A Unit Linked Insurance Plan (ULIP) is a popular investment-cum-insurance product that provides policyholders with the benefits of life cover and market-linked returns. However, investing in a ULIP policy comes with the added responsibility of paying the premium on time to ensure the policy remains active.
Failing to pay your ULIP plan premiums regularly can have several consequences for policyholders. This article will explore the consequences of not paying ULIP premiums regularly. So, if you have a ULIP investment or are planning to create an investment plan, read on to learn about the potential consequences of failing to pay your premiums on time.
What is a Lock-in Period In ULIP?
A ULIP insurance plan comes with a mandatory lock-in period of 5 years, during which you cannot withdraw the accumulated fund value. You can only liquidate your investments or access the fund value after five years have passed since the policy was issued. It is crucial that you allow your investment to grow during this time with timely premium payments.
Consequences of Failing to Pay ULIP Premiums
- If you discontinue premium payments on your ULIP investment plan before the completion of one year of the policy, you will forfeit all the funds invested.
- You are prohibited from withdrawing the amount until the completion of the five-year lock-in period.
- If you stop paying the ULIP plan insurance premiums for your ULIP insurance plan, the coverage for the same shall end immediately.
- If you do not pay some of the premiums during the lock-in and meet your untimely demise during this time, the death benefit paid out to your beneficiaries may be affected.
- Lastly, not paying the premiums even after the grace period can lead to a lapse in coverage. This will impact not only the death benefit of the plan but also the investment.
Consequences of Exiting ULIP Soon after Lock-in
After the five-year lock-in period, you can withdraw your investments from your ULIP funds. However, it may not be wise to do so. Here are some reasons to continue investing in your ULIP after the lock-in period expires.
- Equity works better in the long term rather than the short.
Another reason to remain invested in your ULIP is that it is intended to be a long-term investment. Unit Linked Insurance Plans invest in different market securities through various fund options.
Therefore, ULIP investment is a long-term commitment, and it is advisable to hold the plan for more than the lock-in period of 5 years. You can also benefit from the power of compounding, which yields better results the longer you remain invested.
However, ULIP plans offer a fund switching facility which can help you adjust your investment as per the market conditions. A Tata AIA ULIP plan offers this benefit so that you can align your investments periodically to meet your investment objectives.
- ULIP charges reduce net returns
One reason is that ULIP charges are usually front-loaded. This means that in the initial years, the charges are high, including premium allocation, fund allocation, fund management, and policy administration fees.
As a result, the net returns in the first five years can be lower due to these charges. However, the charges tend to decrease as time passes, leading to better net returns. You can recover the initial costs by staying invested beyond the ULIP lock-in period.
Conclusion
The ULIP premium is an important part of your investment. Not paying ULIP premiums can result in the forfeiture of all invested funds, the immediate end-of-life insurance coverage, and the inability to withdraw funds until the completion of the lock-in period.
Additionally, exiting the ULIP immediately after the lock-in period expires is not advisable. This may prevent policyholders from benefiting from the power of compounding over the long term.
However, if you miss the premium payments, it may be possible to reinstate or renew your plan in case of a policy lapse, depending on the regulations of your insurance company.
Dawit
