Definition
Discontinuance Fund
The discontinuance fund holds the proceeds of a ULIP surrendered or lapsed within the five-year lock-in, earning a minimum regulated return until the lock-in ends.
If a policyholder stops paying or surrenders a ULIP during the five-year lock-in, the insurer deducts a capped discontinuance charge and moves the balance into a discontinuance fund, where it earns at least a regulator-set minimum interest rate. The money is paid out only after the lock-in completes.
This mechanism, introduced by IRDAI, replaced the old practice of forfeiting large amounts on early ULIP exit and ensures policyholders recover most of their value, with a small penalty, rather than losing it. The discontinuance charge tapers to nil after a few policy years.
Related terms
- SurrenderSurrender is the voluntary termination of a life policy by the holder before maturity, in exchange for the surrender value.
- Lock-In PeriodThe lock-in period is the minimum span during which a ULIP's funds cannot be withdrawn or fully accessed, set at five years in India.
- Unit Linked Insurance PlanA Unit Linked Insurance Plan (ULIP) is a life insurance product that combines life cover with investment in market-linked funds chosen by the policyholder.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.