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Exploring ULIP Policy Surrender Rules

The majority of investors invest in ULIPs because they are the most tax-efficient option. Because ULIPs are categorized as insurance products by the Internal Revenue Service, they are a mix of both insurance and investment instruments, delivering annual benefits as an investment instrument and tax benefits as insurance instruments.

Before investing in any financial instrument, the majority of people check the annual tax benefit to reduce their tax burden, but it's also a good idea to review the tax implications on the maturity of an insurance policy, ULIP, or any other investment. The amount of premium paid for ULIPs is deducted under section 80C, however, it's important to focus on the tax benefit on the premium paid for ULIPs. When your ULIP matures at the end of its term, the total amount received by you or your nominee is completely tax-free under section 10 of the Internal Revenue Code (10D). However, the tax benefits are only available if the conditions set forth in the Income Tax Act of 1961 are met in regard to insurance premiums.

ULIP Policy Surrender Rules

Below are few ULIP Policy Surrender Rules:

1. Renouncing Before The Five-Year Period Is Over

ULIPs have a five-year lock-in period, although it is still possible to cancel the insurance. The money, on the other hand, will not be given to the policyholder until the 5-year period has ended. It's important to note that the amount returned after 5 years is not the value of the fund at the time of surrender. This is how things work.
The assurer will deduct specific discontinuation charges after a policy surrender request before transferring the remaining fund value to the Discontinued Policy (DP) fund. The assurer may charge a fund management fee of up to 0.5 percent of the total amount while the money is held in the DP fund.

2. Option After Surrendering

Even if the policy has been surrendered, it can be reinstated within two years after its termination date, but not later than the end of the fifth year. To resuscitate the policy, all outstanding payments must be made, and coverage will continue to be provided. Previously deducted discontinuance charges would be added to the DP fund value upon resurrection, while policy administration and premium allocation charges would be levied, which were not collected in the DP Fund. The risk cover on the policy will be eliminated after you submit the surrender request. The policyholder will be liable to the DP fund value if the policy is not renewed before the end of the fifth policy year.

3. Discontinuance Charges (DC)

The highest DC in the first, second, third, and fourth policy years might be Rs 6,000, Rs 5,000, Rs 4,000, or Rs 2,000, respectively, if the annual premium exceeds Rs 25,000. It is Rs 3,000, Rs 2,000, Rs 1,500, or Rs 1,000 in the first, second, third, and fourth policy years, correspondingly. If the insurance is terminated in the fifth policy year, there is no payment.

4. Returns 

Returns in a ULIP are market-linked, meaning they are affected by the performance of the underlying asset class, whether it is stock, debt, or both. ULIPs are long-term investments that provide both risk protection and profits, according to Mathur. As a result, the product must be evaluated with some fees towards the sum assured (mortality charges), fund management charges, policy admin charges, and other deductions.” It would take a number of excellent upward stock market cycles to recoup these costs while still providing you with a reasonable return.


A unit-linked insurance policy's different charges are forward and primarily absorbed throughout the first five years of the program. As a result, departing soon after the five-year lock-in period expires may not be the ideal option, and long-term goals may be jeopardized. As a result, align your ULIP assets with a long-term aim and stick to it by paying your expenses on time until the term ends.

You may also like to read - Should I Buy ULIP Or Mutual Funds?

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.

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