Partial Withdrawal in ULIPs

Is Partial Withdrawal Allowed in ULIP?

Yes, most ULIPs incorporate this feature as standard equipment. Once the 5-year mandatory lock-in concludes, policyholders gain the ability to extract portions of their accumulated fund value. This feature offers liquidity and enables you to handle unforeseen expenses, such as medical crises, education funding, and property down payments, among others.

However, your insurer will have specific rules for any withdrawals. These rules govern things like:

• The minimum and maximum withdrawal amount.
• The number of partial withdrawals allowed in a policy year.
• The minimum fund value that must be maintained after the withdrawal.

Some insurers give you a set number of free partial withdrawals. After that, they may apply a nominal fee. Your policy document contains these specifics. It is important to read it and understand the exact parameters governing your ULIP’s partial withdrawal mechanics.

How Does Partial Withdrawal Work?

A part of the premium you pay for your ULIP provides life insurance coverage. 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. Each unit is assigned a price, 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 lock-in period of the ULIP start date, the first five years. The amount you receive depends on the total NAV of the number of units redeemed.

Premium Allocation

If you invest in a ULIP, you must pay a fixed premium. Part of the premium is used to provide coverage for income replacement, 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.

Limits on Partial Withdrawals

After understanding what is partial withdrawal in insurance, let us explore the limits imposed on it. Partial withdrawal from ULIP is very flexible, but there are rules that must be followed to keep the policy in action. The main restrictions are:

• 5-Year Lock-In Period: You can only make a withdrawal after the policy has been active for five years and all premiums for that time have been paid.
• Minimum Age: The life assured (the person covered by the policy) must be at least 18 years old to make a partial withdrawal.
• Maximum Withdrawal Amount: Insurers limit the amount you can withdraw in a policy year to a percentage of the fund value, which is usually around 20%.
• Minimum Fund Balance: Your policy must keep a minimum fund value even after the withdrawal. This is usually equal to one year’s worth of premiums or another pre-set amount. If the fund’s value falls below this level, a withdrawal request will be denied.

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. ULIP Partial withdrawal rules 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 insurance companies and specific ​​ULIP plans.

What is the Lock-in Period for ULIP?

According to the Insurance Regulatory Authority of India, ULIPs have a five-year lock-in period during which you cannot withdraw funds. These plans are meant to encourage ​​long-term investments and ensure stability. This life insurance plan offers benefits for both insurance and investment. The lock-in period prevents you from withdrawing funds and provides you higher returns. If you withdraw before the lock-in period ends, you will be charged surrender fees.

Is it Possible to Withdraw Funds Before the Lock-in Period?

No, it is not possible to make partial withdrawals from your ULIP before the mandatory five-year lock-in period is completed. This rule has been established by the Insurance Regulatory and Development Authority of India (IRDAI) to encourage a long-term savings habit among investors.

If a policyholder decides to surrender the policy during the lock-in period, the funds are not paid out immediately. Instead, the accumulated fund value, after deducting surrender charges, is moved to a ‘Discontinued Policy (DP) Fund,’ where it will remain until the lock-in period is over. The amount will earn a minimum guaranteed interest rate (currently 4% per annum) during this time. Only after the completion of the five-year term can the policyholder access these funds.

What is the Impact on the Sum Assured?

When you withdraw from your ULIP fund, the fund value and the sum assured decrease by the withdrawn amount. However, this reduction in the assured sum is temporary and lasts two years. After these two years, 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 is crucial to remember that the automatic restoration of the sum assured is contingent upon two conditions: refraining from making any additional withdrawals within two years and maintaining the regular payment of due premiums.

Therefore, the sole scenario in which a partial withdrawal in ULIP policy could have a prolonged impact is if the policyholder passes away during the two years following the withdrawal. The reduced sum assured will be disbursed to the nominee in such an instance.

How to Choose the Right Plan?

Choosing the right ULIP that aligns with your financial goals and liquidity needs is crucial. Here are some key factors to consider, keeping the partial withdrawal feature in mind:

• Assess Your Financial Goals

Start by defining your long-term objectives, such as saving for retirement, a child’s education, or wealth creation. Your investment horizon will help determine the most suitable fund options (equity, debt, or hybrid) within the ULIP.

• Understand the Partial Withdrawal Rules

Before finalizing a plan, compare the partial withdrawal facilities offered by different insurers. Look for plans that offer flexible withdrawal terms, such as a higher number of free withdrawals or a lower minimum balance requirement post-withdrawal. Understanding these nuances will ensure you can access your money easily when needed without incurring high costs.

• Evaluate Charges and Fees

ULIPs come with various charges, including premium allocation, policy administration, fund management, and mortality charges. In addition, there may be charges for partial withdrawals beyond the free limit. Opt for a plan with a transparent and competitive charging structure to maximize your returns.

• Check the Insurer’s Reputation

Finally, consider the insurer’s claim settlement ratio and customer service record. A reliable insurer ensures a smooth and hassle-free experience when it comes to both claims and services like partial withdrawals.

FAQs on Partial Withdrawal in ULIP