How to Withdraw from ULIP Policy?

A Unit Linked Insurance Plan (ULIP) gives you the best of both worlds—insurance protection and a chance to build wealth. But just like with any financial product, knowing the rules around withdrawing from your ULIP policy is crucial. Whether it’s a partial withdrawal to meet an emergency or closing the policy after achieving your financial goals, understanding the right way to withdraw ensures you don’t face unnecessary penalties or tax issues.

In this blog, we’ll guide you through the key aspects of ULIP withdrawals so that you make well-informed decisions without disrupting your financial plan.

Types of Withdrawals in ULIPs

ULIP Withdrawals Before the 5-Year Lock-In Period: Can you withdraw your ULIP funds before 5 years? Unfortunately, no. According to IRDAI (Insurance Regulatory and Development Authority of India) regulations, all ULIPs have a mandatory 5-year lock-in period. During this period, you cannot withdraw, whether partial or complete. However, ULIP withdrawal after 5 years is possible. Discontinuing your ULIP policy before 5 years will be treated as a policy surrender, and your funds will only be accessible after the lock-in period ends.

ULIP Withdrawals After the 5-Year Lock-In Period: After the 5-year lock-in, you can partially withdraw from your ULIP, offering you more flexibility to use your investment as needed. However, there are a few rules to keep in mind:

• Limit on Withdrawals: You can usually withdraw 10-20% of your fund value.
• Impact on Life Cover: The life cover might reduce if you withdraw a significant portion of the accumulated corpus.

Each insurer sets their own withdrawal limits, so it’s a good idea to check with your provider for exact figures.

To learn more about managing ULIPs effectively, explore premium redirection in ULIPs, which helps optimize your investment strategy.

Conditions and Limits on ULIP Withdrawals

• Minimum Withdrawal Limits and Remaining Fund Value: Insurance companies often specify a minimum amount for partial withdrawal—for instance, ₹5,000. Additionally, a minimum fund value must remain in the policy to keep it active. Your insurer may terminate the policy if the fund value falls below this threshold. This makes it important to plan withdrawals carefully.

• Withdrawal Fees and Impact on Policy: Some insurers may charge fees for partial withdrawals, especially if multiple withdrawals are made within a short period. Moreover, frequent or large withdrawals could reduce the investment corpus, affecting your policy’s ability to grow and reducing your life insurance benefits.

• ULIP Withdrawal Tax Implications: Withdrawing your ULIP before and after the 5-year lock-in period will have different tax implications. Let’s look at them:
  • Tax on ULIP Withdrawals After the 5-Year Lock-In Period: Withdrawals made after the lock-in period are tax-free under Section 10(10D) of the Income Tax Act, provided that the total premium paid in any year does not exceed 10% of the sum assured. This makes ULIPs a tax-efficient way to manage your investments.
  • Tax on ULIP Withdrawals Before the 5-Year lock-In Period: If you decide to discontinue your ULIP policy within the 5-year lock-in, any gains made will become taxable, and the tax benefits you claimed under Section 80C may also be reversed. Additionally, surrender charges may apply, further reducing your payout.

Points to Consider Before Withdrawing from ULIPs

While ULIP withdrawals offer flexibility, it’s important to use this feature wisely. Here are some key things to consider before making a withdrawal:

• Emergency Needs vs. Long-Term Goals: Withdraw only if absolutely necessary, such as for an emergency. Withdrawing funds for non-essential reasons can reduce your long-term wealth-building potential.
• Impact on Investment Corpus: Frequent or large withdrawals can lower the overall returns and reduce your financial safety net for future needs.
• Effect on Life Cover: Withdrawing a significant amount might reduce your life insurance coverage, which can leave your family less protected.

How to Make Partial Withdrawal from a ULIP Policy

Making a partial withdrawal from a ULIP policy is a straightforward process:

1. Contact Your Insurer: Start by getting in touch with your insurance provider through their website, app, or customer service.
2. Submit Documentation: You may need to provide a withdrawal request form, policy documents, and identity proof.
3. Processing Time: Once submitted, the insurer typically processes the request within 7-10 working days.

Make sure you review any fees or charges before initiating the withdrawal to avoid surprises.

Final Thoughts: Making an Informed Decision on ULIP Withdrawals

ULIPs offer flexibility, but knowing the rules and implications of withdrawals is essential to making smart financial decisions. Consider your long-term financial goals and use partial withdrawals wisely to avoid reducing your investment growth or life coverage. If in doubt, it’s always a good idea to consult your insurer or a financial advisor before taking action. However, always remember that a ULIP will benefit you if you stay invested for a longer term.

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Frequently Asked Questions

1. Can I withdraw funds before the lock-in period ends?

No, withdrawals are not allowed during the 5-year lock-in period as per IRDAI regulations. If you discontinue your policy during this time, you’ll receive the accumulated value only after the lock-in period is over.

2. Is partial withdrawal taxable?

Withdrawals made after the 5-year lock-in period are tax-free under Section 10(10D), provided the premium-to-sum assured ratio is maintained. Withdrawals before 5 years may attract taxes and reversal of deductions under Section 80C.

3. What are the impacts on life cover after withdrawal?

Partial withdrawals can reduce the life cover offered by the ULIP. Always check with your insurer to understand how much your life insurance will be affected by the withdrawal.