Partial Withdrawal of ULIPs Explained

Are you looking for a way to create wealth while also being secured by a life cover? There are several life insurance products available in the market right now that can help you do that. The most popular out of these, is the ULIP. ULIPs, or unit-linked insurance plans, are ideal for first-time investors who want to invest, and gain returns as well as get life coverage. While life coverage helps you secure the future of your loved ones, the investment aspect aids in wealth creation and helps you fulfil your goals during your lifetime.

One can withdraw their returns from ULIPs only after a particular period and under certain terms and conditions.

How do partial withdrawals of a ULIP work? 

Money given for a ULIP plan is used to provide for the life cover and to invest in the instruments of your choice. The returns you gain depend on the kind of instruments you invest in. Equity-linked instruments bring in more returns but are fraught with a higher level of risk, while debt funds have lower risk and bring in lower returns. These returns can be enjoyed by the policyholder only after the policy has completed the mandatory lock-in period of 5 years.

To make the most of these withdrawals, it is important to be well-aware of the terms and conditions underlying them.

Making withdrawals before vs. after the lock-in period 

Before the lock-in period

Generally, ULIP policies do not allow the policyholder to withdraw the returns before the lock-in period is over. In case you do not wish to continue your ULIP policy any longer, you would have to surrender or terminate the policy. However, even with this situation, you would receive the returns on the plan only after the mandatory lock-in period is complete. So, one should consider this aspect thoroughly before investing in a ULIP.

After the lock-in period 

Making partial withdrawals after the lock-in period can prove to be very advantageous, as the returns have been accumulated over a period of several years. The power of compounding has been at work on your money and the patience of holding the policy for 5-6 years will prove to be beneficial once the period is over.

Partial withdrawals of a ULIP plan can be systemised as well. For instance, you can ask the insurer to provide you with a certain amount at specific intervals during a year. This is also referred to as a systematic withdrawal plan. Or you can withdraw the amount that you want at your own pace and time. However, it is important to remember that one should not withdraw a large amount to ensure enough funds in the investment to bring in strong returns.

To state the obvious, a policyholder cannot withdraw the entire amount from their ULIP plan. That would lead to the termination of the policy. If the beneficiary of the policy is a minor, then they can make withdrawals on the plan only after they have turned 18 years old.

Tax benefits on partial withdrawals 

ULIP tax benefits are numerous, and they draw investors with tax-saving as their prerogative in huge numbers. Aside from the tax deduction on the ULIP premiums and tax exemptions on death benefit and maturity benefit pay-outs, the partial withdrawals also offer tax benefits in the form of tax exemption. The withdrawals you make after the completion of the lock-in period are exempted from taxation, unlike other sources of income.

Note: If you surrender the policy before the end of the lock-in period, all the ULIP tax benefits that you had gained can get reversed.


FAQs on partial withdrawals

  • What kind of limits do partial withdrawals have? 

Depending on the insurer, one can only make a certain number of withdrawals in a year. Going above the limit may lead to charges. Some insurers may also have a monetary limit; For instance, you may be only allowed to withdraw up to 10-15% of the total premium paid in a particular period.

  • How do partial withdrawals affect the life cover? 

The more you withdraw, the lesser will be the maturity benefit amount. However, this is dependent on several factors, such as the amount and frequency of your premium.

The terms and conditions related to the partial withdrawals of ULIP plans differ greatly from insurer to insurer. Do discuss your queries thoroughly with your insurance provider and read the policy documents carefully before signing.