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Should you surrender a Ulip policy during the lock-in period?


Unit-linked insurance plans, or Ulips, usually have a lock-in period of five years but policyholders can choose to surrender the Ulip policy to meet their financial needs at any point in time. 

Surrendering a policy implies that the policyholder wants to exit the policy before its maturity. For instance, one may opt for a 10-year investment tenure and exit in the seventh year. 

However, before surrendering a Ulip policy, one should know how its surrender value is calculated and the charges and taxes applicable on its discontinuation. 

Taxability: For the surrender value to be tax-free, as per Section 10(10D) of the Income Tax Act, any gain on surrender/maturity of policy will be exempt in the hands of the recipient, provided the premium payable does not exceed 10% of the actual sum assured for any year during the policy term for policies issued after 1 April 2012. For policies issued before 1 April 2012, the life cover should be at least five times the annual premium. 

Bharat Kalsi, chief financial officer of Bajaj Allianz Life Insurance, said, “In case of new Ulip policies issued on or after 1 February 2021, if the annual premium is more than 2.5 lakh, all gains on surrender or maturity are treated as capital gains and taxed accordingly. In case of multiple Ulip policies purchased after 1 February 2021 and having an aggregate premium of 2.5 lakh or more, you have the option to choose the policies wherein the aggregate premium is less than 2.5 lakh to be tax-free. The remaining policies would be taxed as capital gains. Further, death proceeds under all the above policies shall continue to be exempt.”

Surrender value: This is the amount paid by the insurer to the policyholder on termination of a Ulip policy before the maturity period of five  years. “Once you exercise the surrender option, the fund value, after deduction of surrender charges, is payable either at the end of the lock-in period (five years from the time of buying the policy) or immediately thereafter, depending upon the year of exercising the option,” said Mahesh Balasubramanian, MD and CEO, Kotak Mahindra Life Insurance.

For instance, post the lock-in period, the insured will get the entire fund value. However, if the policyholder surrenders the policy during the lock-in period, the funds are moved to the discontinued policy fund, and charges apply. 

Samit Upadhyay, executive vice president and chief financial officer of Tata AIA Life Insurance, said, “During the period that the funds lie in discontinued policy fund, the insurer will apply a fund management charge. The money lying in the discontinued fund will continue to earn interest as insurers have to provide a minimum guaranteed return which would change from time to time. Currently, discontinued policy funds are providing interest of 4% per annum.”

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