Unit Linked Insurance Plan (ULIP) is a unique product that offers life insurance and investment opportunities in a single plan. With a single plan, you get a life cover that protects your loved ones and an investment quotient that offers you a return on investments. Since ULIP comprises two major components, it works differently than typical life insurance. Before you buy one, it is important to understand its structure, which also includes the withdrawals of your investments. Read further to understand how withdrawals work in ULIP.
A recent update on the withdrawals of ULIP by the Insurance Regulatory Authority of India (IRDAI) states that they can receive their maturity amount in instalments over five years. The update applies to ULIPs that have a maturity date of on or before May 31, 2020. The reason behind this update was that because of the Covid-19 pandemic, there would be a depreciation of the fund value in ULIP because of the declining markets.
Long-term investors who had held their policies for ten years or more would have seen their investments eroded rather than getting substantial returns. Hence, to avoid such severe losses to the policyholders, the IRDAI gave the update. Now the markets have significantly recovered after the pandemic, allowing you to withdraw your investments with no loss. You can keep tracking your investments by checking their Net Asset Value (NAV). Apart from the update, here are some ways you can go about with your ULIP withdrawals:
Withdrawing before the lock-in period
ULIP comes with a lock-in period of five years and within this period. you cannot make any withdrawals from your fund. After this period, you can avail of partial withdrawals whenever you need funds. However, if you want to access your funds before five years, you will be required to surrender your policy. Even after you surrender, you will get the accumulated maturity amount only after five years. However, from the day you surrender till the end of the lock-in period, you are not required to pay premiums. The maturity amount comprising the accumulated funds is moved into a discontinuance fund and there are some charges levied too. Also, when you surrender your ULIP, your life insurance cover ceases to exist.
Withdrawing after the lock-in period
Once the lock-in period is over, you can access your ULIP funds in case of emergencies. The plan offers free partial withdrawals from your funds anytime you want. However, it is important that when you buy the policy, you are well aware of any terms and conditions regarding withdrawals post the lock-in period. There are limits that most insurance providers may have placed. For instance, you can avail of a partial withdrawal but only of a certain amount. Some providers allow you to withdraw 10% of the premium paid while others allow 20%. When you withdraw partially, the NAV is reduced as some units you had are sold. Withdrawing more than the limit may lead to a termination of your policy, including your life cover. Also, usually, there are a restricted number of free partial withdrawals after which you may be required to face charges.
Also, if you have a top-up investment attached to your ULIP, the insurer may deduct the withdrawal amount from your top-up investment. If it has not been five years since the top-up was paid, the withdrawn amount may be settled from the investment amount.
Things to remember during withdrawals
Before buying a ULIP, it is important that you understand how withdrawals work. Ensure that you have complete clarity whenever you need to withdraw money in the future. It is essential that you have paid your premiums by the due date to avoid the termination of your plan. Also, it is important to remember that you can withdraw after paying premiums regularly for five years.
Also, the tax implication on your partial withdrawals before maturity is the same as it would be when your ULIP would have matured, provided you have withdrawn your funds after the lock-in period of five years. According to Section 10 (10D) of the Income Tax Act, the maturity value is subjected to exemptions, only after certain conditions are met.