What you should know about partial withdrawal from ULIPs

Dec 05, 2017 | 12 months ago | Read Time: 3 minutes | By iKnowledge Team

A unit linked insurance plan (ULIP) combines insurance cover and an investment component. And it can come in handy when you need a large sum of money. No need to look for loans. No need to cash in that fixed deposit. Simply withdraw from the accumulated fund value of your ULIP. The partial withdrawal feature is a big perk of the ULIP. You can avail a ULIP withdrawal even before the policy matures. But the flexibility that it offers comes with a few terms and conditions. And any withdrawal could have an effect on the life cover.

Limits on withdrawal

There is no fixed limit on the amount that you, the policyholder, can withdraw. The key point here is to leave enough funds to help cover the cost of the ULIP plan. Withdrawing too much is not an option—it could lead to termination of the policy.

The withdrawal limits vary across insurers and across policies. They vary regardless of whether you buy the ULIP online or offline. A standard ULIP might permit withdrawal of up to 10% of the total premium paid. At times, such as in the case of Aegon Life, the limit is 20% of the premium paid. Withdrawal is possible here after the completion of five years.

Some policies have a limit based on the fund value after the withdrawal. For example, the fund value after the withdrawal should be at least three times the annual premium. Another might demand a post-withdrawal fund value of one annual premium. Some insurers even have a cap on the minimum amount one can withdraw.

There may also be limits on the number of withdrawals to which you are entitled. Again, the number varies from policy to policy. Once you exceed this limit, an administrative fee may apply on further withdrawals. Also, in many cases, you can make partial withdrawals only after intervals of three months.

To enjoy the partial withdrawal facility, keep paying the premiums on time. Missing a premium payment could hurt your chances of availing a partial withdrawal. Remember, this feature is available only on active policies.

The lock-in period

Every ULIP comes with a lock-in period of five years. This lock-in period plays a valuable function. Your fund value is low in the beginning. Only after you have paid a few premiums does your fund value begin to grow. Consider this when looking at a partial withdrawal.

Withdrawals before the five-year lock-in period

Partial withdrawals before the end of the five-year lock-in period are not an option. What if you are planning to surrender or discontinue the policy before the five-year term? You can expect to receive the money only after the lock-in period ends.

Withdrawal after the five-year lock-in period

The partial withdrawal feature becomes available only after the lock-in period is over. Here too, there are a few things to consider.

Did you make any top-up payments towards your policy? In this case, the insurer will settle your withdrawals from the top-up amount first. Only if there is no top-up amount will the base fund value come into play. Or it could be that the five-year tenure for the top-up amount is not complete. In that case, payments will be made from the base fund.

If the policyholder is a minor, partial withdrawals are possible only when he/she turns 18.

Partial withdrawal and life cover

You might worry about how the withdrawals might affect your insurance coverage. Will they bring down the sum assured payable on the death of the policyholder?

This depends on the amount withdrawn during the two-year term before the policyholder’s demise. Every partial withdrawal leads to a decrease in the sum assured. But what if you made the withdrawal more than two years ago? In such a case, the sum assured will remain unaffected.

Conclusion

The partial withdrawal feature on ULIPs can be a blessing in your time of need. But keep in mind that the ULIP provides life cover and helps you grow a sizeable corpus. Any withdrawal will affect the size of this corpus. It may also bring down the death benefit payable. So, to reap the benefits of partial withdrawal, make sure to use the facility wisely.

Sources:     

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