If you bought your unit-linked insurance plan (Ulip) after September 2010, your policy would be within the lock-in period of five years. During this period, if you decide to quit your policy midway, your money will move to a discontinued fund till the time the policy completes five years. Once that period is over, the money will be handed over to you.
How does it work?
Discontinued fund was launched in 2010 to ensure that money coming from premature surrender or lapse is protected and comes back to you after the lock-in period of five years. So if you discontinue your policy or simply skip a premium, the insurer will give you a grace period of up to 75 days to revive the policy. If you don’t revive the policy within the stipulated time, the insurer will move the money to the discontinued fund. Once the proceeds of your policy move to the discontinued fund, you will have two years or until the expiry of the lock-in period, whichever comes first, to revive your policy. For example, if you skip your premium in the fourth year, then you will have only one year to revive your policy. If you do not revive your policy during this period, the insurer will return the invested corpus after the lock-in period.
Once your money goes to the discontinued fund, it will earn a minimum of 3.5% per annum.
What are the charges?
The charges upon discontinuation have been standardized and specified by the insurance regulator. If you discontinue your policy in the first year, the maximum that an insurer can charge is Rs 6,000 if your annual premium exceeds Rs 25,000. By the fourth year, this charge will not be more than Rs 2,000. From the fifth year, there will be no discontinuance charge. Earlier, since there were no regulatory ceiling on surrender penalty, insurer charged exorbitantly.
Other than the discontinuance charge the insurer can also deduct a fund management charge, which can’t be above 50 basis points or 0.5%. But if you choose to revive your policy, the insurer will need to reverse the discontinuance charge.
The insurer can, however, levy a revival charge. Typically, if you revive within six months, the insurers don’t insist on a medical check-up. A further delay may need medical checks-up and you may need to pay for them.
Once your policy crosses five years, whenever you discontinue your policy, the insurer will immediately return you the fund value.
What should you do?
Even as discontinuance charges have been trimmed and the regulator has made the process smooth, we advise you not to discontinue a Ulip once you have bought it. Ulips typically work in the long term since the costs are largely front loaded, so the fund works for you only in the long term.