A ULIP plan is regarded as one of the best ways to accumulate future wealth while enjoying life coverage simultaneously. Hence, it is one of the most popular investment options in the country today. But what is a ULIP plan? A unit-linked insurance plan offers life insurance coverage to the policyholder for the tenure of the plan. There is a lock-in period of five years, while the premium is invested in funds and market-linked instruments to earn returns after deducting applicable charges.
The investor can choose the funds to be invested in (debt, equity, liquid, or balanced funds) depending on risk appetite and financial goals while switching them periodically to ensure safer and better returns. But what about withdrawals from ULIP plans? What are the guidelines in this regard? Here is a closer look at the same.
ULIP Withdrawals
The IRDAI (Insurance Regulatory Authority of India) has previously allowed policyholders of ULIP plans to get their maturity amounts in staggered instalments over a period of five years. This was stated for policies with maturity dates on or before 31st March 2020, owing to fund value depreciation due to the pandemic. This helped investors who bought ULIPs 10 or more years ago and were looking to withdraw due to financial emergencies. IRDAI helped them avoid a scenario where their maturity value would be eroded entirely with a lump sum withdrawal.
This is a withdrawal guideline that was issued in the unlikeliest of emergency circumstances. However, the general regulations pertaining to ULIP withdrawals are the following:
- Withdrawal before five years- Each ULIP has a lock-in period of five years. Surrendering the policy or discontinuing premium payments means the accumulated funds will only be received after the investment finishes its 5-year lock-in period. The maturity proceeds will be shifted to a discontinuance fund with charges imposed for the same.
- Withdrawal after five years- You can partially withdraw money from your investment after completing the five-year lock-in period. This may help during sudden financial needs or emergencies. Yet, there are a few terms and conditions imposed on partial withdrawals.
- Your life coverage may be terminated if you withdraw a massive amount from the ULIP
- Withdrawal limits vary across insurance companies, with some allowing 10% of the premium paid, while this may be 20% for others. It may also be based on the fund value that remains after withdrawal. The withdrawal count may have a cap, after which there will be withdrawal charges to pay.
- If you have disbursed a top-up investment for the ULIP and wish to withdraw, the insurance company will settle it from the former. The amount is not settled from the top-up if it has not completed the five-year period.
Now that you know the basic regulations regarding ULIP withdrawals, here are some crucial points to remember in this context.
What to know during ULIP withdrawal
There are some tips that will help you with regard to ULIP withdrawals. These include the following:
- Ensure that you have a proper understanding of ULIP withdrawal regulations
- Always pay premiums on or before the due date to keep your policy active and get the partial withdrawal facility
- Withdraw after regularly paying premiums for five years since purchasing the policy if you have to
- Leave enough amount in the fund to cover the costs of account maintenance and the ULIP investment
- Partial withdrawals may lead to the sum assured coming down for two years from the date of withdrawals. After this duration, the sum assured will be restored, provided there are no withdrawals in the interim period.
- Withdrawals are thus only necessary if there is a financial emergency to tackle
- You may top-up the premium to scale up the fund value of your ULIP and purchase a higher number of units. A higher NAV may restore the withdrawn amount to the earlier value.
You should thus take time before deciding to withdraw from your ULIP. Remember that ULIPs give you the best returns over a long-term period of 10-15 years at least. Hence, avoid withdrawals from your ULIP plan unless it is an emergency.