Let us begin by understanding what is ULIP plan.
Unit-Linked Insurance Plans, or ULIPs, are special financial products that combine investing and insurance into a single package. ULIP plans offer protection in the form of insurance and investment for long-term capital gains if you want to stay invested for a long time.
The way ULIP investments work is as follows: when you invest in a ULIP, a portion of your money is used to purchase shares or bonds, and the remainder is used as a premium for an insurance policy. An added benefit of ULIP plans is that they provide you with the freedom to move between equity and debt investments, depending on your risk tolerance.
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The idea of a lock-in timeframe
A lock-in period is a duration for which you cannot cancel your ULIP investment, as the name implies. This means that you are not permitted to make a withdrawal or take advantage of your payments prior to the end of the time.
The Insurance and Regulatory Development Authority of India (IRDAI) recently expanded the lock-in term for ULIP insurance from 3 to 5 years. Earlier, this duration was set at 3 years. Although you cannot withdraw the money prior to the lock-in period’s expiration, you can still surrender the money before that point. If you cancel the plan before the five years are up, the insurance coverage will finish, and you won’t get your money until then. Visit the official website of IRDAI for further details.
Despite this, investing in a ULIP plan can still be very beneficial for investors. In addition to the apparent benefit of online life insurance, choosing your investment portfolio gives you a great deal of freedom.
But what occurs if your ULIP premium is not paid for three years?
You could occasionally experience financial difficulties that prevent you from being able to pay the payment. A ULIP may not meet your financial objectives, or you may come to that realisation. You have two options if you decide to cease paying your ULIP premiums before 3 or 5 years (of the typical lock-in period). Either you renew the policy, or you leave the programme without having life insurance coverage. Let’s summarise the effects of this:
- No penal measures: To start, you wouldn’t be punished for withdrawing early. If you fail to pay premium on time, your insurer won’t impose any penalties. The only limitation is that you are unable to withdraw the funds until the lock-in term of three years (or five years, as applicable) has elapsed.
- Loss: If you stop paying the premium before even one year has passed, you risk losing all of the money you have already invested.
- Notice: Within 15 days of the policy’s grace period expiring, you will receive a notification if you stop paying your ULIP premiums. This gives the policy a second chance. You can let the firm know if you want to keep the insurance within 30 days of receiving the notice. The payment of all outstanding premiums and fees is necessary for the coverage to be reinstated.
- Final payout: The withdrawal amount will only be paid out if the policy is discontinued rather than being revived after the lock-in term. Yet the full fund worth is not represented by this sum. Instead, it must pay several fees and deductions, including fund administration fees, yearly fees, and surrender fees.
- Tax treatment: The overall income will include the surrender value and any prior tax deductions claimed against the ULIP.
In India, there are two tax regimes available – the old regime and the new regime. The choice of tax regime can impact the tax benefit you receive, so it’s important to consult an expert and select the one that best suits your needs. If you realize that your current regime is not optimal, you can change it in the next financial year.
Note that you can always adjust the money allocation if you are dissatisfied with the results of your ULIP investment. When you leave ULIP insurance, you will have to locate a replacement in the form of online life insurance, a reliable investment option, and pay fees. Choose wisely!
Discontinuing payment of premiums in Unit Linked Insurance Plans (ULIPs) can have various consequences, depending on the policy terms and conditions. If the policyholder stops paying premiums within the lock-in period, the policy may get lapsed, and the benefits associated with the policy may get forfeited. In such a scenario, the policyholder may have the option to revive the policy within the stipulated time frame by paying the outstanding premiums and any interest or penalties levied by the insurance company.
A policyholder may not have thoroughly understood what is a ULIP plan and discontinues the premium payments after the lock-in period, the policy may not get lapsed, but the benefits associated with the policy may reduce. In such cases, the policyholder may have the option to either surrender the policy or keep it alive without any additional premiums.
