ULIP Lock-in Period – What is a Unit Linked Insurance Plan Lock-In Period?


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When it comes to investing in a good financial/investment scheme, there are a host of products available in the market to choose from. Some offer a return on investment, while some offer life coverage. However, there are few plans like ULIPs that provide the dual benefit of staying secured under life coverage along with the option to earn a good return on investment.   

The lock-in period in a ULIP plan is a period during which the investor cannot withdraw the money invested in the fund. The ULIP lock-in period has been increased to five years per the 2010 IRDAI amendments. Before that, this period was three years. Let us look at some of the key highlights of the ULIP lock-in period in this post.

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Withdrawal Options 

ULIPs generally do not allow the funds to be withdrawn by the investor before the lock-in period. A partial withdrawal is allowed after the minimum lock-in period of five years is over. However, in some cases, some insurers allow withdrawal after three years of the plan by paying a certain charge.

When it comes to return on investment, ULIPs are termed sound investment options. They are better if you are planning for long-term savings. Investors can use ULIPs to meet their financial goals in the long term. Thus, it is advised not to consider withdrawing funds from your ULIP scheme before the lock-in period is over unless it is unavoidable.

ULIP Policy Discontinuance 

Generally, the ULIP lock-in period is five years before which it is not suggested to withdraw the fund. However, in extreme cases, if the investor is not happy with the plan returns, if the plan is not up to the expectations of the investor, or if the investor has some urgent requirement, they can choose to surrender the policy.

If a person chooses to surrender their ULIP plan, it implies that the individual is exiting from the plan before maturity. So, in this case, the funds under the policy are transferred to the DP fund or discontinued policy funds. In this case, there are some terms and conditions that the investor has to meet to discontinue the policy. One such condition is that a certain amount of the money is deducted from the fund as a penalty.

Discontinuation before the lock-in period of the policy doesn’t mean that the fund under the ULIP will be transferred to the investor’s bank account. Once the investor stops paying for the ULIP premiums, the insurer sends a notice to the policyholder within 15 days of the policy expiry date. The policyholder must inform the insurance provider if they want to discontinue the plan or to revive it after receiving the notice.

If the policyholder chooses to discontinue the ULIP before the lock-in period, they will still receive the money back after the ULIP lock-in period is complete. In such a case, the money from the ULIP account will be transferred to the DP account at a minimum 4% interest rate till the expiry of the lock-in period. The interest rate offered in this scenario might change as per the framework of the authorities regulating the plan. Alternatively, if the policyholder dies during this time, the fund will be offered to the nominee.

Why you should continue the ULIP plan even after the lock-in period?

It is possible to withdraw your funds from your ULIP scheme after the lock-in period is over. However, there are various valid reasons that make it beneficial to stick to the plan even after the lock-in period is over or not to exit the plan till it matures.

A ULIP plan applies several charges, such as premium allocation, fund allocation, administration fees, fund management charges, etc. All these charges are required to be paid by the investor to exit from the scheme once the ULIP lock-in period is over.

Further, it is also important to note that these charges mentioned above are high in the initial years of the scheme. So, the returns you receive will be lower because of the high charges you pay. But with time, these charges reduce, and you can receive better returns.

ULIP is a better option for people looking for long-term investment, and it is good to continue the scheme until maturity instead of exiting in between.

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To conclude 

ULIP plans are beneficial to fulfill your goals and financial needs. Policyholders need to respect the lock-in period of a ULIP plan. Investing in ULIP is a brilliant idea if you want to enjoy the dual benefits of investment returns and life insurance. Further, an investor must keep the plan active till maturity to reap long-term benefits.
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FAQs: What is a Unit Linked Insurance Plan Lock-In Period?

Why should people invest in ULIPs?

Investing in a Unit Linked Insurance Plan (ULIP) has many benefits. It includes the dual coverage of life insurance as well as investment, where your money is invested in the financial market to gain returns. Thus, it is considered a scheme offering a good return on investment.
Another advantage of ULIP is that it allows tax benefits to the investor on the returns received at maturity under section 10(10D).

How ULIP works?

ULIPs invest your money in funds like debt, equity, etc., to gain maximum returns. They also offer the option of fund-switching to investors so that they can switch funds if they sense any insecurity about their invested money. Further, if the policyholder dies, all the benefits availed by the investor on the policy are given to the nominee.

How can I use the funds of the ULIP?

There are many ways to use the ULIP funds. Below are some examples of using the ULIP fund.

~ For retirement - You can use the ULIP amount to plan your retired life peacefully
~ Education of children - You may use the money to offer your child the best education
~ For creating wealth – This is another good option for investors as they can use the amount to fulfill their financial goals in the future.

What is the lock-in period in insurance?

In insurance, the lock-in period means the time duration during which a policy or fund cannot be withdrawn.

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Aug 25, 2023
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PayBima Team
PayBima is an Indian insurance aggregator on a mission to make insurance simple for people. PayBima is the Digital arm of the already established and trusted Mahindra Insurance Brokers Ltd., a reputed name in the insurance broking industry with 17 years of experience. PayBima promises you the easy-to-access online platform to buy insurance policies, and also extend their unrelented assistance with all your policy related queries and services.

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