What Happen If You Stop Your ULIPs Before 3 Years?
Unit Linked Insurance Policies (ULIPs), though now heavily marketed as a tax saving tool with guaranteed return are actually a mix between an Insurance Policy and a Mutual Fund. Thus it provides you capital appreciation and a life cover at the same time and as such is a tool to grow your money. And for this exact reason, they require time. ULIPs fundamentally require close to 10 years to give you substantial returns.
However, investors see them more as a tax saving tool where money is temporarily locked for three years to account for tax deduction and is withdrawn after the 3-year lock-in period. What one fails to see is that ULIPs are front loaded instruments, where fund charges are very high during the initial few years and even out only over a course of time since the greater proportion of your money goes to building your fund value actually only after the first three years.
However, if one must stop their ULIP before three years, following are the repercussions:
- If you stop your policy even before completely paying the premiums for the first year, then you won't get any of the money that you put in.
- You can stop premium payments for the ULIP after the first year without penalty; however, you cannot take out the money paid till date until 3 years from the start date of the policy is complete.
- If you stop your policy after the first year and before 3 years, then you can take back your money invested after the three year lock-in period. This money would be returned not as per the NAV after the three years but on the NAV in the year you stopped your policy. Also this money would be released only after the various annual, fund management and surrender charges are deducted.
- In the event that the particular ULIP underperformed in the brief initial years, then you would have to bear the low returns along with the high surrender charges. This could also create a scenario where you actually get lesser money than what you have invested till date.
- Your insurance cover will be immediately stopped, and you would not be covered for any amount.
Hence ULIPs as a product require a good amount of time of close to 10 years to build up a good return. If one is not interested in holding out for so long and is looking solely at equity investment and not insurance cover, then one should rather opt for Mutual Funds.