Investing in India is a challenging task, as there are plenty of varied options available right now. Investors have different needs and goals that they want to achieve with their hard-earned money. This is why Unit Linked Insurance Plans (ULIPs) have become popular in the country. They offer flexible investment avenues with the added benefit of life insurance cover. Read on to learn more.
What is ULIP?
The Unit-Linked Insurance Plan meaning is a policy that combines life cover and investment options. When you pay the ULIP premium, the insurance provider invests part of your premium in equity, debt, or a combination of funds as per your financial aspirations and risk appetite after deducting various charges.
ULIPs have various features and benefits. Before you purchase a policy, learn about its different aspects. Among its many highlights, the lock-in period is one that you should have complete knowledge about.
What is the lock-in period?
ULIPs are perfect for long-term monetary planning. With a ULIP, you can secure the future of your dependents and create substantial wealth. However, before buying a ULIP, you need to understand how the lock-in tenure works and why it is essential.
It is a five-year duration during which your ULIP NAV, which is the fund’s Net Asset Value increases. During this time, you are not allowed to liquidate or withdraw any money from the fund. It is understandable if you think that the lock-in term is counterproductive. However, there are multiple reasons why insurance companies have it in place.
Why the lock-in period is necessary
During the lock-in period, you can check your ULIP NAV, but you do not have access to your funds. You might hesitate to invest in a ULIP due to this factor, but this tenure is there to help you. It is because ULIPs are long-term investment avenues that can prove valuable only when they are given an adequate timeframe.
Here is why this period is essential:
One of the crucial aspects of a long-term investment plan is its security. The longer you stay invested in a ULIP, the higher your returns will be. If you withdraw from your fund too early, the returns will be comparatively low. With the lock-in period in place, your investment gets the time to grow effectively, and you can build a large corpus. It brings stability to your investment, ensuring the best possible result.
2. Risk management
A ULIP plan is a market-linked investment avenue. Its returns depend on the financial market’s performance. If you are a first-time investor, any sign of market volatility might scare you and drive you to close the ULIP prematurely to lower risks. However, if you can wait for the market to settle down, it allows your investment to grow over an extended duration. The lock-in period is the best way to stop you from making a hasty investment decision.
3. Partial withdrawal
The Insurance Regulatory and Development Authority of India (IRDAI) mandates that any ULIP policy bought after September 1, 2010, has a five-year lock-in period after which it is possible to make a partial withdrawal from the fund. Before September 1, 2010, ULIPs used to have a three-year lock-in period, resulting in policyholders withdrawing funds too early. With the five-year period, your money will have more time to grow.
4. Discontinuance or surrender charges
If you discontinue the ULIP before the end of the lock-in period, the insurer transfers your money to a Discontinued Policy (DP) fund that earns at least 4% interest until the lock-in period ends. The interest rate levied may change as per the IRDAI’s guidelines. You also have to pay an additional charge for policy surrender during the first five years. Hence, discontinuing the policy will bar you from earning maximum profits.
Now that you understand the necessity of a ULIP planlock-in period, find a policy that meets your financial requirements. You can do so by comparing different ULIPs online.