How to Surrender a ULIP?

A ULIP or a Unit Linked Insurance Plan is a financial product that merges the two essential components of any financial plan – life insurance and investment – into one product. Since ULIPs are an appealing investment option, they perform better if they are held for a long period. However, for some reason or the other, some people may want to surrender their ULIP before the end of the tenure. 

One can indeed surrender their ULIP policy when one wishes. However, this action may come with its share of consequences that may affect your overall experience with the ULIP. Let’s look into this in more detail. 

How does a ULIP work? 

To understand the impact of surrendering a ULIP, one must first look at how ULIPs work in detail. As mentioned earlier, a ULIP provides the dual benefit of insurance and investment under one product. When you pay the premium of a ULIP, the amount is utilised for two purposes. One part of the premium goes towards creating the life cover amount, and the other part is directed towards different investment avenues. 

Because ULIPs have an investment component attached to them, they tend to have a higher premium. You can get an estimate of this premium as well as the returns you can gain within a particular tenure with the ULIP calculator. 

The investment amount earns returns as per the performance of the financial instruments in the market. The longer these instruments are held, the better they perform. That is why one must avoid surrendering their policy if possible. 

Now that the meaning of ULIP is clear, let’s look at how one can surrender their policy. 

• ULIP surrender before the end of the lock-in period 

For the uninitiated, a ULIP has a lock-in period of 5 years. During this lock-in period, the policyholder is not eligible to make any withdrawals on the ULIP. It is only after the policy has completed at least 5 years that one can receive any kind of returns. This may seem like a complication; however, this allows your investment to grow and a considerable corpus to be created. 

Surrendering the ULIP before the end of the lock-in period is not advisable since you will not receive the accumulated returns right after the surrender. You will receive the returns only after the end of the 5-year period.

Moreover, there is no assurance that the money you receive even then would be equivalent to the ULIP fund value during the period of surrender of the plan. After you apply for surrender, your investment is shifted to the discontinued policy fund. The insurer may also levy discontinuance charges at this step. While the money lies in the DP fund, a minimal fund management charge is also levied. 

The money kept in the DP fund earns a small amount of interest. The total amount is then provided to the policyholder once the lock-in period is complete. 

If you surrender the policy during the lock-in period, the tax benefits you may have gained on the policy are also reversed. 

Surrendering the ULIP after the lock-in period 

Once the lock-in period is over, you can easily apply for the surrender of the plan. The fund value as of that date may be provided to you after the application of certain charges. The fund value is calculated by taking the NAV or Net Asset Value into consideration. 

Though it is easy to apply for surrender after the lock-in period, it is not recommended. The main meaning behind investing in a ULIP is to reap the benefits of long-term investment. This is especially more relevant for equity ULIPs, whose gains are subject to the power of compounding. Hence, experts suggest holding the investment for at least 10-12 years. 

Alternatives to surrendering your ULIP 

• If you are surrendering the plan because you are in need of money, you can instead opt for a partial withdrawal. You can even set up a systematic partial withdrawal plan to receive regular pay-outs. 

• If the main reason behind the surrender of the plan is its underperformance, then you can consider switching funds. This way, your investments in equity funds can be transferred to debt funds and vice versa. You can use tools such as the ULIP calculator to better understand how your funds may perform in different asset classes if you are planning to switch funds. 

Most of all, you must consult a financial expert. It is important to get an expert opinion on the matter before proceeding.