Unit-linked Insurance Plans (ULIPs) are an efficient investment tool available today. The most important reason for their popularity is that such products combine insurance coverage and investment returns.
When you purchase a ULIP policy, a portion of the premium is parked in an insurance fund to provide life cover. The balance amount is invested in the financial markets in different equity, money market, and debt instruments. Therefore, you are able to procure life cover while also earning returns through investments in various financial products.
A ULIP plan is one of the most flexible investment products because you are able to choose the funds in which you want to invest your money. Moreover, insurance companies allow you to switch from one fund to another if your investment is not performing as per your expectations. Furthermore, you may redirect the future premiums in funds that are different from the ones you originally choose.
ULIPs provide tax benefits under section 80C of the Income Tax (IT) Act, 1961. However, these financial products have a minimum lock-in period of five years. At the end of this period, you may partially withdraw your money. However, there are certain terms and conditions that regulate such partial withdrawals. Six such limitations are given below.
- Lock-in period
As already mentioned, the minimum lock-in period for ULIPs is five years. No withdrawals are allowed before the end of this period. Although five years is the minimum lock-in period, some insurers allow you to make partial withdrawals at the end of three years. It is recommended you check with your insurer before you make your decision to invest. It is important that you read the policy document carefully to clearly understand the minimum lock-in period.
- Reduced sum assured
There is a certain sum assured when you purchase a ULIP. However, when you make a partial withdrawal, you must remember that the sum assured will be reduced by the withdrawn amount. Additionally, you need to bear in mind that insurance companies permit only a certain number of partial withdrawals. Once you reach this limit, the insurer may levy a fee for additional withdrawals made.
- Cap on withdrawal
Insurance companies allow you to withdraw only a certain percent of your total ULIP returns. During the duration of the policy, you cannot withdraw the entire accumulated corpus. Most insurers require you to maintain an amount that is at least equal to one year’s premium on the policy. If you want to withdraw the entire sum before the ULIP maturity, you will have to prematurely surrender the policy.
- Withdrawal on timely premium payment
If you want to make withdrawals from the accumulated corpus of the ULIP policy, you need to have paid all the due premiums in a timely manner. If there are any discrepancies in payments or a suspension, the insurance company will not allow you to withdraw from the ULIP.
- Minimum withdrawal amount
When you want to make a withdrawal, you need to adhere to the maximum withdrawal limits. Similarly, you must also adhere to the minimum limits as defined by the insurance companies. In most cases, the minimum withdrawal amount is INR 1,000. However, this varies from one plan to another and from one insurer to another. It is recommended you check the terms and conditions to know the minimum withdrawal amount.
- Top-up premiums
To earn higher ULIP benefits, insurance companies allow you to top-up the original premium amount at any time during the policy duration. A top-up premium is an amount that you may invest irregularly over and above the regular premium amount. If you want to make a partial withdrawal, the request is first met from such top-up premium invested. Once the top-up funds are withdrawn, you may make additional withdrawals from the base policy. However, you must remember that the top-up premium is also subject to the minimum lock-in period of five years. Therefore, if the top-up amount is still within the lock-in period, your partial withdrawal request will be paid from the base fund value.
Being able to make partial withdrawals from your ULIP policy is a beneficial option. However, you must completely understand how it works to maximize its effectiveness. Most experts recommend you do not withdraw funds from the accumulated corpus under the ULIP unless you are in a very difficult financial situation or need money to meet unforeseen emergencies.
Moreover, it is advisable to make partial withdrawals only when the ULIP is for the long-term (20 to 30 years). This is because such withdrawals will not have a very significant impact on the basic sum assured, since the accumulated corpus will be substantial.
When you make partial withdrawals from the ULIP policy, you must ensure the amount is not so high that the policy may have to be terminated. This means you must not withdraw an amount that leaves funds which are inadequate to meet the various policy expenses.
Before you decide to withdraw money from the ULIP policy, it is recommended you evaluate your requirements. You must also consider the impact of such withdrawals on the various policy terms and conditions. You must make withdrawals only if there are any benefits to such decisions.