Ch. 12: Surrendering or Discontinuing The Ulip Plan

Sometimes you may not be able to pay the premiums under the Unit Linked Insurance Policy you purchased. Or you may realise that the plan is not serving your financial needs. In such cases, you can discontinue the premium payments. But, what happens if you stop paying the premiums?

And, if you’ve read our previous articles on ULIPs, you’ll know that these plans come with a lock-in period. You cannot make any withdrawals within the 5 years of the policy term. So, what happens if you discontinue your premiums before this lock-in period ends? Will the insurer pay the money to you? And, what if you discontinue the premium payments after the 5-year lock-in period?

We answer these and a lot more questions - in this article.

Let’s dive right in!

For any reason, if you stop paying your premiums during the 5-year lock-in period -

• The insurer will deduct the surrender/ discontinuance charges from your fund value. And then, the balance fund value will be moved to a Discontinued Policy Fund.
• The insurance cover in the policy will cease immediately.
• The insurer will communicate the status of your policy within 3 months of the first instalment premium's due date.

Yes, every insurance company will have an option to revive a discontinued policy. This can be done within 3 years from the date of discontinuance.

Opting for revival but not reviving the policy
If you opt to revive the policy but do not revive it within the revival period, i.e., 3 years, then -

• The insurer will pay the policy funds that are held in the Discontinued Policy Fund. They will make the payment either at the end of the revival period or the lock in period, whichever is later.
• If the revival period ends after the lock-in period, the policy funds will be held in the Discontinued Policy Fund until the revival period ends. And, during this period, the insurer will levy fund management charges - they will not levy other charges.

If you do not wish to revive your policy at all
In this case, here's what will happen -

• The policy will remain active.
• The fund value will remain invested in the Discontinued Policy Fund.
• The risk and rider cover, if any, will cease.
• When the lock-in period ends, the proceeds of the Discontinued Policy Fund will be paid to you and the policy will automatically terminate.

Proceeds of the Discontinued Policy Fund includes -

• Fund value - This is the fund value as on the day the policy was discontinued. Apart from the discontinuance charge, your money lying in the discontinuance fund may also be charged fund management charge which is currently capped at 0.50% per annum under IRDAI regulations.
• Interest - You’ll continue to earn an interest on the funds lying in the Discontinued Policy Fund. The interest you’ll get will be subject to a minimum guaranteed interest rate as prescribed by IRDAI. The current minimum guaranteed interest rate is 4% per annum.

Surrendering the policy
You also have the option of surrendering your policy at any point in time. In case you surrender your policy, the insurer will pay the proceeds of the Discontinued Policy Fund to you. The proceeds will be paid either at the end of the lock-in period or on the date of surrender, whichever is later.

Reviving the discontinued policy
If you choose to revive your policy within the revival period, then -

• Your funds will be moved out of the Discontinued Policy Fund.
• The investments made in the funds chosen by you will be restored, after deducting the applicable charges.
• Your risk and rider cover, if any, will be restored.

Now, before you revive your policy -

• The insurer will collect all due premium instalments without charging any interest or fee.
• They will levy Premium Allocation Charges as applicable during the period of discontinuance. Other than this, no other charges will be levied.
• The Discontinuance Charges deducted at the time of discontinuing the policy will be added back to your fund value.

Note: If you pass away during this period of discontinuance, the Discontinued Policy Fund Value will be given to your nominee and the policy will terminate.

If you stop paying the premiums after the lock-in period, your policy will be converted into what is called a "reduced paid-up policy". In a reduced paid up policy, the sum assured under your policy will be reduced in proportion to the number of premiums you have paid to the total number of premiums payable during the policy term. And, it will be referred to as a ‘reduced paid-up sum assured’.

Your investment remains in your existing fund. It does not get transferred to a Discontinued Policy Fund if it is discontinued after the lock-in period.

And, the risk cover does not cease in this case - only the sum assured reduces. If you pass away during this time, the reduced paid-up sum assured will be given to the nominee. Depending on the product, it can be

• Reduced Paid-Up Sum Assured or Fund Value whichever is higher, or
• Reduced Paid-Up Sum Assured + Fund Value

When your policy is converted to a reduced paid-up policy -

• All applicable charges will be deducted as per the policy terms and conditions.
• The Mortality Charge will be deducted based on the reduced paid-up sum assured.

On the day you discontinue paying the premiums, the insurer will evaluate your policy. They will notify you about the status of your policy within 3 months after the first instalment premium's due date. Once that is done, you’ll have 2 options -

• To revive the policy within the revival period of 3 years.
• To completely withdraw/ surrender the policy.

Let’s have a look at a few aspects to understand this.

Opting for revival but not reviving the policy
If you choose to revive your policy but fail to do so during the revival period, the insurer will pay the fund value to you when the revival period ends.

Not reviving the policy at all
Your policy will continue to be a reduced paid-up one. At the end of the revival period, the Fund Value shall be paid to you and your policy will terminate immediately.

Surrendering the policy
If you want to surrender your policy, you’ll have to raise a request for surrender with the insurer, who will pay the fund value to you. After the insurer pays the fund value, your policy will end.

Reviving the policy
If you choose to revive your policy, the original risk cover will be reinstated in line with the policy terms and conditions. And, at the time of the revival, the insurance company will -

• Collect all due premium instalments without charging any interest or fee.
• Levy Premium Allocation Charges as applicable during the period of discontinuance.
• Not levy any other charges.

Conditions for reviving the policy after the lock-in period
Here are some conditions you must be aware of if you’re reviving your ULIP after the lock-in period -

• The insurer will consider your request to revive your policy only if it is submitted in writing.
• You’ll have to provide adequate proof of health and continuation of insurability to the insurer. They may also seek further information or documentation to process the revival request.
• You’ll need to pay all due premiums till the date of revival to the insurance company.
• Based on the prevailing board-approved underwriting rules, the insurer may either revive or refuse to revive your policy. The revival will take effect only if the insurer has specifically communicated or notified you.
• Upon revival, all benefits under the policy that existed prior to the day it was converted to a Discontinued Policy will be reinstated automatically.

So, that is all about discontinuing or surrendering a Unit Linked Insurance Plan. Ensure you’re well aware of the repercussions before you go ahead and discontinue or surrender your ULIP.

And now, you should also be aware of the claims process of a ULIP. Go through and understand the process, the documents you need to keep handy, and other nitty gritty details - in our next article!