After five years, you might find your ULIP investment is worth less than the total premiums you have paid. Most financial advice recommends canceling the plan, buying a separate term insurance policy, and moving your money into a mutual fund.
Many people decide to cancel their plan, which is often where the problem starts. They focus only on the premiums they have already paid, instead of considering the fact that the premiums are already paid and cannot be recovered. Since you cannot change the past, those old costs should not influence your decision about the future.
A narrower question worth asking here instead is: does this money do better inside the plan or outside it?
In this blog, we will understand this in detail and see whether it's best to surrender the ULIP or stay in after 5 years.
The Money Already Spent Is Not Part of the Decision
The fees you paid during the first 5 years are already gone, and keeping the plan will not help you get the money back. Any exit argument built on recovering them is not right. Instead, the focus should be on the future, where you ask yourself where your money will grow more over the next 15 years.
Every ULIP plan splits each premium into two parts. The first part buys units in a chosen fund; the other part pays for the life cover and the running of the contract. Your ULIP statement clearly shows your investment growth, but it hides the fees charged for insurance and management. Because these costs are kept quiet, you don't fully realize your returns are lower than expected until the five-year lock-in period ends.
At the 5-year mark, two unrelated events happen in the same month. The first is realizing your investment returns have been lower than expected, and the second is finding out you are finally free to cancel the plan, and most policyholders read them as one signal.
These events are fundamentally very distinct and should not automatically dictate any financial decisions.
Why the Plan Gets Cheaper Just as People Want Out
Charges in a ULIP are front-loaded, so the first five years are the most expensive stretch of the policy, as premium allocation charges are the highest in the opening years. As the five years come to an end, the discontinuance charges drop away entirely and thus the ULIP starts feeling cheaper.
What the Regulator Caps, and When
The regulator limits how much fees can lower your investment returns. These limits get stricter the longer you keep the policy: fees are capped at 3% by the 10th year and 2.25% by the 15th year. Additionally, the fee for managing the fund is capped at 1.35% per year.
If you look at how the fees work, you’ll see the trap. Someone surrendering at year five has paid for the costly half of the plan and is about to walk away from the cheap half.
The Charge That Moves in the Opposite Direction
Mortality is 5% every year, because age is what prices it. Instead of sending you a bill for your insurance, the company pays for it by automatically taking some money from the investment units. This cost increases every year as the person gets older, but because it happens behind the scenes, many do not notice it growing.
Two things soften the effect. The fee is calculated based on the difference between the total life cover and the current investment balance; as the investment grows, that difference gets smaller, thus lowering the fee. Once your investment fund becomes larger than your life cover, the fee can stop entirely.
Deciding whether to keep the ULIP plan after 10 years depends on two competing factors: one being your age and the second being how much money is in your account.
What Does Surrendering Actually Cost Beyond the Fund Value?
Two things leave along with the money, and neither appears on the surrender statement. Life cover ends the day the contract closes, and a tax benefit you get with it.
Cover That Cannot Be Bought Back at the Old Price
A person’s health and needs at 31 and 36 are rarely identical. A raised sugar reading, a stent, a thyroid diagnosis, any one of these makes replacement cover dearer or conditional. Any new insurance policy you try to buy will be much more expensive or might not be approved at all.
A Tax Position Worth Knowing Before Signing
Whether the ULIP returns are tax-free depends on when the policy was bought.
If bought before Feb 1, 2021: The entire amount you receive after exit is tax-free, regardless of how much the premium was.
If bought on or after Feb 1, 2021: The amount is tax-free only if the total yearly premiums were ₹2.5 lakh or less. If the pay is more than that, your profits will be subject to capital gains tax (typically 12.5% for investments held longer than a year).
Also, because the 5-year lock-in period has ended, you don't need to worry about paying back any tax deductions you claimed on your premiums earlier.
You also don't need to worry about any tax deductions you claimed on your premiums in the past. You would only have to pay those back if you cancelled your plan within the first 5 years. You don't have to worry about this issue because you have already passed that lock-in period.
Is There Another Option Between Staying and Leaving?
Yes, there are three, and each answers a different complaint.
If the saved-up money is needed, this points urgently to a partial withdrawal, which is permitted after the lock-in and leaves the contract alive.
If the plan is performing poorly, the best option here is to switch the plan, since the fund is adjustable while the structure is not.
A premium that no longer fits the budget points to a third route. In this case, stopping the payments after 5 years turns some contracts into a reduced paid-up one rather than closing them, though whether a particular policy allows this depends on its own documentation.
Anyone looking for the best ULIP plan with high returns rarely needs to switch to a new policy. Investment funds within an existing plan can be changed at any time. Replacing a policy simply restarts expensive early-year fees, making it better to optimize the current plan instead.
