ULIP, or Unit Linked Insurance Plan, is a special product that offers you both, life cover and investment in one plan. You can select from various fund options depending on your risk preference and get returns linked to the market. You also get tax advantages on the premium paid and the maturity amount received under Section 80C and Section 10(10D) of the Income Tax Act, respectively.

But what if you face some financial difficulties or are not happy with the performance of your ULIP? What if you want to change your goals or switch to another plan? Can you stop paying your ULIP premium before 3 years? What are the consequences of doing so? And are there any alternatives to discontinuing your ULIP premium before 3 years?

Let’s discuss this.

Reasons to stop ULIP premium before 3 years

There could be various reasons why you may want to stop paying your ULIP investment premium before 3 years. Some of the common ones are:

  • Financial difficulties: You may face unexpected expenses or emergencies affecting your cash flow and budget. You may find it hard to pay your ULIP premium and other financial commitments.
  • Dissatisfaction with the performance: You may be disappointed with the returns of your ULIP fund. You may feel that your ULIP is not meeting your expectations or is underperforming compared to other investment options.
  • Change of goals: You may have a change in your life situation or your financial goals. You may want to invest in a different product that suits your new needs and preferences better.
  • Switch to another plan: You may find a better ULIP plan that offers more features, benefits or flexibility. You may want to switch to that plan and take advantage of its offerings.

Consequences of stopping ULIP premium before 3 years

If you decide to stop paying your ULIP premium before 3 years, you should be aware of the following consequences:

  • Policy status: Your ULIP policy will not lapse immediately. It will continue for a grace period of 15 days (for monthly mode) or 30 days (for other modes). If you pay your premium within the grace period, your policy will be revived and you can enjoy its benefits as usual. However, if you fail to pay your premium within the grace period, your policy will be discontinued and moved to a discontinued policy fund (DPF).
  • Surrender value: You can surrender your ULIP policy after the lock-in period of 5 years. You will not get any surrender value if you surrender your policy before 5 years. Your fund value will be transferred to the DPF, and you will get it after the completion of 5 years, subject to a deduction of discontinuance charges. The DPF will earn a minimum guaranteed interest rate of 4% per annum or as prescribed by the IRDAI from time to time.
  • Fund value: Your fund value will depend on the performance of your chosen fund option. If you stop your ULIP premium before three years, you cannot switch funds, make partial withdrawals or top-up your premium. You will also lose the benefit of rupee cost averaging, which helps you purchase more units when the market is down and fewer units when it is high. This reduces your average cost per unit and enhances your returns in the long run.
  • Charges: You will have to pay various charges for your ULIP policy, such as premium allocation charge, policy administration charge, fund management charge, mortality charge, etc. These charges will reduce your fund value and affect your returns. If you stop your ULIP premium before three years, you will not be able to recover these charges and you will lose the opportunity to earn higher returns on your investment. To get a better idea of this, use the ULIP calculator.
  • Tax implications: You will get tax benefits on your ULIP premium and maturity amount under Section 80C and Section 10(10D) of the Income Tax Act, respectively. However, these tax benefits are subject to certain conditions. One of them is that you have to pay your ULIP premium for at least five years. If you stop your ULIP premium before three years, you will lose these tax benefits and have to pay tax on your ULIP income.

Conclusion

ULIP is a great product that offers you life cover, tax savings and market-linked returns. However, it also requires you to pay your premium for at least five years to get the plan’s full benefits. If you stop your ULIP premium before three years, you will face many consequences that will affect your policy status, surrender value, fund value, charges and tax implications. You will lose the benefits of ULIP and incur losses on your investment.