Understanding ULIP Lock-In Period

A ULIP comprises two components: investment and life insurance. The ULIP lock-in period is the minimum time you have to stay invested in the plan to receive various benefits such as tax benefits on ULIP investment under Section 80C. In 2010, the IRDAI increased the lock-in period from three years to five years. Overall, the ULIP policy lock in period is mainly designed to encourage long-term investment and offer adequate time for invested funds to grow through the power of compounding.

To start with, a ULIP can aid in disciplined investing. With a five-year commitment enforced through the ULIP lock-in period, you cannot exit from the investment prematurely. So, you keep paying, and your units keep compounding, and your plan stays on track.

Second, it protects you from last-minute decisions. Investors who panic-sell during a dip in the market often miss the rebound that can happen in the long-term. The ULIP policy lock-in period acts as deterrent that can .

Lastly, it aligns the product to real goals. A unit linked insurance plan is best used for achieving long term goals such as funding children’s education, retirement corpus, or legacy building. These require an investment period extending over years often decades. That’s also why many policyholders stay invested in ULIPs well beyond the mandatory 5 year lock-in period.

Now let’s take a closer look how the lock-in period of ULIPs work and the impact it can potentially have on your investment:

• Withdrawals are restricted: Typically no withdrawals allowed during the five year lock-in period of ULIPs. If you stop paying premiums during this period, your money is shifted to a discontinuance fund, and it earns a capped return and is released only after five years from the start date.
• Post lock-in flexibility: After the fifth year, you can continue adding to your investment and getting the benefits of compounding. Also partial or complete withdrawals for planned milestones is allowed with applicable tax benefit after the lock-in ends.
• Locked-in premiums: The premiums of a ULIP are locked in at inception. This is the case not only during the lock-in period of the ULIP but over the entire tenure of the policy.
• Your returns keep accruing: Your investment grows with the performance of your selected funds during the lock-in period. After the lock-in period has ended this growth continues depending on the fund performance.
• Life cover runs throughout: Your family remains protected by the life cover promised by the ULIP for the entire policy tenure, not just the ULIP lock-in period

When investors ask why to hold beyond five years, the practical answer is simple: the years after lock-in are often the most rewarding ones. Some of the notable benefits of holding your ULIP plan after the ULIP policy lock in period are:

• Higher long-term returns: Equity funds especially deliver better results over the years compared to just five.
• Reduced charges: Irrespective of the type of ULIP, higher charges are applicable in the early years. As, these charges get reduced over time, it means that more of your premium is allocated towards investment after the ULIP lock-in period has ended.
• Compounding benefit: The longer your money stays invested, the stronger compounding becomes.
• Tax efficiency: Continued investments are eligible for tax deductions under section 80C of the Income Tax Act, applicable only under the old tax regime. Also, the payout at maturity on policyholder death is tax-exempt under Section 10(10D), subject to certain conditions.
• Financial discipline: Even after the ULIP plan lock-in period ends, investors can continue investing in the ULIP to benefit from compounding of long-term savings.
• Flexibility in fund management: It provides the option to move across funds after the ULIP lock-in period ends. Based on your financial objectives and the state of the market, you can select between debt, equity, or balanced funds.

Before you commit to a ULIP, weigh these factors because each one of these checks makes sure that the ULIP plan lock in period serves your goal instead of stressing it.

• Check the investment horizon: If your goal is due within a period shorter than five years, a ULIP is not ideal. For education in 8 to 12 years or retirement in more than 20 years, it fits better.
• Risk appetite: If markets make you anxious, begin with a balanced or debt fund and shift to equity as confidence grows. If you are market-friendly, use equity early and glide towards debt as the goal nears.
• Fund choices and switching: Check if your ULIP offers flexibility to switch between funds often without any restrictions. This is very important during and after the lock-in.
• Commitment to honour the premiums: Be honest about your cash flows. A sustainable premium paid for long is better than a heroic start that you cannot continue.
• Charges and features: Understand the most common charges that are linked to managing ULIPs, like premium allocation, policy admin charges, fund management, mortality, and switch/top-up rules.

People often think of the ULIP lock-in period as a restriction, but it's actually a feature that's meant to protect your journey to wealth. By staying invested in your ULIP for five years, you give its two engines, protection and market-linked growth, a chance to work together. Enforcing discipline helps you focus on long-term goals and shields you from the temptation of short-term exits.