What is ULIP?
Let us begin by reviewing what a ULIP means. ULIP stands for Unit-Linked Insurance Plan and is a combination of insurance and investment. The purpose of these insurance plans is to provide both protection as well as wealth creation.
While there are various ULIP benefits, one of the most important ones is flexibility. As an investor in ULIP, you are provided with a number of fund options such as debt and equity funds. This means that you can enjoy immense flexibility in choosing your fund options, based on your financial goals. For instance, if you are looking to invest for the purpose of retirement, you can opt for a more conservative debt fund. On the other hand, if you are looking to invest for long-term wealth creation, you can choose an equity fund that provides investment growth. Based on your risk appetite and purpose of investment, you can switch your investments between different funds.
Types of ULIP Withdrawals
A ULIP also allows investors flexibility, which is that they can make lump sum withdrawals from their ULIP plans. However, depending on when you make your withdrawal, it can be subject to certain conditions:
• Before 5-Year Lock-in Period
ULIPs are designed to serve as long-term investments. Since life insurance is a long-term product, investors can only enjoy the complete benefits of ULIPs when they hold it for the entire duration of the policy. Which is why in 2010, the Insurance Regulatory and Development Authority of India (IRDAI) increased the lock-in period for ULIPs from 3 years to 5 years. During this lock-in period, no liquidity is permitted, which means it is not possible for investors to make partial withdrawals from their ULIP. Even if the ULIP plan is surrendered or discontinued, no liquidity is available until the 5-year lock-in period is complete.
• After 5-Year Lock-in Period
ULIP withdrawals of any kind can only be made after the completion of the 5-year lock-in period. If you have made any top-ups to your ULIP and they have completed the 5-year lock-in period, they will be withdrawn first in case of a request from you. Only once the Top-up value is exhausted or in the absence of top-up payments will the base fund value be utilized. It is important to note that since ULIPs are designed to be long-term products, early withdrawals can result in your expected ULIP returns being affected.
How Partial Withdrawals Impact Life Coverage
As ULIP plans combine both investment and insurance, it prompts many ULIP investors to wonder: "Can we withdraw ULIP amounts without affecting our coverage?" The answer to that question is variable and depends on when and how much you wish to withdraw from your ULIP plan.
The sum assured for your ULP plan is only restored to its original level two years after you make a partial withdrawal. This is also contingent on the fact that you do not make any further withdrawals within this period. This means that if a withdrawal is made less than two years before the demise of the policyholder, the death benefit will indeed be reduced. After age of 60 years, all partial withdrawal done are reduced from the death benefit.
Limits on ULIP Withdrawal
While one of the many ULIP benefits is that they allow investors the flexibility to make partial withdrawals, these withdrawals must follow certain conditions. Among these conditions are withdrawal-related ULIP charges. The ULIP withdrawals either can be free up to a certain limit or can be charged based on the transactions subject to terms and conditions mentioned under the product. Other limits are placed in terms of number of withdrawals and withdrawal amounts based on fund value and premiums paid.
Policy withdrawal is possible after 5 years during which there is no surrender charge. Surrender charge is applicable during the first 5 years where partial withdrawals are not allowed.
Should You Withdraw Early From your ULIP?
One of the most important reasons why ULIP plans work for a number of investors is that they make the most of the power of compounding. This refers to the process of earning on the returns along with the invested amount. The profit is reinvested, and this goes on until the time you remain invested.
However, this process of compounding can be benefited from only when you stay invested for a long period. Making partial withdrawals from your ULIP plans can disrupt this process and affect your overall ULIP returns. Hence, withdrawals from your ULIP should only be considered as a last resort and to the extent that an investor can, should be entirely avoided.
Conclusion
As long-term products with an investment component, ULIPs are optimally utilised when policyholders choose to remain invested for the entirety of the term. Therefore, before the question of "Can we withdraw ULIP?" arises, it is worth considering if the withdrawal is indeed urgent or necessary. If not, it is recommended that the ULIP be allowed to make the most of compounding and eventually yield its returns at the end of the policy term.
