Here’s why exiting ULIP after the lock-in period is a bad idea

 Here’s why exiting ULIP after the lock-in period is a bad idea

 Here’s why exiting ULIP after the lock-in period is a bad idea


When you are looking for investments, there are several factors that one needs to consider, ranging from returns to liquidity. The liquidity of investments is a key factor to consider, knowing how easy it is to access funds when you need them. The returns that you earn and the risk appetite that you have are also factors that directly influence your decision-making. For the checklist of long-term investments, Unit Linked Insurance Plan (ULIP) is one that gets all the ticks. Let’s look at what makes ULIP a perfect long-term investment and why you should stay invested even after the lock-in period.

What is a ULIP plan?

ULIP is life insurance with an investment part to it. It offers life cover along with returns on investment. For ULIP as an investment, there are several types of funds a policyholder can choose from based on their risk appetite. Also, one of the unique ULIP benefits is that the policyholder can switch their fund allocation anytime they want. Since it is a market-related investment, the ability to switch funds helps the policyholder to make the most of market volatility. 

What is a lock-in period?

While understanding what a ULIP plan is, you will come across a term known as the ‘lock-in period’. In the tenure of the lock-in period, the policyholder cannot liquidate any funds from their investments. However, once the lock-in period has ended, they can withdraw their funds anytime they want. When ULIPs were launched, their lock-in period was initially 3 years. Later, new regulatory changes were implemented on 1st September 2010 when the lock-in period was extended to 5 years.

Several users make the mistake of immediately exiting their ULIP after their lock-in period has been completed. Knowing what a ULIP plan is and its benefits, they find themselves disappointed when they exit soon. This is because, to benefit from the potential of ULIP truly as an investment, it is important to stay invested in it for the long haul. This is because, along with providing life insurance, it offers investment. 

The returns offered are one of the biggest ULIP benefits in the long haul. Investing in a ULIP helps the policyholder to achieve their long-term financial goals. Whenever the policyholder needs funds urgently, they can opt for partial withdrawals free of cost. Most funds allow partial withdrawals that do not exceed 20% of the fund value in a policy year.

What to do after your lock-in period has ended?

Here are two factors that are directly affected if you immediately exit your ULIP after the lock-in period has ended:

  • Provides higher profits on long-term investments
    ULIPs are a long-term investment. The earlier you invest in it, the more likely you are to earn returns. The purpose behind the ULIP lock-in period is that the policyholder invests in a disciplined approach for the long haul. Investors prefer to stay in ULIPs for 10 to 20 years to seek the true benefits from their ULIPs. Also, the higher the number of years is, the higher is compounding likely to be. The compounding of investment ensures that over time, the policyholder is earning returns not only on the core investments but also on the returns that they have previously earned.

  • Low charges for the long haul
    When you buy a ULIP, the premium that you pay is partly allocated towards providing you with a life cover and partly allocated towards assets of your choice. After a policyholder purchases a ULIP, there are some nominal charges laid, like premium allocation charges, policy administration fees, and fund management charges. The deduction charges are high in the initial years and reduce over the years. This ensures that the longer the duration of your policy is, the lower your charges will be. There comes a point over the years where these charges no more impact your fund value. When your ULIP lock-in period has ended, these charges are written off and your capital grows full-fledged. Hence, exiting a ULIP immediately after the lock-in period does not fetch enough returns, as compared to the ones expected on a long haul. 

After the lock-in period has ended, smart investors prefer to continue their investments ahead rather than surrendering their policy immediately. Most of them prefer to stay invested for at least 10 years. In case of urgent need of funds, there is a partial withdrawal feature of ULIP where they can remove funds anytime they want.