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A Unit Linked Life Insurance Plan (ULIP) is a good insurance investment option to consider for your portfolio. It combines the benefits of two different financial products—life insurance and wealth creation investments. A ULIP plan allocates a portion of the premium paid by the policyholder as the premium for the life insurance policy, and the remaining is invested in a fund of the policyholder’s choice to meet their financial goals.
From a long-term perspective, a ULIP policy is a prudent policy because it also enables tax* savings in addition to the dual benefits. ULIPs offer other advantages such as partial withdrawals. The partial withdrawal option comes in handy when you unexpectedly need a chunk of money. But it is important to understand how partial withdrawals work in ULIPs, and how to opt for them wisely when required.
ULIP plans allow for partial withdrawals for situations arising at different life stages and needs, such as your children’s higher education, critical illness, purchase of a new building or property, children’s marriage, etc.
The regulating body for ULIPs, the Insurance Regulatory and Development Authority of India (IRDAI), came out with a set of new guidelines for life insurance companies in February 2020. Before these new guidelines, the limit of withdrawals and other technicalities varied, depending on the insurer. However, now such details are standardized.
According to the new rules, the policyholder can make partial withdrawals thrice from their ULIP funds after the lock-in period ends. This means that the partial withdrawal facility is available three times during the entire term of the ULIP policy. It is also important to note that the policyholder must be at least 18 years of age to make partial withdrawals.
Partial withdrawals in ULIP are possible only after the lock-in period of your policy ends. The maturity period of your ULIP policy may be 20 or 30 years. However, the lock-in period for all ULIP plans is five years. This lock-in period is related to the money invested in funds. The lock-in period is devised to boost your fund value. Typically, your fund value begins to rise only after you pay the initial few premiums on your ULIP policy. Also, the longer your investment horizon, the better it is for your returns and for hedging market risks.
You cannot make partial withdrawals during the lock-in period of five years. There’s no way around it. Even if you choose to surrender your ULIP policy or discontinue it, you still won’t be able to access your money until the end of the lock-in period.
When you surrender your ULIP plan, the risk cover will cease to exist, but you still will have to wait to receive the money. It is also essential to note that the partial withdrawal facility is only available to those who have paid all the premiums due, and the ULIP policy is in force.
When partially withdrawing from your ULIP plan, you can withdraw either ₹ 1,000 or ₹ 2,000 as the minimum amount, depending on your policy. As for the maximum limit, it is around 25% of your fund’s value at the time of withdrawal. This is subject to the condition that at least one year’s premium remains in the fund.
For instance, say a policyholder bought a ULIP policy, which after the lock-in period of five years has a fund value of ₹ 3 lakh. The annual premium is ₹ 50,000, and the sum assured is ₹ 6 lakhs. 25% of the fund value, in this case, amounts to ₹ 75,000. On withdrawing ₹ 75,000, because the amount equal to one year’s premium (₹ 50,000) remains in the fund, it is possible to make a partial withdrawal for ₹ 75,000.
When you withdraw from your ULIP fund, not only does the fund value decrease by that amount but also the sum assured.
However, this reduction in the sum assured is only for a period of two years. At the end of the two years, the sum assured will automatically be restored to the original amount. So in the long term, making a partial withdrawal will not have a negative impact on your ULIP policy.
It is important to remember that this automatic restoration of the sum assured is only possible if you don’t make any additional withdrawals within the two-year period. Another requirement is that you continue paying the premiums due.
Hence, the only situation in which making a partial withdrawal in ULIP will have a lasting impact is if the policyholder passes away during the two-year period after the withdrawal. In that case, the reduced sum assured will be paid to the nominee.
The partial withdrawal facility is certainly a useful feature of ULIP funds. It can be a blessing during financial emergencies. However, before making a partial withdrawal, you should consider the impact on your ULIP funds and the sum assured.
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This blog is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.
Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.
THE LINKED INSURANCE PRODUCT DO NOT OFFER ANY LIQUIDITY DURING THE FIRST FIVE YEARS OF THE CONTRACT. THE POLICY HOLDER WILL NOT BE ABLE TO SURRENDER/WITHDRAW THE MONIES INVESTED IN LINKED INSURANCE PRODUCTS COMPLETELY OR PARTIALLY TILL THE END OF THE FIFTH YEAR.
Past performance is not indicative of future performance.
All investments made by the Company are subject to market risks. The Company does not guarantee any assured returns. The investment income and price may go down as well as up depending on several factors influencing the market.
Please make your own independent decision after consulting your financial or other professional advisor.
*Income Tax benefits would be available as per the prevailing income tax laws, subject to fulfilment of conditions stipulated therein. Income Tax laws are subject to change from time to time. Tata AIA Life Insurance Company Ltd. does not assume responsibility on tax implications mentioned anywhere in this document. Please consult your own tax consultant to know the tax benefits available to you.