Partial Withdrawal of ULIPs: All you need to Know

If you’re an individual looking to enjoy the benefits of insurance and create market linked wealth over the long-term, investing in a ULIP is one of the preferred ways. You’re probably thinking ‘what is a ULIP?’ now, aren’t you? Don’t worry. Here’s something that can help you understand exactly what it is.

A Unit-Linked Insurance Plan, or ULIP for short, is an insurance policy where you get to invest in the market-linked instruments such as equity, debt etc., and enjoy life insurance coverage. The insurance aspect of a ULIP allows your family to continue with their existing lifestyle even in your absence by providing them with some much-needed financial assistance. The investment aspect, on the other hand, may help you to create wealth over the long-term by enabling you to invest in different market-linked funds of your choice.

One of the many reasons why ULIPs are considered to be the go-to investment option for many individuals interested in market linked wealth creation is the fact that it allows partial withdrawals. Want to know more? Continue reading to find out.

Limits on partial withdrawal

Although ULIPs come with the ability to partially withdraw the accumulated fund value, there are certain conditions that have to first be met. Firstly, partial withdrawals can be made only after the completion of the lock-in period, which in the case of ULIPs is 5 years.

Secondly, partial withdrawals may be subject to certain charges depending on the policy terms and conditions. Some policies allow individuals to make withdrawals free up to a certain limit, whereas others charge a percentage of the withdrawal amount. Finally, ULIPs may also come with other limits such as a cap on the number of partial withdrawals that you can make and the amount of withdrawals.

Since these limits on partial withdrawals can vary from one ULIP to another, it is advisable to read through the policy document and terms to get a better idea.

Making partial withdrawals before the completion of the lock-in period

Since ULIPs are supposed to be long-term investment options, the Insurance and Regulatory Development Authority of India (IRDAI) has imposed a lock-in period of 5 years, which you’ve already seen above. The Lock-in Period ensures that investors stay invested for a reasonable tenure and give a fair chance to their investments to grow under the plan.

Now, as per IRDAI (Unit Linked Insurance Product) Regulations 2019, partial withdrawal of ULIP shall be allowed only after the lock-in period of 5 years. That’s not all. Even if you discontinue or surrender your ULIP before the end of the lock-in period, the remaining fund value, if any, is only paid out to you after the expiry of the 5-year lock-in.

Making partial withdrawals after the lock-in period

However, once the lock-in period ends, both surrenders and partial withdrawals can be made. That said, here’s something that you should know. If you make a partial withdrawal, fund build up from the top-up premiums, if any, will be utilized first as long as such fund supports the partial withdrawal. And only once all of the top-up premium fund is withdrawn, will you be able to partially withdraw your base fund value.

Also, here’s another key thing that you need to be aware of. Ideally, you will no doubt invest with a particular time horizon in mind. But if you withdraw your funds beforehand, the goal with which you made the investment is diluted.

Effects of partial withdrawal on your life cover

Since ULIPs are basically a combination of insurance and market-linked investment, any partial withdrawals that you make also affects your life cover. In fact, partial withdrawals reduce the death benefit sum assured. And it takes as much as two years for the ULIP death benefit to get restored to its previous level depending upon the policy terms and conditions.

So, if a ULIP policyholder were to face an untimely death within two years from making a partial withdrawal, the death benefit paid out to their family would be lower.

Conclusion

As you can see, partial withdrawals may affect your ULIP in more ways than one. Therefore, consider refraining from making any partial withdrawals unless necessary. This way, you can let your ULIP Fund grow which may in turn help in enhancing the returns that you get to enjoy.

That said, if you’re worried about how to invest in a ULIP, don’t be. It is very simple and easy to understand. All that you must do is visit an insurance provider’s website, fill and submit the application form, and make the premium contribution. It takes only a few minutes to complete and can be done online.

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