ULIP are modern alternatives to traditional life insurance plans. They are one of the most preferred and efficient financial tools today.
ULIPs (Unit Linked Insurance Plans) are attractive alternatives, and there’s no doubt about that. They give customers the dual benefit of insurance and investment. The investment opportunity is customised as per the risk appetite of the investor. There are provisions to invest in stocks, bonds or fixed income money market funds. Investors also enjoy the flexibility to switch from one fund to another depending on their choice and requirements, throughout the term of the ULIP. Moreover, ULIPs provide tax benefits under section 80C of the Income Tax Act, 1961.
Another feature of ULIP includes making partial withdrawals from your ULIP fund. There may be certain variations in the pattern depending on the provider of the ULIP, but a partial withdrawal is made by the cancellation of a part of the units you hold as a component of your fund. Before deciding on partial withdrawal, you must know certain aspects of ULIPs.
Earliest Withdrawal or Minimum Duration Period
After the inception of the policy, there is a minimum lock-in period of 5 years. You can avail of partial withdrawal only after this duration. This is the minimum duration period. Some ULIPs have a minimum duration period of 3 years. In the initial years, a large part of the premium goes towards payment of various expenses associated with the policy. The remaining fund goes towards the investment and life coverage sections. Thus, the fund value remains low in the initial years.
Maximum Withdrawal Limit
There is a cap on partial withdrawal from ULIPs. The maximum limit for partial withdrawal is 20% of the fund value of the policy. But, there is another restriction on partial withdrawal. It states you must maintain a fund amount equal to at least one year’s premium. So, if the fund value is Rs. 1,00,000 and the annual premium is Rs. 25,000, you can make a partial withdrawal of no more than Rs. 20,000. This will bring your fund balance to Rs. 80,000, which is acceptable since the balance amount is more than the annual premium amount. In no situation a total withdrawal is possible. What’s more? In case the withdrawal limit is exceeded, the policy will attain premature termination.
Minimum Withdrawal Limit
Like the upper-limit cap, there is a lower-limit cap for partial withdrawal as well. The minimum limit depends on the policy.
Number of Withdrawals
Your ULIP will define the number of ‘free’ withdrawals permitted. Once you exceed the number, withdrawals will be subject to administrative fees. This reduces the effective withdrawal amount.
Decrease in Sum Assured
With every withdrawal, the amount of sum assured will reduce. If the life assured dies during the policy period, all withdrawals made during the term of two years preceding the death is deducted from the sum assured. But, in cases where the life assured attains 60 years of age, all partial withdrawals will reach permanent deduction from the sum assured payable on the death of the policy holder.
Regular Payment of Premium is a Must
To avail of the partial withdrawal facility, you must make sure premiums are always paid as per schedule, and the policy is active without interruption. Any lapse, suspension or dispute in payment will disallow you from availing the partial withdrawal benefit.
It is important to remember that partial withdrawals are tax-free if the withdrawals are made after the lock-in period. Thus, the partial withdrawal option allows the policy holder to plan for goal-oriented withdrawals from ULIPs. This helps fulfil commitments like marriages, big-budget purchases, children’s education and more.
Though the partial withdrawal facility from ULIPs is a useful feature, it comes with certain contradictions in particular situations. For example, if the policy is long term, for 20-30 years, the partial withdrawal does not impact the sum assured much. This is because the corpus of the fund will be large. Otherwise, partial withdrawal will affect the sum assured. Repeated withdrawals will attract charges and erode the end benefit.
Thus, it is a good idea to check the pros and cons and the details of the policy. Do these before you decide to withdraw. It will ensure maximum benefit from this instrument.