Home >Money >Calculators >The rules about discontinuing a unit-linked plan

On 5 May, the Insurance Regulatory and Development Authority of India (Irdai) issued a circular directing insurers to not delay payments on discontinued Unit-linked insurance plans (Ulips). As per the regulator, insurers were interpreting the rules on discontinuance in a manner that would delay the release of fund value under discontinued unit-linked products, even when the policyholder had opted for complete withdrawal of funds or did not revive the policy during the lock-in period.

Here we explain the rules about discontinuance under Ulips in detail.

Ulips come with a lock-in period of 5 years, which means you cannot take out your money in the first 5 years. But you can choose to discontinue your policy by not paying more premiums. 

The insurer will provide a window of about 75 days, after which it will declare your policy lapsed and move it to the discontinuance fund. Upon discontinuance, the insurers levy a charge—a maximum of Rs6,000 if discontinued in the first year, which gets reduced to Rs2,000 if you discontinued in the fourth year, and nil thereafter. The purpose of discontinuance fund is to hold your money from the lapsed policy till the lock-in period is over, and also pay some interest on it.

The insurers can't levy any other charge except a fund management charge, which cannot exceed 50 basis points on the fund value per annum, until the lock-in period is over. One basis point is one-hundredth of a percentage point.

During the window of 75 days, you have three options: pay the premium, opt for complete withdrawal or let the policy lapse. 

When you opt for complete withdrawal, the proceeds from the discontinued fund come to you right after the lock-in period is over. But if you don’t choose any option and choose to lapse your policy, you get an outer limit of 2 years to revive the Ulip.

Earlier, you could revive within 2 years or till the end of the lock-in period. So, if you lapsed in year 5, you had only 1 year to revive your policy, after which the proceeds from the discontinuance fund would be paid to you at the end of the fifth year. But last year, the rules changed to allow a 2-year window for revival, irrespective of when the lock-in period ends. So, even if you lapse the policy in the beginning of the fifth year, you can revive it in the sixth year, i.e., even after the lock-in period is over. 

The insurance regulator observed that this rule was being interpreted in a manner that caused delays in payment. Insurers were holding payments even after the lock-in period was over, so that the policyholders could contemplate reviving the policy within 2 years. Irdai has clarified that if policyholders choose to discontinue their Ulip or don’t revive their policy within the lock-in period, the money needs to be paid after the lock-in is over. In other words, it’s back to the previous rule. If you lapse the policy in the fifth year and don’t revive it within a year or expressly state that you want the option of revival within 2 years, the insurer is supposed to return your money once the lock-in period is over. 

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