Why One Should Not Exit ULIPs?
Published On Oct 13, 2021 10:00 AM By InsuranceDekho
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The Insurance Regulatory and Development Authority of India issued a new set of regulations for Unit-linked Insurance Plans in 2010, which marked a watershed moment for ULIPs. To promote ULIPs among middle-class Indians and to make them more appealing to customers, a number of improvements were implemented. The expansion of the ULIP lock-in period was one of the several adjustments made by IRDAI.
Previously, the lock-in term was only three years, but from September 1, 2010, new regulatory reforms have increased the lock-in time to five years. The money you put into a ULIP is now locked in for the first five years. During this time, no liquidity is available. However, once the lock-in period has over, you are free to withdraw your funds at any time.
Those who purchased a ULIP as a medium-term investment instrument may intend to quit as soon as the lock-in period expires. Users are dissatisfied when the product's features do not match their personal objectives. It is not recommended to abandon the program early because most people buy insurance to gain long-term benefits. We're all aware that ULIPs provide insurance and investing benefits in one package. It is, however, more known as an investment vehicle. ULIPs are appropriate for people who are not financially disciplined and find it tough to manage their invested money.
Why Should One Not Exit ULIPs?
Below are a few points to keep in mind before you exit a ULIP:
1. Impact On Fund Values
The Impact on Fund Values ULIPs includes a slew of costs that are heavy on the font. These expenses are further amortized over the first five years of the policy. The NAV-to-NAV return for any particular ULIP fund might be around 9% after five years (yearly return). The fund's valuation, however, may not reflect this. The other charges are the root of the problem. The impact or effect of these charges diminishes over time, especially after the fifth year. You'll need several stock market upswings to recuperate your investment.
2.No Loyalty Bonuses Are Given To You
It is not a good idea to leave a ULIP before the lock-in term (5 years) has passed. It's also worth noting that the first five years account for the vast majority of the overall costs. Additionally, if the fund's value rises, exiting at that point will be unreasonable. If you do not keep investing until the policy matures, you will miss out on any loyalty increases, which are paid out along with the maturity benefit (fund value) at the policy's end.
You have the opportunity to prevent the coverage and remove the current amount, which includes the top-ups if you do not earn sufficient returns after the lock-in period. If you're in a pinch and need money straight away, this is also something you can do. Unless you are in severe need of cash, you are not able to leave soon after the lock-in time has expired.
3. Fund Performance
The only risk associated with ULIPs is the performance of the funds. It's likely that the fund's performance will fall short of expectations. It's expensive to get out of a situation like this. In the event of a market slump, your returns from a complete equity-oriented ULIP are likely to be below. It's a good idea to look at the performance of the programs if the markets did well. Exiting the plan during its bull phase, when the scheme is functioning well, is not encouraged. You must stay on the regimen in order to gain the revitalizing benefits. You can keep the capped fund you chose for your ULIP.
4. Your Financial Goal Will Not Be Met
Make sure you don't endanger your financial goals by exiting your investment in the middle. After the lock-in period, which is the first five years, ULIP holders are entitled to exit. The user does not have to pay any surrender penalties as a result of this. They must, however, practice disciplined investing by starting a SIP and avoiding returns from products that provide risk and return protection. Furthermore, you should revisit your financial strategy to ensure that your investments and risks are correctly linked in order to achieve your long-term objectives.
Those who have previously purchased a ULIP should hold it until it matures and link it to their long-term goals. Over a 15-year period, the total effect of all charges examined in a ULIP is 2.23 percent. ULIPs are built with at least ten-year goals in mind, and they offer both transparency and flexibility. For liquidity, partial withdrawals are also possible. So, if you want a high return on your insurance policy, get a ULIP and make sure to maintain it invested during the policy's term.
Also read - Ways To Reduce Income Tax Using ULIPs
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.