Unit linked insurance plans (Ulips), which bundle market-linked investment and insurance, come with a lock-in of 5 years. A lock-in means you can’t withdraw from this policy even partially during this time. But what if you plan to discontinue? If you stop paying the premiums and the policy lapses or you choose to surrender (regular or a single-premium plan) even then, the money doesn’t come to you. Instead, it moves to a discontinuance policy fund where it stays until the lock-in period is over. This is how it works.
If you buy a regular premium policy, where you pay premiums throughout the premium payment term, you need to pay the premium instalments on time. For an annual premium instalment mode, the insurer gives you a grace period of 30 days if you don’t pay on time. The insurer will, however, send you a letter within 15 days and give you a window of 30 days to revive the policy. The insurance cover is active during this time. After this, the proceeds of your policy move to the discontinuance fund. But it’s not as if the money sits idle there. As per regulations, insurers need to offer a minimum interest rate of 4%.
When you exit an insurance policy, there is an exit penalty. So, before the money moves to the discontinuance fund, you pay an exit penalty. Regulations have put a cap on these penalties.
In the case of regular premium policies, if the annual premium is Rs25,000 or less, the maximum discontinuance charge is lower of 20% of the annual premium or the fund value, but capped at Rs3,000. If the annual premium is more than Rs25,000, then it’s lower of 6% of annual premium or fund value, subject to a cap of Rs6,000.
If you exit in the second year, this charge is lower, and lowest if you surrender in the fourth year. It’s lower of 5% of the annual premium or the fund value subject to a cap of Rs1,000 if the annual premium is up to Rs25,000 and lower of 2% of the fund value or the annual premium subject to a cap of Rs2,000. If you exit in the fifth year, the penalty charge is nil.
Other than the discontinuance charge, your money lying in the discontinuance fund will also pay the fund management charge that’s capped at 0.50% currently. There is no cost of insurance since your policy has lapsed but insurers provide a 2-year window to revive your policy. If the policyholder decides to revive the policy, then discontinuance charges get added back. The fund management charge is not reversible. Also, at the time of reviving your policy, you may need to pay a revival charge