December 5, 2022

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How to estimate your ULIP’s surrender value

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Everyone aspires to be financially independent at some point in their life. Taking an early retirement and following their dream or just not going back into the grind is something may dream of. This can be achieved with early and sound investments. While it is not always easy for everyone to invest directly in stock market to gain wealth, with a financial instrument such as ULIP, you can grow your wealth substantially. 

Staying invested in an insurance-investment plan like ULIP insurance for a long term is more beneficial. Not many people tend to wait that long though and surrender their policy immediately. If you have invested in ULIP and plan on surrendering the plan; read on to understand how you can get an estimated surrender value of your ULIP.

What is a ULIP?

A unit linked insurance plan is a type of life insurance policy. In a ULIP insurance, you get the dual benefits of investment and insurance under the same policy. Your investments provide you the opportunity to increase your wealth over a period of time. Investments are done in equity and debt funds. Based on your risk appetite and requirements, you can choose to invest in either of them. Similarly, you can invest in both of them to get consistent returns. There are many different types of ULIPs that you can choose from. The insurance aspect provides life cover to your loved ones in the event of your sudden demise. 

What is the ULIP surrender value?

ULIPs have a lock-in period of 5 years. During this lock-in period, different types of ULIP charges are deducted from your funds. Many investors tend to surrender their policy during or after the lock-in period if they feel the fund is underperforming. When you surrender your policy, the money that your insurer pays based on your investment and the returns gained on it is called the surrender value. 

If you surrender your ULIP policy during the lock-in period, your insurer will charge you something which is called as the surrender charge. This will be deducted from your fund. Do keep in mind that surrendering the policy during the lock-in period does not allow you to access the fund until the period is over. However, if you surrender your policy after the lock-in period, no charge will be applied, and the insurer will immediately give you the money based on the fund value.

How to estimate the surrender value?

Listed below are the factors that determine the surrender value of your ULIP:

  1. Fund management charge

When you invest in a ULIP, your insurer offers you the chance to avail the services of a fund manager. A fund manager basically manages the funds for you as per your requirements. This service is beneficial for those who cannot always pay attention to their investments and make timely decisions. Instead, the fund manager makes these decisions for them. As per the IRDAI, your insurer cannot charge you more than 1.35% P.A of your fund value for this service. Before your net asset value (NAV) is decided, what the FMC will be will get decided. These charges get deducted from your NAV.

  1. Mortality charge

ULIPs provide insurance along with investment. In the insurance part, your insurer will pay a sum as part of the death benefit to your family in the event of your untimely demise. Your insurer charges a sum of money to provide this death benefit. This charge is known as mortality charge. The amount that will be charged to the policyholder will be based on factors such as their age and health conditions. This charge is deducted from the premium and gets added back to the maturity benefits.

  1. Allocation ratio

As mentioned earlier, you get the dual benefits of investment and insurance with ULIPs. Based on your requirement, you can choose to allocate a major part of your premium towards investment, with the remaining being used for insurance. This ratio of allocation is a deciding factor for how much your maturity benefit could be. If you are aware of this ratio, you could get an idea about the surrender value of your ULIP.

  1. Duration

The surrender value of your ULIP is also dependent on its duration. Short-term ULIPs have a lower surrender value compared to long-term ULIPs. Deducting the charges levied on your ULIP and getting an estimate of your allocation ratio will give you a clear idea about your ULIP’s surrender value as per the duration.

If you are planning on surrendering your ULIP, keep these factors in mind to get an estimate of its surrender value. You can also use the ULIP calculator to check how much your maturity benefits could be. 

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