It is more than five years since the Insurance Regulatory and Development Authority of India (IRDAI ) introduced its new set of guidelines for unit linked insurance plans (Ulips) in 2010. Among several changes in the way Ulips are structured, an important change was to increase the lock-in period from three to five years. However, should a Ulip holder exit after the lock-in period ends? Let's find out an answer to this.
If one is contemplating an exit immediately after the lock-in period has ended, there is a possibility that the Ulip was bought as a medium-term investment product. When there is a misalignment between the product features and the goal, there ought to be disappointment. Insurance is a long-term product and any early exit is therefore not advisable. Parag Mathur, General Counsel and Head of Compliance, BankBazaar.com, says, "It is only if Ulips are held until maturity (10-15 years)can expect reasonable returns.
Although Ulips provide insurance cover also, they have largely been 'perceived' as an investment product. Let's take a look at how equity funds of Ulips have performed over the last 5 years.
Exiting your Ulip immediately after the lock-in period ends after 5 years may not be the right approach. Remember, you would have paid a major portion of total charges in the first five years and when the time has come for the fund value to improve, an exit will be unwarranted.
Still, if an exit is required, ensure that various financial goals are not jeopardised. Mathur says, "Ulip holders who are looking to surrender after the lock-in period of five years can do so without having to bear any surrender penalty, but they should get back into disciplined investing by starting an SIP and try not to look for returns in products that cover risk and return at one go." Maybe, it's time to re-visit one's financial plan to make sure those risks and investments are well-aligned to achieve the goals.
Whom does Ulip suit
Ulips suit those who lack financial discipline and find it a bit tardy to keep protection and investment needs separate. Further, Ulip Insurance India suits only those goals which are at least ten years away. If these two conditions are met, then only consider investing through a Ulip, else it's always better to stick to creating a mutual fund portfolio comprising of large and mid cap funds and buying a pure term insurance plan for protection needs.