of five years, which can help instil focus and discipline in the investment journey. To see real benefits from investments in ULIPs, a period of 15-20 years would be ideal. What’s more, insurers tend to provide loyalty benefits as extra units for staying invested in the long term. Such rewards can further boost your wealth.
The lock-in period in a ULIP helps reap the benefits of long-term investment. For urgent needs, you can use the partial withdrawal feature and encash a part of your fund value instead. This way, you only use the amount you need, and the rest remains invested and helps you generate wealth.