Complete Guide to Surrendering Your ULIP Policy

Saving in ULIP insurance must always be a long-term goal. Any investment made for market-linked returns should be held for a longer term. Short-term fluctuations in investment fund value due to volatile market conditions may be balanced during the longer investment period. Therefore, the fund value has the potential to increase and help in wealth creation based on your type of fund option. However, if you choose to surrender your ULIP plan, you will lose out on a certain fund based on the discontinuation charges. This guide explains everything you need to know about ULIP surrender.

What is a ULIP policy?

A ULIP policy is a comprehensive life insurance plan that provides dual benefits, life cover and market-linked returns. The amount you pay as a premium gets divided into two parts. One part provides you with life cover, which means if you die during the policy term, your nominee will get the death benefit. Another part of the premium gets invested in market-linked funds and provides potential returns at the end of the policy term. Thus, the ULIP policy safeguards your family's financial future while increasing your wealth during the long-term investment.

You can choose the ULIP funds for investment based on your risk appetite, whether equity, debt or hybrid funds. The Net Asset Value (NAV) of the fund is based on the extent of your investment and the market conditions. There are various charges associated with managing your ULIP investment, such as mortality charges, fund management charges, premium allocation charges, etc. Furthermore, if you want to know how to withdraw the ULIP policy, you can do so after the 5-year lock-in period.

Surrendering a ULIP Policy
 

For any definite reason, if you have decided to surrender your ULIP life insurance investment, you need to understand the financial implications.

Let us consider two scenarios.

Surrendering ULIP plans during the lock-in period 

• You can surrender the policy before the ULIP lock-in period ends. The life cover will cease to exist once you surrender the policy. However, the surrender value based on the investment is paid only after the lock-in period of five years.

• The surrender value of the ULIP policy is not based on the fund value as of the surrender date. Instead, it is calculated after deducting certain applicable discontinuation charges.

• The surrender value of the ULIP policy depends on the individual insurer's policy conditions. It is usually based on the ratio of ULIP insurance and investment, mortality charges, fund management charges, etc.

• The investment fund value, post deducting the discontinuation charges, is transferred to a separate fund referred to as the Discontinued Policy (DP) fund.

• The fund will remain as the DP fund until the ULIP reaches the lock-in period.

• A minimum fund management charge not exceeding 0.5% of the fund value applies to the DP fund.

• The DP will earn interest until paid for the ULIP after the lock-in period. The interest rate is subject to change based on the IRDAI regulations.

• One other important aspect to note is the taxability* of ULIP on surrender. When you surrender a ULIP policy before the lock-in period, all the tax* deductions you had claimed earlier will be accounted for as income and become applicable for the tax* calculation based on the income tax* slab. Moreover, the surrender value will be subject to the TDS (Tax* Deducted at Source).

   

Surrendering ULIP plans after the lock-in period

• The exit charges for ULIP policies are nil post the five-year lock-in period.

• The charges associated with the ULIP life insurance, such as the mortality charges, policy administration charges, fund management charges, etc., are relatively high during the initial period and further managed by the market value earned. Therefore, it is important to consider ULIP as a long-term investment and stay invested for a longer duration, such as 10 to 15 years, to increase the investment fund value.

ULIP surrender rules: everything you need to know

Before surrendering the ULIP policy, you should understand the following ULIP surrender rules:

Five-year lock-in period

ULIPs come with a mandatory five-year lock-in period that restricts early withdrawals. If you decide to surrender your policy during this period, you will receive a reduced surrender value as the insurer deducts discontinuance charges from your accumulated amount. The insurer then places the remaining capital in a discontinued policy fund, and you can only access these funds after the lock-in period ends, typically earning minimal interest rates.

Surrender value calculation method

The surrender value refers to the amount you receive when you terminate the policy. This value is calculated based on your investment portion's accumulated value after deducting applicable charges. These charges can be lower or eliminated if you surrender after completing the lock-in period.

Applicable surrender charges

Various charges apply during surrender, such as discontinuance charges during the lock-in period, surrender charges after the lock-in period, and allocation charges. The tax treatment of your surrender value depends on how many years the policy was active.

Consequences of early surrender

When you surrender your policy, you lose the life insurance cover and the opportunity for long-term growth through market investments. Since ULIPs are designed for long-term investment, surrendering early often results in low returns.

Tax implications of surrendering a ULIP policy

The tax treatment when surrendering a ULIP policy in India varies depending on the surrender timing.

• If you surrender before completing five years, it is considered a premature surrender, and penalties may be charged. The surrender value you receive is added to your income and taxed as per your income tax slab rate. Tax* Deducted at Source (TDS) may also be applied to this amount.

• After the lock-in period ends, no surrender charges are applicable. The entire surrender value becomes tax-free* under current regulations. 

Note: If you previously claimed tax* deductions under Section 80C for the premiums you paid, you may need to pay tax* on the gains that accrued during the policy term.

Tips on ULIP investment

If you have decided to surrender your ULIP policy due to underperforming investment fund values, you can consider these points to stay invested.

• The ULIP policy allows switching between the fund options during economic downturns. Therefore, if you have invested in an equity fund and want to change it to a debt fund, considering the risk associated with market volatility, you can always choose to do so.

• As the ULIP policy allows you to choose the type of investment, consider your financial status and future financial commitments to decide on the risk appetite and invest in it accordingly. Our Tata AIA Life insurance offers 11 fund options for the different categories of investors. You can take the help of expert fund managers to decide on the right investment choice and manage it further.

• Purchase the online ULIP plan to keep monitoring the fund value and make the necessary changes as required timely to safeguard your investment fund value.

• Have an emergency fund that is liquid to manage temporary financial difficulties and avoid withdrawing your ULIP investment fund. 

   

Reviving surrendered ULIP policy

Insurance providers offer the option to revive your ULIP policy if you have surrendered it before the lock-in period. The maximum time allowed is within two years of surrendering it. In such cases, the ULIP policy will continue to provide market-linked returns. Also, the deducted discontinuation charges will be added back to your investment fund, and the unpaid premiums will be deducted to start the investment.