ULIPs are steadily gaining ground as preferred investment options in India. What is a ULIP policy? ULIP stands for unit-linked insurance plans, and it is a type of life insurance that combines the benefits of investment and insurance. A ULIP policy invests your premium in market-linked instruments (funds that you can choose) after deducting applicable charges while giving you life coverage for the tenure of the policy alongside. These are handy tools that are good for wealth accumulation and earning market-linked returns in the long run.
Investors also prefer a ULIP policy since it comes with accompanying tax benefits. You can get deductions up to Rs. 1,50,000 under Section 80C every year on your premium payments. Simultaneously, long-term ULIPs can always perform well, outstripping inflation and helping build a sizable corpus to meet future objectives. Simultaneously, the total amount received at maturity will be tax-exempted under Section 10 (10D), subject to certain terms and conditions. Death benefits received by nominees are fully tax-exempted, though.
All ULIPs have lock-in periods of five years. This is the stipulated duration in which no payout will be offered if the policyholder discontinues or surrenders any policy. After the completion of this period, the payout will be disbursed to the policyholder. The question now arises as to whether surrendering a ULIP after five years means taxable payouts. Here’s taking a closer look at this aspect in the article.
Surrendering a ULIP after Five Years- Are the Payouts Taxable?
Suppose you surrender your ULIP policy before its five-year lock-in period expires. What happens in this case? The whole surrender value will be perceived as income in the present year and added to your total gross income. Therefore, you will be paying taxes on the same based on your applicable slab rates. For example, if the surrender value of a ULIP is Rs. 4 lakhs and you earn Rs. 12 lakhs annually, then your gross taxable income will be Rs. 16 lakhs.
What happens then if you surrender your policy only after the five-year lock-in period expires? In this scenario, the surrender value will be tax-exempted. This is a major benefit of staying invested until the conclusion of the lock-in period. Hence, taking the above example, even if your ULIP surrender value is Rs. 4 lakhs, your gross taxable income will only be Rs. 12 lakhs. Completion of the lock-in period also equates to zero surrender charges. This also helps you save more money.
Now that you have a clear idea of the taxability of your ULIP payouts after completing the five-year lock-in period, here’s answering another common dilemma of investors. Should you exit a ULIP after five years? The probable decision drivers are mentioned below.
Exiting ULIPs after Five Years- Yes or No?
Should you exit from a ULIP after the conclusion of the lock-in period? Experts recommend that you stay invested for the long haul without considering any such exit at the end of five years. Some of the key reasons are listed below:
- ULIPs have a few fees/charges that you have to pay. The premium allocation charge is subtracted before the investment of the amount. The policy administration, fund allocation, and fund management charges are deducted through NAV adjustments or unit cancellations. The deduction is more in the first year and comes down over time. Once the investment completes five years, these charges do not impact the investments much. Hence, you will have to stay invested for a few more years to get the actual benefits.
- ULIPs, while subject to market volatility, always give the best returns over a longer time frame. Exiting after five years will not give you the kind of returns you can achieve over 10-15 years or even 20 years. A long-term strategy will help you build an inflation-beating corpus above everything else. You can always switch your funds to optimize/maximize/safeguard your returns throughout the ULIP tenure.
Invest in a ULIP policy only when you can afford the premium amount at a basic level and the ability to stay invested for the long haul. If you can invest for 10-15 years or more without exiting at the completion of the five-year stage, then you can expect stellar returns without a doubt.