Discontinuation policy fund
Also written Discontinued policy fund
The fund a lapsed or surrendered ULIP's balance value moves into during the 5-year lock-in, once the capped discontinuation charge is deducted — insurance cover stops, but the money stays locked until the lock-in ends.
In plain language
A ULIP has a mandatory 5-year lock-in. Stop paying premiums, or choose to surrender, before that lock-in ends, and the money does not simply come back — it moves into the discontinuation policy fund instead, and stays there until the lock-in period is over.
Before the balance moves, a discontinuation charge — capped at Rs 6,000 — is deducted. What remains after that charge is transferred to the discontinuation policy fund.
How it works
The mechanics. If a ULIP is discontinued — premiums stop, or the policyholder surrenders — before the 5-year lock-in ends, the policy value (after the capped Rs 6,000 discontinuation charge) is moved into the discontinuation policy fund. Insurers may also credit an additional amount based on the current value of the assets held against the policy.
What stops, and what doesn't. The workbook's own comparison (a term-plus-mutual-fund case study, contrasted with a Type II ULIP) is instructive: in a ULIP, if the premium is not paid within the grace period during the first 5 years, the entire contract moves into the discontinued policy account and insurance coverage stops — even the investment portion cannot be separately continued during this window. Even after the 5 years, the insurance cover cannot be revived selectively while stopping only the investment — unlike a standalone mutual fund investment, which can be paused or restarted freely.
Liquidity. The money sitting in the discontinuation policy fund is locked until the 5-year mark from inception, at which point the accumulated balance is paid out — it is not available on demand the way an ordinary mutual fund redemption is.
A worked example
Illustrative figures.
Ms Bhattacharya starts a Unit Linked Insurance Plan in Year 1, paying premiums monthly. In Year 3, she stops paying — her fund value at that point is Rs 1,80,000.
The insurer deducts the discontinuation charge, capped at Rs 6,000, leaving Rs 1,74,000, which moves into the discontinuation policy fund. Her life cover stops immediately — there is no insurance protection during this period, even though her money is still invested.
She cannot access this Rs 1,74,000, or restart just the investment portion separately, until the policy's 5-year lock-in from inception is complete — at which point the accumulated balance in the discontinuation fund is paid out to her. Contrast this with a plain mutual fund SIP that she had simply stopped paying into: that money would have remained fully liquid and redeemable at any time.
Why NISM asks about it
Chapter 2 (Features of Life Insurance Products), section 2.1, on policy lapse, introduces the discontinuation charge cap and the discontinuation policy fund, and the ULIP-versus-term-plus-mutual-fund case study later in the chapter contrasts what happens to the insurance and investment portions on non-payment. Expect a question on the discontinuation charge cap, or on what happens to cover and liquidity when a ULIP lapses within the lock-in.
Common exam traps
- The discontinuation charge is capped at Rs 6,000 — a specific figure worth remembering directly.
- Insurance cover stops on discontinuation, even during the lock-in — the ULIP is not like a term plan that keeps covering you regardless of the investment side.
- The money is locked until 5 years from inception, not freely redeemable the moment the policyholder decides to stop paying.
- Even after 5 years, insurance cannot be selectively continued while stopping only the investment — the workbook is explicit that, unlike a term-plus-mutual-fund combination, a ULIP's two components are not always separable.
Where this is taught
Free preparation for NISM Series X-BRelated terms
- Endowment policyA life insurance policy that pays the sum assured plus accrued bonus on survival to the end of the term as well as on death — an investment-cum-insurance contract with a level premium.
- Paid-up policyAn investment-cum-insurance policy that continues without further premiums after the policyholder stops paying, with the sum assured cut in proportion to premiums paid versus premiums due.
- Surrender valueThe amount an insurer returns when a policyholder discontinues an investment-cum-insurance policy early — at least 30% of premiums paid under the workbook's rules, rising to 90% near maturity.
- Death coverThe life insurance benefit paid only if the insured dies within the policy's specified period — nothing is paid if the insured survives it, the defining feature of a pure term plan.
- ULIP charge deductionHow a ULIP takes its costs: mortality and administration charges are met by cancelling units rather than sitting inside the NAV, which is what makes a post-expense return hard to compute.
- ULIP liquidity rulesWhen money can leave a ULIP: a 5-year lock-in with no redemption, surrender possible but paid only at the end of the lock-in, partial withdrawal allowed after it, and revival of a lapsed policy within 3 years.
- ULIP Type IIThe ULIP structure in which death before maturity pays the sum assured plus the fund value, while maturity pays the fund value alone — the most generous of the death-benefit wordings the workbook lists.