What Happens if you stop your ULIP premiums before 3 years?

A Unit-Linked Insurance Plan (ULIP) is a unique financial product that provides the dual benefits of life insurance cover and investment for long-term capital appreciation. They also provide tax benefits under Section 80C and Section 10(10D), subject to specific terms and conditions.

But you need to continue investing in a ULIP policy for a long term, say ten years or more, to reap its benefits. Even if you don’t plan to stay put for long, you should at least complete the mandatory lock-in period before wrapping up your ULIP plan. While the lock-in period in ULIP was three years initially, it was increased to five years by IRDAI (Insurance Regulatory and Development Authority of India) in 2010.

But investors sometimes may find it hard to continue their investments due to financial issues or other personal reasons. As a result, they stop paying their premiums and think of surrendering their policy.

It’s certainly not a pleasant situation to be in, and policyholders must be aware of the consequences of discontinuing their ULIP premium payment.

No Penalty

There won’t be any penalty if you discontinue your premium payment after staying invested for a year. However, you can’t withdraw the amount until the completion of the lock-in period.

Besides, all the usual charges like surrender charges, annual maintenance charges, fund management charges, etc., will be deducted from your accumulated fund before you receive the final pay out after the lock-in period.

No Insurance Cover

The life insurance cover will be immediately discontinued once you stop paying the premiums.

Loss of Capital

You stand to lose all your invested money if you discontinue premium payments before one year of the completion of the policy.

Grace Period

Your insurance firm provides an option of reviving your policy within thirty days of discontinuing your premium payment. This period is called the grace period. You can revive your lapsed ULIP during the grace period on paying the unpaid premium with applicable charges.

Tax Implications on Premature Surrender

Since you are prematurely surrendering the ULIP, any tax deduction you claimed against it will be considered income, taxable as per the income tax slabs. Moreover, TDS (Tax Deducted at Source) might be deducted from the surrender value.

Payout on Old NAV

Net Asset Value (NAV) is the value of each unit of a ULIP policy. It’s also an important indicator to track the performance of your ULIP over the years. You get the withdrawal amount as per the NAV of your ULIP on the date of withdrawal.

But if you discontinue paying your ULIP premiums and withdraw the amount after the lock-in period, you will not receive the withdrawal amount as per the current NAV. Instead, your withdrawal amount will be calculated as per the NAV of your ULIP in the year you discontinued your premium payment.

You must be aware by now that prematurely discontinuing your ULIP can cost you a lot. It is particularly painful to bear such financial loss knowing that a ULIP policy can provide you remarkable benefits over a long period of time.

Thus, it’s important to plan your finances carefully and consider discontinuing your ULIP premium only as a last resort.

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