What is Partial Withdrawal in ULIPs?

ULIP, or Unit Linked Insurance plan refers to an insurance plan that offers dual benefits, including an investment plan to fulfil your long-term goals and a life cover to financially protect your family during an unfortunate event. 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 know the details regarding how to withdraw ULIP policy and what are the limitations.

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 coverag 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.

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 as per 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, 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.

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.