Best suited for individuals with long-term financial planning, a ULIP investment offers comprehensive life insurance policy coverage for the policyholder. While a part of the money invested covers insurance, the other part is utilised for investing in market-linked funds. These plans are designed with a lock-in period of 5 years. Since the capital market is respected for providing long-term gains and monetary returns, it is best advised that a ULIP plan must not be withdrawn before at least 10 – 15 years.
Let’s explore more on the subject of the ULIP plan being a comprehensive life insurance policy and the reasons for staying invested even beyond the lock-in period of 5 years.
Types of Policy Surrender
The surrendering feature that a ULIP plan offers can be broadly classified into two categories:
Surrender Before 5 Years
A ULIP policy cover is not restricted to the withdrawal of the policy only after 5 years. Users are allowed to withdraw their policy and encash the surrender value of the ULIP policy even before the completion of the due time, but in such a case, the policyholder has to bear mandatory surrender charges.
These Charges Include:
- Discontinuance charges
- Fund management charges on the discontinued policy fund amount
- Interest charges on the discontinued policy fund till the lock-in period completes
Note: Even if the ULIP plan has a provision for discontinuity of the insurance cover, the leftover premium after the date of surrender is still payable for upto 5 years.
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Surrender After the Lock in Period of 5 Years
There are no charges imposed on surrendering the policy after the lock-in period, but due to the additional benefits that a policyholder enjoys, it is suggested to continue with a ULIP plan even after 5 years.
Why Should One Not Surrender the ULIP after 5 Years?
Lower Charges During Final Years and Hence Larger Investment
A ULIP policy is structured in such a way that the overhead charges that a user has to bear, along with the premium amount, reduce with time. Charges such as fund management fee, administration fee etc., seem negligible after the lock-in period of 5 years. Since a larger part of the premium starts getting invested due to the reduction of these charges, the plan fetches higher returns in the long run and not immediately after 5 years.
Actual Benefits After a Longer Term
The working of a ULIP plan has to be understood like a game. Since the invested sum is sensitive to market fluctuations, there are times when the fund value is high and times when the invested money seems to be drowned.
It is patience that a user needs to adapt to completely reap the benefits of a ULIP plan. Capital markets have always had a history of performing better in the long run, and this is the knowledge one should gain as the portfolio improves and performs better over time.
Is The Maturity Value Of ULIP Taxable?
This Question Should Be Attended To On Two Grounds:
Taxability for ULIPs Issued Before February 1, 2021:
Given that an annual premium of less than 10% of the capital sum insured is paid for the plans bought after April 1, 2012, ULIP returns on maturity are tax-free.
Taxability for ULIPs Issued on/After February 1, 2021:
ULIP policy under this category is taxable for a given level of premium paid, i.e., ₹2.50 lakhs. A 10% tax is imposed for users exceeding premiums paid over ₹1 lakh.
Is the Surrender Value of ULIP Taxable?
Taxability of ULIP on Surrender After Lock-in Period:
Provided that the amount of premium paid does not exceed 10% of the capital sum insured for any particular year, the receipts from a ULIP plan are tax-free under the Income tax rules.
Taxability of ULIP on Surrender Before the Lock-in Period
Surrendering the amount before the lock-in period would treat the entire surrender value of ULIP policy as gross income, which would be liable to tax payable under the given income brackets and their respective tax rates.
Conclusion
A ULIP policy is a well-crafted insurance cover with the aim of investment and covering uncertainties. It generates long-term returns for the user, given that decisions to surrender the policy are taken with respect to market analysis. Hence, it is the ultimate behaviour towards monetary returns that generates long-term capital gains for the buyer. Policyholders can check out insurance plans of different companies and then take a final decision. For example, with Tata AIA Insurance, you can use the ULIP return calculator to plan the entire process well.
