Lock in Period in Insurance: A Comprehensive Guide

Mrs Verma, a new policyholder, recently invested in a health insurance policy to safeguard her family’s health. As she reviewed her policy documents, she stumbled upon a term she hadn’t fully understood: the lock-in period.

If you’ve encountered similar confusion, you’re not alone. Allow our experts from Bima Seva Kendra to help. From the cumulative experience of 100 years to the new policyholders, here’s all you need to know about the lock-in period.

1. What is a Lock-in Period?

The lock-in period is when the accumulated funds and investment/invested sum can't be withdrawn/redeemed or resold. The period is often utilised for plans with an investment component like ULIPs, mutual funds, and so on.
ULIPs (United Linked Insurance Plans) are long-term saving options, a life insurance plan uniquely combining insurance and investment. The lock-in period in ULIPs, of 5 years as per the IRDAI, is designed to keep the investor invested or involved in the investment.

2. Significance of the Lock-In Period

While the lock-in period completely prohibits withdrawal, some plans may allow partial withdrawals (unlimited or not exceeding 20% of the fund’s value in a policy year) after 3 years, depending on the policy.

The lock-in period is more than just a contractual obligation; it plays several key roles:

• Encourages Commitment: It ensures that policyholders remain committed to their insurance plan, which is beneficial for long-term coverage.
• Tax Benefits: Tax benefits are available on ULIPs under Section 80C of The Income Tax Act, 1961.
• Limited liquidity: The inability to access the invested funds allows more disciplined savings (though it could pose an issue as immediate emergency withdrawal is not allowed)
• Longer investments-higher returns: experts believe that the longer money is invested, the higher the returns will be and the lock-in period thus provides the sum time to grow.

3. Lock-In Period and Health insurance

For Health Insurance claims, the lock-in period may also be known as the ‘waiting period’. This period varies by insurer and policy, so it’s essential to understand the specifics of your plan. During this time, claims, modifications and surrendering of the policy are not allowed.

If claims are made within the waiting period, there are chances of claim rejections, delays in claim process and other claim rejection-related issues.
The primary function of the waiting period in Health Insurance Claims is to protect the interests of the insurer, minimising the risk of fraudulent claims and exploitation by the policyholders.

Following are some of the types of Waiting periods -

• Initial Waiting Period
• Pre-existing Diseases (PED) Waiting Period
• Waiting Periods for Specific Ailments/Procedures
• Critical Illnesses Waiting Period
• Maternity Benefit Waiting Period

4. What are Surrender Charges?

When a policy is terminated or surrendered before the lock-in period is over, surrender charges are applicable. Consider these charges are penalties for premature termination of the policy, designed to cover administrative expenditure.

Conclusion

In conclusion, the lock-in period is an essential component of any insurance policy. Understanding the lock-in period is crucial for effectively managing your insurance policy. While it may seem restrictive, it serves an important purpose.
Understanding the complexities of the insurance world, experts like Bima Seva Kendra are ever ready to bring SEVA to your fingertips. When the jargon seems to be getting out of hand, industry experts will be there to assist you through it all.