What Happens When You Surrender Your ULIP In India?

What Happens When You Surrender Your ULIP In India?

Health Insurance

ULIPs provide you the dual benefit of insurance cum investment plans and are famous among all age- groups in India. Moreover, it is a sought-after plan for those who are tardy to maintain protection cover and investment separately. So if you are planning to have a ULIP plan, know the exit options and reasons to consider them for longer term.

Concept of ULIPs

Unit linked insurance plans are hybrid products that offer the benefits of protection cover and wealth creation by investing in capital markets. As ULIPs are structured insurance products these funds reap benefits only if invested for a longer term which is 10 – 15 years. Moreover, ULIPs have a lock-in period of 5 years, which was extended from 3 years in 2010 by IRDAI.

Surrendering before Lock-in period ends

Lock-in period means that you cannot withdraw the fund before the end of the tenure that is 5 years. In case you surrender it before 5 years the insurance product ceases to exist and the amount is received only after the end of 5 years. Here is how it works-

·Applying to surrender before 5 years will move the fund balance to a discontinued policy fund (DP) after deducting the discontinuance charges.

·The insurer may also charge a maintenance fee for allowing the fund to remain in DP, which is not more than 0.5% of the balance amount.

·You can still earn an interest on the balance amount which is very low but your risk cover will get terminated.

Reviving your policy after surrendering

You can also cancel your decision to surrender your funds within 2 years but before the end of 5 year of policy discontinuance. To revive the policy, one would need to pay the pending premium amount along with the policy administration charges and premium allocation charges. The discontinuance charges would be added to the DP fund value on revival and the policy continues as before.

Discontinuance charges for surrendering ULIPs

 The discontinuance charges vary depending upon the annual premium of the policy. If the amount is above Rs. 25000 the amount paid would be a maximum of Rs. 6000, Rs. 5000, Rs. 4000 or Rs. 2000 in the 1st, 2nd, 3rd and 4th year. In case of lesser premium amount the charges are Rs. 3000, Rs. 2000, Rs. 1500 or Rs. 1000 in the 1st, 2nd, 3rd and 4th year.

Tax implications

If you surrender your ULIP plans before 5 years you will be charged tax basis the entire surrender amount added to your gross income for that year. For example, if a person’s annual income is 15 lakhs and the surrender value is 3 lakhs, the total income for taxation would be considered 18 lakhs.

Though if you surrender after 5 years your surrender value would be tax exempt and you can also avail tax benefit on the assured amount. But the returns that one would get after withdrawing immediately after the lock-in period ends is much lower.

To reap the actual benefits of investing in ULIPs one would need to stay invested for atleast a duration of 10-15 years.

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