6 days ago
ULIP After Five Years: Stay Invested or Exit?
A ULIP combines life insurance with market investments.
Its fees are often highest during the first few years, so the investment can look disappointing after five years.
In one example, the ULIP had grown to about ₹5.84 lakh after ₹5 lakh of premiums, while another fund reached about ₹6.49 lakh.
However, leaving the ULIP invested for 15 years produced a higher after-tax result than switching to a fund in that example.
This was mainly because the eligible ULIP payout was treated as tax-exempt while the fund’s gains were taxed.
The result can change if the policy is not eligible for that tax treatment.
It can also change if the ULIP fund performs poorly compared with its benchmark.
Instead of surrendering everything, a person may be able to switch funds, withdraw part of the money, or stop paying premiums while remaining invested.
The right choice depends on the policy’s charges, insurance cover, tax status, and the investor’s need for cash.
A five-year ULIP may trail a comparable index fund because many policy charges are concentrated in the early years.
In the example, ₹5 lakh paid into the ULIP becomes about ₹5.84 lakh, versus roughly ₹6.49 lakh in a 1.2% fund.
Over 15 years, staying invested produces about ₹28.73 lakh, while exiting and reinvesting produces about ₹28.03 lakh after estimated taxes.
The advantage of staying depends largely on the ULIP remaining eligible for tax-exempt maturity proceeds.
Investors should consider fund switching, partial withdrawals, or stopping premiums before permanently surrendering the policy.
- Who
- ULIP policyholders, particularly those whose five-year lock-in period has ended.
- What
- The article examines whether investors should surrender a ULIP after five years or remain invested.
- Where
- When
- After the ULIP’s five-year lock-in period; the tax discussion is stated for FY 2026-27.
- Why
- Early ULIP charges can make returns look weak, but staying may be preferable because later costs may taper and eligible maturity proceeds may be tax-exempt.
Case for staying invested
Case for exiting or changing strategy
Early charges
Case for staying invested
The investor has already absorbed the most expensive, front-loaded allocation and administration charges, which may taper in later years.
Case for exiting or changing strategy
The ULIP trails a lower-cost fund in the early comparison, and its total cost can remain a concern if the policy’s returns are weak.
Tax treatment
Case for staying invested
If the policy meets the stated premium and sum-assured conditions, eligible maturity proceeds may be tax-exempt, improving the long-term result.
Case for exiting or changing strategy
If annual premiums exceed ₹2.5 lakh or the sum assured is below ten times the annual premium, the exemption may not apply, making a lower-cost fund more attractive.
Alternatives to surrender
Case for staying invested
The investor can remain invested while switching funds, making partial withdrawals, or stopping premiums if the policy permits it.
Case for exiting or changing strategy
An investor who needs cash, lacks adequate insurance, or holds a fund that has persistently lagged its benchmark may prefer withdrawing, changing funds, or exiting after checking the policy terms.
Key facts
- Illustrative annual premium
- ₹1,00,000
- Illustrative sum assured
- ₹10 lakh
- Five-year ULIP fund value
- About ₹5.84 lakh after ₹5 lakh in premiums
- Comparable fund value
- About ₹6.485 lakh using a fund charging 1.2%, at the stated return assumption
- Fifteen-year ULIP value
- About ₹28.73 lakh after ₹15 lakh in premiums
- Fifteen-year exit-and-reinvest value
- About ₹28.03 lakh after estimated long-term capital-gains tax
- Premium threshold discussed
- ₹2.5 lakh annually across unit-linked policies
Sources
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