By FMTeam ULIPs are one of the renowned investment options that combine the benefits of life insurance with debt & equity funds. Under ULIP, a part of the premium is allocated towards life insurance & the remaining towards the money market. The amount receivable on the maturity of the plan is considered as ULIP Returns. The policyholder will receive either the sum assured or the fund value, or a combination of both. Hence, a good combination of funds should be allocated to the assets, which would ensure considerable returns & fulfil financial objectives.
There are three types of funds available under ULIPs:
A) Equity Funds
- Focus: Investing in stocks offers high growth
- Risk: High, due to being linked to the market.
- Suitability: Aggressive investors, i.e. those who are willing to take risks.
B) Debt Funds
- Focus: Investing in debts, bonds, & government securities offers stable returns & preservation of capital.
- Risk: Low-to-moderate
- Suitability: Risk-averse investors, i.e., those who are reluctant to take risks.
C) A combination of both
- Focus: Investing in both debt & equity to get stability & moderate growth.
- Risk: Moderate, depending upon the ratio of allocation between debt & equity.
- Suitability: Moderate-risk investors, i.e. those looking for both stability & moderate growth.
What is the lock-in period?
A lock-in period is a time horizon during which an investor is required to remain invested & is not allowed to withdraw funds. Under ULIP, the minimum lock-in period is 5 years, which means an investor is not allowed to withdraw funds during this period of five years. There is no maximum lock-in period, as the investors can remain invested for the entire duration, i.e. 10 to 20 years.
This means if a plan is bought with 15 years policy tenure, the first five years would be considered as a lock-in period. Once the lock-in period of 5 years is completed, investors are allowed to make partial withdrawals or surrender their plan.
However, there are certain exceptions under which withdrawals can be made during the lock-in period:
- Policyholder’s death
If the policyholder dies due to some unfortunate event, ULIP entitles the nominees to receive the death benefits, including the fund value.
- Critical Illness
The partial withdrawals are allowed to be during the lock-in period in case an investor is suffering from any critical illness.
Impact of ULIP Lock-in period on Liquidity
Mentioned are certain factors in which the ULIP lock-in period impacts the liquidity of funds:
- Limited Access to Funds
Due to a m&atory lock-in period of 5 years, it restricts access to the funds, building long-term investment. Hence, it prevents unnecessary withdrawal of funds arising from urgent financial requirements. Due to this factor, an investor can build long-term wealth.
- Financial Planning Discipline
The lock-in period builds financial discipline by requiring investors to stay invested for a longer tenure. This habit helps an investor prevent frequent withdrawals in case of non-urgent requirements, allowing consistent savings with long-term financial planning.
- Potential for Higher Returns
Due to ULIPs being market-linked, they offer better returns if left over a longer duration, as it balances the market’s ups & downs. Also, the power of compounding further enables wealth creation, providing better ULIP returns during a longer investment horizon in comparison to a shorter span.
- Influence on Debt Management
This feature of restricted liquidity of funds sometimes becomes a constraint, making immediate access quite difficult. In such instances, investors can avail a loan from the bank with the help of tax advantages & use it as collateral.
What happens if a ULIP is discontinued before the lock-in period?
Provided are the outcomes if a Unit Linked Insurance Plan is discontinued before the lock-in period:
- The surrender charges, or discontinuance charges, would be levied by the insurance company if the policy is surrendered by the investor before the end of the lock-in period.
- Once the surrender charges or discontinuance charges are deducted, the fund value would be transferred to a different fund, known as the Discontinued Policy Fund.
- The funds are returned once a lock-in period of 5 years has been completed.
- The accumulated funds yield an interest rate of 4% per annum till the completion of the lock-in period.
- But, in case the investor surrenders the plan after the lock-in period, the insurance company pays the fund value at the net asset value of the original fund – at that point in time.
- In case the investor dies at any time during the investment tenure before the end of the lock-in period, this amount of discontinued policy amount is provided to the nominee.
Advantages of Lock-in Period
Provided are the advantages of the lock-in period:
- Disciplined Saving:
A lock-in period encourages long-term commitment by preventing unnecessary withdrawals, inculcating a habit of disciplined savings.
- Market Recovery:
Due to a longer investment horizon, it gives an investor time to deal with the short-term volatility, which further provides higher returns.
- Compounding Benefits:
The lock-in period lets you take advantage of the power of compounding, as it requires an investor to remain invested for a longer tenure.
- Partial Withdrawals:
The investors are allowed to make partial withdrawals in case of any financial emergency without any need to surrender the policy.
- Continued Investment Growth:
The investments made keep on growing due to the regular contributions being made in a favourable market scenario.
- Policy Surrender:
Though it is advisable to remain invested to reap maximum returns, policyholders can avail an option to surrender the plan in case of financial needs, if any.
Conclusion
ULIPs are the perfect choice, which offer insurance & investments both. A lock-in period is considered to provide long-term growth. It requires careful assessment of terms & conditions & how ULIPs perform. Additionally, an investor can also seek advice from a financial advisor. This feature lets an investor inculcate a habit of disciplined savings, focusing on financial objectives, etc. Also, by remaining invested, an investor can reduce their costs, increase returns, & enjoy flexibility.