Unit-linked insurance Plans (ULIPs) have become a popular investment option for people who want to get additional benefits along with a life insurance policy. It is a fusion of insurance and investment. The premium you pay is divided into two parts- to provide life cover and to invest in various equity and debt funds of your choice.
The people who opt for a ULIP can get returns on their investment, along with the life coverage that ordinary life insurance offers. A ULIP is a good option, but if you do not go through with the insurance payments, there will be some changes and consequences, too.
ULIPs offer you flexibility in premium payments. You can pay the premium monthly, quarterly, half-yearly, or annually. Whatever payment duration you choose, you need to pay the premium on time. If you cannot pay the premium on time, the insurance company will most likely offer you a grace period.
The grace period is like an extension within which you can pay the premium without any consequences. If you still cannot pay the premium within the grace period, the ULIP plan will be canceled. Most of the ULIPs have a lock-in period of 5 years, which is when the investors cannot withdraw their money from the whole setup.
What Happens When You Stop Paying Premiums Before 5 Years?
If a policyholder does not pay his premiums on time during the lock-in period, he will not receive the entire invested amount. Rather, he will receive the fund value. The person will also face the discontinuation charges that come as cuts in the pay from the policy. The fund value is the amount accumulated till the discontinuation of the policy, after the deduction of discontinuation charges. The insurance company has to take out the discontinuation charges to make up for the losses that they suffered because of your discontinued payments.
The discontinuation charges depend on the time of discontinuation of the policy. The insurance company might decide to deduct around 20 percent pay from the total amount of the premium paid. This happens mostly in the first year. However, if you have paid your insurance premiums for more than a year and then discontinue, the discontinuation charges are reduced.
If you do not pay the premium of the ULIP after the first year, the insurance company considers that the ULIP is discontinued, and you only get the money amassed during the first year. There are many things to consider when you discontinue the ULIP Plan. For example, even if you discontinue after the first year, you will not get the locked-in money immediately.
The locked-in money will be available to you only after the period ends. This discourages a lot of people from discontinuing the ULIP plan because the benefits are not immediate. You would rather want to continue the investment and get the full benefit from the ULIP plan.
Consequences of Not Paying the Premiums on Time
Not paying premiums on time can have serious consequences. The most immediate consequence is that your insurance policy may lapse or be canceled. This means that you will no longer have coverage for any claims or expenses that may arise. Other consequences you may face are:
No life cover
The ULIP comes with the benefits of life coverage and return on investment. If there is a discontinuation of the payments, then your policy will stand dissolved. You will not get any life cover if you fail to pay the premiums. Thus, if you want to protect your loved ones from financial liabilities, then go for timely payments.
If you do not pay your ULIP premiums, your policy lapses and ends. So, you will not be able to get the ULIP benefits in the long run. The reason why you opt for the ULIP insurance is fully defeated if the policy lapses. If you want to revive a lapsed policy of ULIP, you should pay all the outstanding dues within a specific grace period. If you exceed the grace period, there will be no revival, only termination.
If you discontinue the ULIP fund and surrender it, you might get some of your money back. However, there will be discontinuance charges to give and other deductions. The discontinuation of ULIP is a pricey affair. Instead of discontinuing, you should plan your ULIP with a ULIP calculator in such a way that you can manage the policy well, till it matures. The deductions are like an extra loss to put on your back otherwise.
A ULIP is a good option to choose if you are looking for one life insurance plan that does it all. The ULIP plan helps you prepare and plan for your retirement and later years.
With an effective ULIP, you can benefit from market opportunities, mitigate risks, and secure your financial future and that of your loved ones. However, remember you need to pay the premium to keep the policy active.