Why You Should Not Surrender Your ULIP
When an investment earns a considerable amount of returns, one often feels tempted to withdraw the entire amount and enjoy the gains. One may also feel that surrendering the scheme/ plan is the right decision if the investments are not performing the way you want. However, regardless of the short-term performance of the investment fund, experts suggest that one should continue for a long duration. One can say the same for a ULIP plan. Since these plans, too, are designed with a long-term approach, the policyholder will receive the maximum benefits if they do not surrender the policy early. There are many reasons one should continue the plan rather than surrender it. We list a few of these reasons.
Before we proceed to that, let us first understand what a ULIP policy is.
What is a ULIP policy?
ULIP policy is a unique product that merges two financial products into one – life insurance and investment. When you pay your ULIP premiums, the insurer uses that money for two purposes. One is to build and sustain the life insurance corpus and the other is to invest in the right financial instruments. The way these instruments perform in the market determines the returns you receive. Money is invested in these instruments via a lump sum amount, which is also collected from other investors as well. The reason this product is called ‘ULIP’ or Unit-Linked Insurance Plan is that the insurer allocates the policyholder units as per their share of the total investment amount.
Now that you are clear on what a ULIP policy is, let us see why surrendering it early may not be the wisest option.
Reasons not to surrender your policy
Lower returns because of a reduced compounding effect
Investments earn returns largely due to compounding. This concept allows you to receive interest on the total amount that you have in your investment fund, including the interest and the returns earned previously on the principal amount. Since the total amount increases each year due to interest/returns, the renewed amount that will generate returns also increases, leading to a compounding effect. As may be clear, the longer this process occurs, the more will be the returns from your ULIP plans.
Early surrender of the policy will considerably lower the total returns you will receive because of a less impactful compounding effect.
ULIP charges reduce over time
One of the reasons that you may be surrendering your policy is because of the charges ULIPs usually incur. It must be admitted that, as compared to other insurance products, they are a bit high. However, one must remember that these charges are being levied for the several benefits you enjoy when you invest in ULIPs.
Furthermore, these charges reduce. Initially, they may be high, but as time passes and your ULIP plan performs well, the charges begin to reduce. Also, the returns you receive from continuing the plan far outweigh the charges you will incur initially.
Life insurance coverage is annulled
When you surrender your ULIP plan, you also let go of the life insurance coverage it offers to you. Without a life cover, there is no financial security for your family if any unpredictable event occurs in your life. One should go ahead with surrendering their ULIP keeping this fact in mind as life insurance is not an optional expense, but a necessary investment in today’s times.
Alternatives to surrendering your ULIP policy
- Switch your funds
Is the low return from your ULIP debt funds the main reason you want to surrender the plan? Such a big move can be avoided by instead opting to switch your funds instead. If you are looking for high returns, you can get your funds transferred (partially or wholly) to equity funds. If your initial equity options are too risky for you, then you can get the money switched to debt funds. You can also achieve a moderate portfolio.
- Withdraw money partially
Rather than surrender your policy and receive lump-sum gains, you can opt to receive the returns from ULIP plans via partial withdrawals. You can even set up a systematic withdrawal plan. What’s more, these withdrawals are tax exempted as per prevalent tax laws.
One should remember that ULIP returns are based on market fluctuations. If the returns have not been satisfactory for a period does not mean that the rest of the ULIP performance will be similar. It is best to think with a long-term outlook in mind.