ULIP Withdrawals: Rules, Limits & Taxation Explained

ULIP withdrawals are an option offered by insurance providers to access your invested corpus after a 5-year mandatory lock-in period. You will have the option to withdraw funds, about 20-25% of the fund value, in order to meet your urgent financial needs. Explore ULIP plans before you invest in one to know about various charges applicable when you withdraw funds.

It helps you to utilise the investments whenever required. The withdrawal is available from the units collected through premiums and market-linked returns, with the insurance component left untouched. Although ULIP withdrawals after 5 years offer valuable flexibility, they are subject to certain rules and limitations.

ULIP plans have a mandatory 5-year lock-in period. It means you can withdraw your funds only after the 5-year maturity period. However, you can withdraw a partial or full amount before the lock-in period by surrendering the policy or discontinuing premium payments. A ULIP calculator can help you compute your returns while you stay invested.

Withdrawing funds before the lock-in period may incur extra charges and be subject to withdrawal limits. Hence, it is ideal to make partial withdrawals in ULIP only after completing the lock-in period to avoid disrupting the investment’s compounding.

ULIP funds mainly offer 2 types of withdrawal options: partial and complete. Both of them have different rules, eligibility criteria, and impacts on policy benefits. You should understand the features of both withdrawal types to decide when accessing your ULIP funds.

Insurers offer a simple ULIP withdrawal process that allows you to access your funds in line with regulatory guidelines. Follow the steps below to withdraw your funds from the ULIP plan:

Learning the rules and limits of ULIP withdrawals helps you decide as per your financial requirements and long-term investment goals. Check out the important ULIP withdrawal limits, along with applicable conditions, mentioned below:

• Lock-in Period: ULIP plans have a 5-year mandatory lock-in period after which you can withdraw your funds partially or wholly.
• Minimum Fund Value: Insurers require you to maintain a minimum fund value of ₹10,000 to ₹50,000 to initiate a withdrawal, depending on the terms and conditions. It makes sure that the policy has sufficient funds to cover administrative charges.
• Withdrawal Frequency: Your insurer determines the frequency of fund withdrawals from ULIP plans. Every withdrawal from your plan may include processing charges, lowering the net amount received.
• Withdrawal Caps: Usually, insurers limit the amount of funds that can be withdrawn at a time to a fixed percentage of the total fund value, typically 20-50%.
• Premium Payment: You should pay the premiums regularly after partial withdrawals from the ULIP plan to keep your policy active. Failure to pay premiums may result in policy lapse, tax liability, or cancellation of life cover.

ULIP withdrawals after 5 years significantly affect the overall fund value, thereby lowering life cover, tax benefits, and compounding of your investment. Check out the impact of ULIP withdrawals on the policy benefits:

• Reduce the Fund Value: The value of the accumulated funds decreases every time you withdraw from the ULIP plan. You lose the compounding of the funds for the remaining years, reducing the overall maturity returns.
• Effect on Life Cover: Insurers usually lower your life cover when you withdraw part of your funds. For example, if you withdraw 20% of the fund value, your insurance cover reduces by a similar percentage.
• Impact on Returns: Withdrawing funds when the market is down results in the loss of the fund value. Even if the market recovers, the remaining fund value will generate lower returns.
• Charges and Deductions: The insurer will charge certain fees and exit loads on the units redeemed. These deductions will reduce the amount you withdraw.
• Goal Achievement Delay: Frequent partial withdrawals can delay long-term goals, such as children’s education, marriage, or your retirement planning. It means that rebuilding the amount you withdraw will require higher premiums in future or an extended investment timeline.

ULIP fund withdrawals involve planning your finances based on several factors. Some of these factors are withdrawal type, long-term financial requirements, and the impact of the withdrawal on fund performance and life cover. Do consider factors like benefits, life cover, and taxation of ULIP withdrawals when choosing the amount, timing, and nature of withdrawals.