Lock-in periods for ULIPs explained

In today's world, people don't solely rely on bank deposits to grow their funds. Rather than relying on bank accounts and deposit schemes, they seek schemes that offer higher returns. Among various investment options, unit-linked insurance plans are gaining popularity due to their versatility and extensive benefits.

The unit-linked insurance plan combines insurance and investment components, providing you with life security and return on investment. If you hold a ULIP plan, you must have encountered the term "lock-in period". This article details what a ULIP lock-in period is and how it works.

What is a ULIP lock-in period?
 

In most insurance plans with investment components, you cannot withdraw funds before the lock-in period expires. Since a unit-linked plan has an investment component, it comes with a lock-in period. Unit-linked insurance plans (ULIP) lock-in is five years.

This means that you cannot liquidate funds from your investment before it completes the tenure of five years. Prior to 2010, the lock-in period for ULIPs was three years and later increased to 5 years by IRDA. However, in case of a financial emergency, you can withdraw funds before the completion of the lock-in period. However, you need to pay a surrender fee as per the insurer’s terms and conditions.

Once the ULIP lock-in period is over, you can withdraw funds without charges. However, it is not advisable to liquidate funds immediately. You should monitor market performance to maximise your returns and benefits.

If you are looking for long-term investment options, you can also invest in mutual funds and deposit schemes.

Why lock-in period is necessary?
 

The lock-in period is crucial because it gives the insurer ample time to preserve the investment and reap maximum benefits in the long run. Moreover, it motivates investors to stay focused and invested for a longer tenure. When you invest in a goal-based investment, it is beneficial to have a lock-in period. Moreover, ULIPs are a long-term investment and early withdrawals don’t contribute much to capital gains.

Key aspects of the lock-in period in ULIPs
 

As already mentioned, unit-linked insurance plans are a combination of insurance and investment. The investment component is divided into units and invested in equities, securities, debt funds etc to gain profit. The insurance component insures you against unfortunate events. With a lock-in period, both insurers and investors get sufficient time to grow wealth based on market performance. Once the locking period is over, investors can liquidate funds partially or fully. The following are the aspects of the lock-in period in ULIP.

· Liquidity option in ULIP
 

Usually, ULIPs do not allow partial withdrawals before the five-year lock-in period. After the lock-in period ends, the policyholder can make partial withdrawals anytime. Some plans allow unlimited partial withdrawals, while others may allow limited withdrawals every month during the tenure of the policy. However, withdrawals may be subject to fees and charges.

· Surrendering policy before the lock-in period
 

In case the ULIP is surrendered before the lock-in period, the funds are transferred to a discontinued policy fund known as the DP fund. A surrender fee is charged as per the policy issuer's terms and conditions. Moreover, the amounts are returned after the completion of the lock-in period and the fund receives an interest of around 4% until the lock-in tenure. If the policy owner dies before the end of the lock-in period. The nominee receives the accrued funds.

ULIPs are among the most popular long-term investment plans. Along with life security, they also provide wealth creation. However, before investing in a unit-linked insurance plan, do read the terms and conditions and risks involved.

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