Many people now prefer investing in ULIP funds, especially if they’re looking for the best of both worlds. You’ll understand why if you know the meaning of a ULIP plan. Unit-linked insurance plans combine handsome life coverage throughout the policy tenure with investments in market-linked instruments for future returns. After deducting applicable charges, your premium is invested in equity or debt funds, or a mixture of both.
You can choose these funds at the start of your policy. Then, depending on market conditions, you can switch your funds in order to either safeguard your portfolio or maximize your returns. In case of your unfortunate demise within the policy period, the insurer will pay either the sum assured or ULIP fund value (depending on the type of ULIP) to your nominees, which ensures financial security for your family in the future. Now that you’ve got a basic idea of ULIPs, here’s taking a look at exits after the lock-in period and why you could possibly reconsider your decision.
Exiting Your ULIP After the Lock-In Period- Should You Go Ahead?
Should you exit from your ULIP investment after the compulsory five-year lock-in period gets over? Agreed, you can exit without paying any penalties or charges after the completion of this duration. However, if you consider a few aspects carefully, then you may end up realizing how immediately exiting your ULIP after five years may not be the best strategy on your part. Unfortunately, several financial planners also seem to think so.
Here are some points worth noting in this regard:
- You Miss Out On Compounding– The power of compounding is what kicks in with a long-term ULIP investment, ideally for 10 years or more, ensuring that you can build a sizeable corpus for meeting your future goals. ULIPs are ideally positioned to ensure the best possible returns only for the long haul. Quick withdrawals may lead to lower returns if you have majorly invested in equity funds. Exiting after five years will negate compounding benefits. The corpus will actually start growing massively in the last few years.
- Being Affected By Market Fluctuations- Five years is not a very long time for a market-linked investment. Equity markets show volatility in the short or medium term before evening out in the long haul. If you withdraw your investment after the lock-in period ends, then you may be affected by downward trends and cycles in the market, leading to substantially lower returns. If you exit at the time of a bull run, then your returns will increase. Hence, since you cannot time the market, you should ideally adopt a long-term investment horizon and wait for your investment to compound and grow handsomely in the future while riding out temporary market volatility.
- Charge Front-Loading And Other Aspects- You should not exit your ULIP immediately after the lock-in period ends if you wish to avoid the front-loading of your charges. ULIPs usually impose most charges like fund allocation, policy administration, premium allocation, fund management, and other costs in the initial few years of the policy tenure. These charges are sometimes deducted through unit cancellation or adjustments to the NAV (net asset value) of your funds. While the charges are higher in the first year, they go down to almost negligible levels by year five. If you exit after the fifth year, then you will miss out on the opportunity to rapidly increase your capital with negligible charges. This is a golden chance for investors to build their wealth and reduce their per-unit costs accordingly in the last few years of their policies.
- Missing Out On Added Benefits- Sometimes, leaving ULIPs after five years means missing out on loyalty benefits and bonuses given by the insurance company to long-term customers. Such loyalty additions are paid at the maturity of the ULIP in the long haul and may add considerably to your final returns from the investment. Do you wish to lose out on the same? Probably not. Hence, staying invested for a longer tenure is always the best way forward from this perspective.
Should you exit your ULIP just when the lock-in period has ended? You already know the answer. It is a big No. You should stay invested for five or six more years, at least, until the ULIP starts compounding more and giving you better returns minus temporary market volatility and initial high charges. At the same time, you should also look out for loyalty additions and benefits. Simply put, if your investment is doing well, you don’t need to abruptly pull out as soon as the lock-in period is over. Doing so may mean more misses than hits on your part.