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How Does Partial Withdrawal in ULIP Affect Your Investment and Life Cover

Author: Team Finpage
Monday, April 22, 2024

ULIPs (Unit-linked insurance plans) offer two types of benefits. One is a life cover and the second is returns on investment. The premium that you pay is divided into two parts. One part goes towards providing you with life insurance, which ensures that your loved ones are taken care of financially, even after you are gone. The second part of the premium goes towards investing in a combination of debt funds and equity assets. Debt funds are low-risk options, while equity assets involve higher risk but the possibility of higher returns as well. The division between debt funds and equity assets depends on your risk appetite and financial goals.

ULIP Withdrawal During the Lock-in Period

ULIPs typically have a lock-in period of five years. Policyholders cannot make a partial withdrawal but can surrender the ULIP policy before the lock-in period is over. When you surrender your policy before the lock-in, you can stop paying premiums. Your life cover is immediately terminated. The insurer charges a specific amount in case you decide to withdraw your ULIP plan during the lock-in period. These charges are deducted before the invested amount is returned to you. However, the charges for surrendering a policy during the lock-in period are typically quite high.

Partial ULIP Withdrawal After the Lock-in Period

After the lock-in period is over, you can choose to fully or partially withdraw your ULIP plan. This is useful in case you have a sudden big expense. However, do remember that withdrawals reduce the sum assured for your life insurance cover and the investment is also affected.

How Do Partial ULIP Withdrawals Work?

The premium that you pay goes partly towards your life insurance cover and partly towards investments in various debt and equity funds.

The portion that goes towards capital market funds is divided into units. In case of a withdrawal, the funds are liquidated by selling these units. 

Depending on your policy, there could be a minimum and maximum amount that you can withdraw in a year. Some funds allow up to 20% of the total fund value as partial ULIP withdrawal.

How Does Partial Withdrawal Affect You?

When you make a partial ULIP withdrawal, both the fund value and sum assured are reduced. The good news is that the sum assured may be restored after a prespecified period after the partial withdrawal. This means a partial ULIP withdrawal does not have a negative impact on insurance in the long run. To enjoy this benefit, continue to pay the premiums. Further, make sure you refrain from making additional withdrawals. 

Systematic Withdrawal Plans in ULIP

Instead of withdrawing a lump sum at once, consider a systematic withdrawal plan after the lock-in period is over. Some plans offer this to help you achieve your financial goals.

Besides protecting your loved ones and growing your wealth, the maturity amount received from ULIP is tax-free under Section 10(10D). This is applicable when the premium in a financial year is less than 10% of the sum assured under the plan. Overall, ULIPs are excellent financial tools. Maximise their potential by making partial ULIP withdrawals only during an emergency.

Team Finpage

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