Did you know that insurance companies need to offer you a free look period? This is usually 30 days, during which you can reconsider the policy and return it for a complete refund. After this, comes the lock-in period. As the name suggests, the lock-in period is the duration for which your funds get locked in, preventing you from withdrawing any amount.
In health insurance, there is usually a waiting period, after which your insurance coverage kicks in. This waiting period could stretch from around three months to 2 years. For instance, pregnancy and delivery-related hospitalisation may have a waiting period of 12 months, while cancer usually has a waiting period of 2 years. Claims raised during this waiting period will be rejected by the insurer.
Importance of a Lock-In Period
A lock-in period prevents you from making impulsive decisions. Once you have committed to a policy, withdrawing your money before the lock-in period is over can have an impact on your insurance cover as well as lead to a penalty in the case of ULIPs, which are plans that combine the benefits of insurance and investment.
The lock-in period is usually 5 years for ULIPs. The lock-in period for these plans helps you stay invested so you can meet your financial goals in the long term, while also safeguarding your family’s financial future in case you are no longer there to do so.
Some of the other benefits of the lock-in period are:
They offer tax benefits under Section 80C of the Income Tax Act, of 1961. Starting February 1, 2022, any proceeds generated from ULIPs become taxable if the premium paid in a financial year surpasses Rs 2.5 lakh.
They inculcate the habit of saving. You put away money for the future and are penalised for withdrawing from it.
What Happens to Your Insurance if You Surrender During the Lock-In Period?
Most ULIPs do not offer withdrawal options before the end of the lock-in period. If you are in urgent need of funds, you can consider surrendering your policy. When you do this before the lock-in period ends, the life cover associated with the policy will immediately cease. You might also be charged a specific amount for surrendering the policy during the lock-in period. These charges tend to be quite high.
What Happens to Your Insurance if You Make a Withdrawal After the Lock-In Period?
Most ULIPs allow you to make a partial or complete withdrawal after the lock-in period is over. Use this option only in case of an emergency. This is because a partial withdrawal will reduce the sum assured under life coverage.
Even if you have made a full withdrawal, you will have some life insurance cover, provided you have paid your premiums on time during the lock-in period.
To enjoy the full benefits of a policy, whether it is insurance, investment or a combination of the two, it’s best to wait for the lock-in period to be over and hold the policy till maturity without making any withdrawals.
