Most of the financial instruments that are used for investing money in the market operate on the principle of premium payment. Premium is basically the amount that you pay to get access to a specific service. So, instruments that allow investment use the premium for investing in funds. This applies to ULIPs as well. The premium paid for the policy is used for investment and insurance cover. But what would happen if you were not able continue with the premium payments for the policy? Read on to understand more about this.
What is ULIP?
A unit linked insurance plan is a life insurance policy that has the dual benefit of investment and insurance under a single policy. The premium that the investor pays towards the policy is divided into two parts. One part is used for the provision of life insurance cover. The other part is used for investing in market-linked funds. You have the option of investing in equity funds, which carry a high-risk factor and give higher returns to the investor. Or you can invest in debt funds, which carry a low-risk factor and provide low-to-medium returns to the investor. The fund that you select should match your risk appetite and your life goal.
What are the types of premiums in ULIPs?
In ULIPs, you have two options when it comes to paying premium for the policy. They are:
- Regular premium
In this mode of payment, you can pay for the policy on a monthly basis, quarterly basis or yearly basis. This mode of payment allows you to have a small amount of savings for any immediate expenses. Regular payment is suitable for those who cannot afford to pay a large premium amount in one go.
- Single premium
In this mode of payment, you can pay the entire premium of the policy with a lump sum amount. This means you are not required to pay the premium in instalments or keep reminders about the date of payment. This option is suitable for those who can afford to do large payments without any financial burden.
Why is premium payment important?
As mentioned above, the premium paid for ULIPs is for both investment and insurance. When you invest in ULIPs, you get to select what amount of life cover you want for your loved ones. That much money would be deducted from the premium. The other part would be used for investing in the funds. You can go with either a single fund or both the funds. The division of money in the funds will be as per requirements. When you stop paying premium, both of these aspects would get severely impacted.
What happens to the policy?
There are two time periods in which the premium payments can stop. Let’s understand both:
- During the lock-in period
ULIPs come with a lock-in period of 5 years. During this period, you cannot withdraw or access your investment. Only after the completion of the lock-in period can you access your investment or make partial withdrawals. However, if you stop paying premium during the lock-in period, the life insurance cover that is a part of ULIP benefits, would get discontinued. Whatever penalties are to be levied would get deducted from your fund value. Insurers usually offer a grace period, which may vary from one insurer to another. If you do not pay the premium during this grace period, or do not wish to continue with the policy, whatever returns you have gained from your initial investments would be paid to you. This will happen once the lock-in period ends. This would also mark the termination of your policy.
- After the lock-in period
Once the lock-in period ends, and you stop paying premiums, the sum assured will get reduced. Your insurer may intimate you to restart the premium payment. However, if for some reason you are not able to pay or want to surrender your policy, you can do so. The insurer will pay you whatever the accumulated sum assured is, which gets compounded with returns from your ULIP investments. Your policy will get terminated after the payment is done.
These are the things that could happen when you stop paying premium towards ULIPs. To enjoy good returns for your future and get a good life insurance cover for your loved ones, continue with the premium payment for the policy.