How should I exit a ULIP purchased by mistake?

Published: July 24, 2023 at 6:00 am

A reader says, “Hello, sir- I have made the folly of investing in ULIPs. I have read enough articles from people like you, who I trust to know it was a mistake. What I want to understand is what do I do next? Should I wait till the five-year lock-in and then withdraw my capital? Or should I stop paying more premiums ( I’m in year 3)? I see many articles on why ULIPS are bad but very few on what to do if you have already invested. Please help!”

About the author: Ajay Pruthi is a fee-only SEBI registered investment advisor. He can be contacted via his website

This guide offers a step-by-step process for exiting a ULIP (before 5 years) or conducting a thorough assessment to determine if exiting the ULIP is genuinely necessary. This guide does not promote or advocate the purchase of a new ULIP.

Step 1: Check if it is ULIP or a Traditional policy.

This seems to be a very silly point but it is a very important one. I’ve encountered numerous clients who struggle to differentiate between a traditional life insurance policy and a ULIP.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

Once you’ve successfully identified it as a ULIP, Congratulations! 🎉

The reason to celebrate is that with ULIPs, you’re not bound for an extended period like 10, 15, or 20 years as compared to traditional policies. The lock-in period is only 5 years, and even if you discontinue paying premiums, you’ll receive your existing fund value along with an interest rate of approximately 4% from the life insurance company.

Step 2: Premium Allocation Charges

Premium allocation charges refer to the percentage the life insurance company deducts from your premium before investing the remaining amount.

Let’s assume a life insurance company imposes a 5% premium allocation charge for the initial 5 years. If you pay an annual premium of Rs. 1 Lakh, an amount of Rs. 5,000 will be allocated towards these charges, and the remaining Rs. 95,000 will be invested in your chosen fund option. These charges are normally used to pay commissions to agents for their efforts.

Typically, these charges range from 4% to 5% during the policy’s first 4 or 5 years.

However, there are ULIPs available in the market now with zero premium allocation charges. The policy functions more like equity or debt mutual funds in such cases, depending on your fund selection.

Whether the premium allocation charges are 4%-5% or zero, it’s not necessarily a reason to surrender the policy at this stage. Before making a decision, consider the following key points.

Step 3: Policy administration charges

Policy administration charges cover the expenses incurred in managing the administrative aspects of a ULIP. These charges are deducted monthly by cancelling a certain number of units from your investment. These charges normally persist throughout the entire term of the policy.

For example, If a life insurance company imposes a policy administration charge of Rs. 100 per month, and you pay an annual premium of Rs. 30,000. This would still account for 4% of your premium. However, if the annual premium is Rs. 1 Lakh, then the policy administration charges would be 1% of the premium. Some companies cap it to 500 per month or 1% of the premium, whichever is less.

Thus, the percentage of policy administration charges varies depending on the premium amount you pay.

Some ULIPs do away with premium allocation charges but increase the policy administration charges instead. So, it is always better to combine these charges.

When you combine premium allocation and policy administration charges, and if they are in a high range (even 4%-5% is considered high), it might be prudent to consider surrendering the policy.

But weighing the impact of these charges on your returns is essential to make an informed decision regarding your ULIP.

Step 4: Returns and Benchmark

Not every ULIP is a bad investment, just as not every equity mutual fund is a good investment.

Drawing from my experience with approximately 1500 clients, I have seen certain ULIPs performing at par with good mutual funds. But even if the fund performance is at par, due to the impact of premium allocation charges and policy administration charges, the net return to the investor will be less.

When people claim that ULIPs are poor investments and advocate for equity mutual funds instead, there is no guarantee that you would have chosen the right mutual funds after listening to their advice.

Furthermore, there is no assurance that you would have remained invested in those mutual funds over time. Human behaviour often lacks the discipline necessary for consistent investment. In some cases, the lock-in period of ULIPs can help promote better returns.

The most crucial point to consider is your expectations regarding returns from the ULIP. For instance, if you expected a 10% return and your policy delivers an 11% return, it may still leave you dissatisfied because certain mutual funds have provided returns in the range of 15%. However, this alone should not be a reason to surrender the policy. There will always be investment instruments that outperform your current holdings, but constantly changing investments based on that would be unwise.

So, it would be wise to take a decision considering points 2, 3, and 4 together. If all parameters indicate a negative outlook, surrendering the policy might be a better course of action.

However, if the returns align with your expectations and goals, even if the charges are high, it is advisable to continue with the policy.

Why?  If you surrender the policy, the fund value will be transferred to the discontinuance fund, where you will receive a minimum interest of 4% on your fund value, as you cannot withdraw money until the lock-in period of 5 years is over.

Tax Implications When Surrendering ULIP Policies

If you’ve decided to surrender your ULIP policy, seeking advice from your Chartered Accountant (CA) or investment adviser is essential to understand the tax implications involved.

Different tax rules apply to policies purchased after February 2021 and those purchased before that date.

Additionally, the tax rules may vary based on the sum assured of the policy and whether it is a pension policy.

Here are a few cautions and charges to consider:

  1. Suppose you have a pre-existing medical condition, so you cannot purchase a term insurance policy (assuming you don’t have one already). In that case, it’s advisable not to surrender the ULIP.
  2. Surrender charges will apply to your policy, depending on the number and amount of premiums paid. These charges are subject to a maximum of Rs. 6,000 if you surrender after one year and reduce after the first year.
  3. Fund management charges for ULIPs are generally comparable to those of equity mutual funds (excluding index funds).

Remember, there’s no one-size-fits-all solution when it comes to surrendering ULIP.

Just because some people may view it as a bad investment doesn’t mean it’s unsuitable for you. If the existing ULIP aligns with your financial goals, it might be your best investment option.

If you still have any questions, please feel free to ask.

Till then, Happy Investing!

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)