ULIP, or Unit Linked Insurance plan, refers to an insurance plan that offers dual benefits, including an investment plan to fulfill your long-term goals and a life cover to protect your family during an unfortunate event financially. The premium amount that is paid towards ULIP is divided into two parts.
A part of it is contributed to your life cover, and the remaining is invested in the fund of your choice. ULIPs make inflation-beating returns on your investment possible when continued until the end of the policy term. However, it can also act as an interim source of funds if you face a financial shortfall during the policy period. You can redeem some of the units accumulated in your fund before the policy end date. This partial withdrawal facility helps you avoid digging into your savings, taking expensive loans, or having to sell your assets. One unique advantage of the ULIP plan is that you can take out a part of your accumulated fund value before the policy matures.
Now that you know what is policy withdrawal, let’s dive deep to learn the details regarding how to withdraw ULIP policy and what are the limitations.
When Can We Withdraw from ULIP?
Policyholders have the option to make partial withdrawals from their ULIPs after the lock-in period. The lock-in period is typically five years from the date of purchase. During this period, no withdrawals are allowed. After the lock-in period expires, policyholders can make partial withdrawals from the fund value while the policy remains in force. Partial withdrawals allow policyholders to access a portion of their invested amount without surrendering the policy entirely. The exact rules and limits for partial withdrawals vary among different insurance companies and specific ULIP plans.
How Much Amount is Allowed for Partial Withdrawals?
Regarding the upper threshold, it stands at approximately 25% of your fund’s current value upon withdrawal, with the requirement that a minimum of one year’s premium remains within the fund. To illustrate, consider a scenario where an individual purchases a ULIP policy.
As an example, consider a scenario where an individual has purchased a ULIP policy. After a lock-in period of five years, the policy’s fund value stands at ₹3 lakh, with an annual premium of ₹50,000 and a sum assured of ₹6 lakhs. In this context, a quarter of the fund value translates to ₹75,000. By withdrawing ₹75,000, it becomes feasible to execute a partial withdrawal, given that an amount equivalent to one year’s premium (i.e. ₹ 50,000) remains within the fund.
How Does Partial Withdrawal Work?
A part of the premium you pay for your ULIP provides a life insurance cover. The insurer invests the remaining amount in the financial instruments you select as per your capacity to bear market fluctuations. The pooled investment from all investors in a ULIP is divided into units. A price is assigned to each unit, known as the Net Asset Value (NAV). It is the price at which investors can purchase and sell ULIP units. The NAV goes up when the value of the underlying funds increases.
Based on the premium you pay, units are assigned to you. You can encash some of those units after the first five years from the ULIP start date, the lock-in period. The amount you receive depends on the total NAV of the number of units redeemed.
Premium Allocation
A fixed premium needs to be paid if you invest in a ULIP. A part of the premium is used for providing coverage Replacement of income e, while the remaining part is invested in various capital market funds.
Withdrawal of Funds
Part of the premium that gets invested is further divided into units. ULIP partial withdrawal allows you to redeem some of those units in case of any emergency.
How Does Partial Withdrawal in ULIP Affect Your Investment and Life Cover?
The worth of your investment, the fund value, gets reduced by the amount withdrawn. Moreover, your life cover amount is also lowered by a sum proportionate to the encashed amount. The coverage remains reduced for two years from the withdrawal date. Hence, in case of an unfortunate event during this interval, your nominee will receive a reduced payout.
However, the amount payable to your nominee is restored to the original sum assured after two years. But your fund value after these two years will depend on the prevailing NAV and the premiums you invest.
What is the Impact on the Sum Assured?
When you make a withdrawal from your ULIP fund, both the fund value and the sum assured decrease by the withdrawn amount. However, this reduction in the sum assured is temporary and lasts for a span of two years. After this two-year period concludes, the sum assured will automatically revert to its original amount. Consequently, opting for a partial withdrawal will not adversely affect your ULIP policy in the long run.
It’s crucial to bear in mind that the automatic restoration of the sum assured is contingent upon two conditions: firstly, refraining from making any additional withdrawals within the two-year period, and secondly, maintaining the regular payment of due premiums.
Therefore, the sole scenario in which a partial withdrawal from your ULIP policy could have a prolonged impact is if the policyholder passes away during the two-year period following the withdrawal. In such an instance, the reduced sum assured will be disbursed to the nominee.
How to Choose the Right Plan?
While planning to buy ULIP, it is advisable to check different plans that provide maximum benefits. In addition, various factors like stability, customer service quality, the reputation of the brand being opted for, etc., must be considered that can help the policyholder’s family financially during any unfortunate incident.
Here are some of the top features of the plan:
Financial protection
In case of any unfortunate incident, the nominee gets the claim amount along with the fund value.
Rewards
By regularly paying the premium amount and staying invested with the plan, you can get various loyalty additions and wealth booster benefits in your investment.
Top-up option
Investment from your premium amount can be increased anytime at the policyholder’s convenience.
Flexible payment options
The premiums of ULIPs can either be paid monthly, half-yearly, or yearly.
Tax Benefit
Partial withdrawal from ULIP is taxable; therefore, you enjoy lots of benefits.
Terms and Conditions for Partial Withdrawal
- On February 1, 2020, the Insurance Regulatory and Development Authority of India (IRDAI) made three partial withdrawals permissible during the entire ULIP tenure. You can make such withdrawals on your children’s wedding, their college admission, buying property, and also if any critical illness strikes.
- Partial withdrawals are possible only when the ULIP policyholder is at least 18 years old. Therefore, if your ULIP ensures a minor, you have to wait until the child becomes an adult before making partial withdrawals.
- The amount you withdraw is not taxable, subject to the conditions under Section 10 (10D) of the Income Tax Act, 1961.
- The sum you can withdraw depends on your insurance provider and your policy type. You must leave enough funds to cover operational costs and life cover charges.
Conclusion
Partial withdrawals can help you tide over financial crunches. But it affects the monetary benefit your loved ones are entitled to receive. Moreover, the returns you can expect at the end of the investment period also take a hit. Hence, financial experts advise against ULIP partial withdrawal unless it is an absolute emergency in order to avail the benefit of long-term capital growth.
In this policy, the investment risk in the investment portfolio is borne by the policyholder.
Key takeaways
- Partial withdrawals allow policyholders to access a portion of their invested amount without surrendering the policy entirely.
- The lock-in period is typically five years from the date of purchase. During this period, no withdrawals are allowed.
- After the lock-in period expires, policyholders can make partial withdrawals from the fund value while the policy remains in force.
- When you make a withdrawal from your ULIP fund, both the fund value and the sum assured decrease by the withdrawn amount.
