Know the Impact of Surrendering a ULIP


Unit-Linked Insurance Plans (ULIPs) have become a popular investment avenue in India due to their dual benefits of life cover and wealth creation. If you are wondering why you should invest in ULIP now, there are many reasons to do so. ULIPs have multiple benefits if you stay invested for an extended period.

However, if you have to surrender the policy for any reason, you may lose most of its advantages. Here, we explain the impact of surrendering your ULIP.

What is ULIP?

The ULIP meaning is a life insurance policy that offers an investment opportunity. You need to keep a regular premium to keep a ULIP active. The insurance provider creates the life cover and invests part of your premium in equity, debt, or a combination of multiple funds depending on your financial goals and risk appetite. The investment can grow into a substantial fortune in the long run. Before investing in a ULIP, learn about some of its essential aspects.

As ULIPs are market-linked policies, the financial market condition significantly influences your returns. It determines the Net Asset Value (NAV) of your ULIP fund. The NAV determines how much return you can expect from the ULIP. You can check the NAV regularly and make investment choices accordingly.

The NAV also impacts the ULIP’s surrender value. The surrender value is the amount you are eligible to receive if you decide to discontinue the policy. The amount depends on when you surrender the ULIP. Read on to understand it better.

Surrendering during the lock-in period

As already mentioned, surrendering the policy affects the ULIP benefits, resulting in reduced returns. However, the actual impact depends primarily on whether you surrender the ULIP during or after the lock-in duration. ULIP policies come with a five-year lock-in period during which you cannot withdraw your funds. However, if you have to surrender the policy during the first five years, the insurance company will charge you an additional fee. 

The surrender charge is not the only thing to consider before discontinuing your ULIP. Here is a list of consequences of surrendering ULIPs during the lock-in tenure.

  • Your policy gets discontinued. You will still receive the surrender value, but when the lock-in period ends 
  • You will need to pay multiple charges. Hence, the surrender value will not be equal to the fund value. The insurer will deduct specific discontinuance fees and will pay the remaining amount when the lock-in term ends
  • You will have to give up the policy’s tax benefits. The insurer will pay you the surrender value after deducting the Tax Deducted at Source (TDS), as any returns from ULIPs become taxable if you discontinue it within the first five years
  • Your insurer keeps the payable amount in a Discontinued Policy Fund after you surrender the ULIP. The money stays in the fund until the lock-in period is over. During this time, you earn a yearly 4% interest rate on the fund value. However, you may also have to pay up to 0.5% fund management charge during this period

Surrendering after the lock-in period 

Investing in ULIP means to keep the policy active for a long tenure to generate substantial returns. If you surrender the ULIP after the initial five years, the insurer will not charge any discontinuance fee. However, you still miss the opportunity to increase your wealth over an extended tenure, resulting in significantly lower returns. Additionally, you may have to pay higher mortality, administrative, fund management, and other associated fees while surrendering the ULIP, as these expenses will not be divided over a long tenure. Staying invested for the long term makes-up for these charges by helping you earn more wealth. 

So, if you want to enjoy the ULIP benefits, consider continuing the policy for 15 to 20 years unless it is necessary to surrender early.  


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