What is partial withdrawal in ULIPs?
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What is partial withdrawal in ULIPs?

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  • 14th Mar 2021
  • 719
What is partial withdrawal in ULIPs?

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.

But you need to fulfil specific terms and conditions to avail of this facility.

How does partial withdrawal work?

A part of the premium you pay for your ULIP secures your life 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, the total holding, 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 increase.

Based on the premium amount 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.

How do partial withdrawals 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The worth of your investment, the fund value, gets reduced by the amount withdrawn.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.

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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, for 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 insures 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.

For example, Kotak Life Insurance offers a wide range of ULIPs for investment and insurance purposes. Kotak Life requires you to maintain at least 50% of the total premium paid until the withdrawal date. For Kotak Ace Investment ULIP, you must withdraw at least ₹ 10,000 from your fund value. But for Kotak Single Invest Advantage, the minimum amount for partial withdrawal is ₹ 5,000. The partial withdrawal form is available for download from the website. You can indicate the percentage you want to redeem from each fund in your portfolio.

Conclusion

Partial withdrawals can help you tide over financial crunches. But it affects the monetary benefit your loved ones are entitled to receive. The returns you can expect at the end of the investment period also take a hit. Hence, it is advisable to use this facility only in emergencies.

- A Consumer Education Initiative series by Kotak Life

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