ULIP Withdrawal

Unit Linked Insurance Plans (ULIPs) combine insurance protection with investment opportunities, making them suitable for individuals with long-term financial goals or specific savings objectives. However, sometimes policyholder may need funds before the maturity period, such as medical emergencies, funding a child’s education, or meeting other financial obligations. Understanding the withdrawal process and its implications helps policyholders make informed decisions that balance immediate needs with long-term objectives. In this article, we outline the key aspects of ULIP withdrawals to help policyholders make informed decisions when accessing their funds.

What are ULIP withdrawals?

ULIP withdrawals refer to the facility that allows policyholders to access a portion of their accumulated fund value before the policy matures. This provision enables policyholders to utilise their investment corpus when necessary, rather than waiting until the end of the policy term. Withdrawals are drawn from the units accumulated through premiums and market-linked returns, separate from the insurance component. While this flexibility is valuable, it is subject to defined rules and limitations.

Rules of ULIP withdrawal

Here are the rules for withdrawing funds from ULIPs.
 

Lock-in period compliance

ULIP policies are subject to a mandatory lock-in period of five years, as per insurance regulations. Meanwhile, partial withdrawals are not permitted to ensure long-term investment and eligibility for applicable tax* benefits.
 

Minimum fund value requirement

Insurers typically require a minimum fund value to remain in the policy after any withdrawal, usually ranging from Rs. 10,000 to Rs. 50,000, depending on the provider. This ensures the policy retains sufficient value for administration charges and meaningful insurance coverage.
 

Withdrawal frequency limitations

Most insurers limit the number of partial withdrawals allowed in a year, generally permitting up to four transactions. Each withdrawal may involve processing charges, reducing the net amount received. Frequent withdrawals may also impact the compounding potential of the remaining investment.
 

Percentage-based withdrawal caps

Typically, the insurers set a withdrawal limit on the amount of funds that can be withdrawn at one time to a fixed percentage of the total fund value. This range lies anywhere between 20 and 50%.
 

Premium payment continuity

Even after partial withdrawals, it is mandatory to pay the premiums as scheduled. Defaults in paying the premiums may cause the policy to lapse, cancellation of insurance, and result in tax consequences regarding the deductions allowed under 80C.

Types of ULIP withdrawals

ULIP withdrawals include the following types:
 

Partial withdrawals

Partial withdrawals allow the policyholders to withdraw a certain portion of their funds while the policy remains active. The life cover remains intact, and the remaining amount continues to be invested in the chosen funds. These are suitable when liquidity is needed without affecting the long-term investment plans and life cover.
 

Full withdrawal or surrender

Full withdrawal, or surrender, involves terminating the ULIP before maturity, liquidating the entire accumulated corpus. This ends both insurance coverage and investment growth. Surrender value depends on policy tenure and applicable charges, which are generally higher in the initial years.

How to withdraw ULIP amount

ULIP withdrawals follow a structured process to ensure compliance with regulatory and policy guidelines. Careful adherence to the steps ensures a smooth experience.
 

Step 1: Confirm your withdrawal eligibility

• The 5-year lock-in period must be completed.

• The policy should be active, with all premiums paid.

• Only the primary policyholder may request a withdrawal.

• Lapsed or discontinued policies may allow access only via the Discontinued Policy Fund (DPF).
   

Step 2: Check your ULIP fund value
It is essential to check the current fund value and Net Asset Value (NAV) before making a withdrawal. In ULIPs, fund values vary according to market performance. Knowing this is useful for withdrawal planning. This can be done by accessing the insurer's portal, using an online app, reviewing statements, or consulting an advisor.
 

Step 3: Submit your withdrawal request
Requests can be submitted online through the insurer’s portal or app, or offline at a branch. Documents generally required include:

• KYC proof

• Bank account details

• Policy document (especially for full withdrawal or surrender)

The insurer verifies identity, eligibility, and policy details before processing. Partial and full withdrawals may have different submission requirements.
 

Step 4: Processing and fund disbursement
Withdrawal requests are generally processed within seven working days.

• Partial withdrawals credit the requested amount while the policy continues.

• Full surrender results in the disbursement of the entire fund value and termination of life cover.

Confirmation is usually sent via email, SMS, or official statements. Tracking the request ensures transparency and timely fund receipt.
 

Step 5: Maintain records of your withdrawal
Keep all documents related to the withdrawal, including fund statements, receipts, tax certificates, and payment proofs. Proper documentation:

• Helps comply with tax obligations

• Resolves disputes or queries

• Supports better financial planning and policy management

Regular review of records ensures accuracy and protects interests in future transactions or audits.

Impact of ULIP withdrawal

Withdrawing funds from a ULIP can lead to the following.
 

Reduction in fund value

Every time you withdraw, the value of your accumulated funds decreases, potentially affecting your financial goals. More importantly, you lose the compounding potential of the funds over the remaining policy years, which can significantly reduce your maturity amount.
 

Effect on insurance coverage

Many insurers reduce your sum assured proportionately when you withdraw funds. If you've withdrawn 20% of your fund value, your insurance cover might drop by a similar percentage. This means less financial protection for your family.
 

Investment returns impact

Withdrawing during market lows forces you to sell units at lower prices, incurring losses that might have been recovered. Even after markets rebound, your remaining fund value generates lower absolute returns despite similar percentage gains.
 

Charges and deductions

Expect to pay Rs. 100 to Rs. 500 per withdrawal transaction, plus possible exit loads on the units being redeemed. These charges reduce your withdrawal amount and become significant if you make frequent withdrawals.
 

Goal achievement delay

If your ULIP was meant for retirement or children's education, withdrawals can delay them. Rebuilding the withdrawn amount requires either higher future premiums or extending your investment timeline, neither of which may be practical.

ULIP withdrawal pros and cons

The following are the benefits and drawbacks of ULIPs.
 

Advantages of flexibility

ULIP withdrawals help to provide liquidity in times of financial emergencies without relying on expensive personal loans or liquidating other portfolios or investments. This allows the individual to take care of their emergencies while continuing to invest and keep the insurance protection.
 

Benefit of timing investment exits

Investors can withdraw funds during market highs, especially after gains in equity funds. This approach protects accumulated returns and creates opportunities for reinvestment during market downturns, potentially improving overall policy returns.
 

While withdrawals provide these advantages, they also carry significant drawbacks that can affect long-term financial planning.
 

Disadvantage of reduced compounding

Withdrawals disrupt the compounding process that drives long-term growth in ULIPs. The withdrawn amount stops earning returns, which cannot compound further. This creates a multiplier effect that substantially reduces the final maturity amount.
 

Risk of taxation issues

Early withdrawals or those exceeding premium limits may incur tax liabilities. Previously claimed Section 80C deductions could become taxable, and gains might be subject to capital gains tax. These tax implications reduce the net benefit of withdrawals.
 

Challenge of maintaining policy viability

Large or frequent withdrawals can decrease fund values to where policy charges consume a significant portion of the remaining amount. This leads to poor returns or even losses, making it difficult to sustain the policy.

Tax on ULIP withdrawal

Partial withdrawals after five years are generally tax-free if annual premiums remain below Rs. 2.5 lakh (for policies purchased after February 1, 2021). Early surrender makes the entire amount taxable and previously claimed Section 80C deductions must be added back to taxable income. Insurers do not deduct tax at source; policyholders must declare withdrawals in their returns. Consulting a tax advisor is recommended due to frequent changes in regulations.