If you are looking for a way to create wealth while also being secured by a life cover, then a ULIP is the best option for you. A ULIP or a Unit-Linked Insurance Plan is essentially a life insurance product that merges life insurance and investment options under one product. One great feature of ULIPs is that you can withdraw the returns partially from your ULIP investment even while your life insurance coverage continues. Let’s learn more about the same.
What are ULIPs and how do they work?
First, let us understand what a ULIP is and how it works. Your ULIP premium is divided broadly into two purposes: the life coverage amount, and the investment amount. You also have to pay a few other charges. The life coverage amount helps you relieve your worries about the financial needs of your loved ones when you are longer present to take care of them. The investment amount is pooled along with the money from other policyholders and invested into the funds that you have chosen. If you have invested in equity, the market conditions determine your returns. If you have invested in debt funds, then the rising/falling interest rates influence your returns.
You can use a ULIP calculator to get an estimate of the kinds of returns you can expect with each asset class. The returns from your ULIP can be withdrawn only after a particular period and under certain conditions.
Understanding ULIP partial withdrawals
- ULIP partial withdrawals before the lock-in period
ULIPs have a lock-in period of five years. Policyholders are not allowed to make any withdrawals on their funds within this period. If you want to receive the returns on your plan within this period, you will have to surrender or terminate the policy. However, note that even if you take this step, you receive the returns on the ULIP only after the five-year lock-in period is over. Hence, before you invest in a ULIP, you should consider this aspect carefully.
- ULIP partial withdrawals after the lock-in period
If you carry out partial withdrawals after the lock-in period is over, you can enjoy higher benefits. The investment would have gained returns considerably over the period of several years. Compounding would have done its work on your investment, allowing you to enjoy greater monetary benefits without having to increase the money invested.
Before you make decisions regarding withdrawal, you must use the ULIP calculator to check the returns you can expect within a particular period. As mentioned earlier, the returns depend on the asset class you have invested in.
One can also systemise their ULIP partial withdrawals. Many insurers offer the SWP or Systematic Withdrawal Plan feature, wherein you receive a certain amount at specific intervals during a year. If you do not wish for regular pay-outs, you can withdraw the amount as per your own wish. Regardless, you should ensure that there are enough funds in their investment after the withdrawal to ensure good returns over a long-term period.
Important things to know about ULIP partial withdrawals
- As per relevant tax laws, the withdrawals on your ULIP plan are exempted from taxation, unlike other sources of income, as long as they are carried out after the end of the lock-in period. Aside from this, there are tax deductions on the ULIP premiums and tax exemptions on death benefit and maturity benefit pay-outs as well.
- However, if you make the withdrawal before the end of the lock-in period, you lose out on the tax benefits you may have claimed till then.
- Depending on the insurer, there might be limits as to how many times you can withdraw in a year. After a certain number of withdrawals, you may be charged a particular amount. Some insurers may also have a limit on the amount you can withdraw within a year. Do consult your insurer regarding this.
Tax benefits are subject to terms and conditions, and modifications in tax laws. Some tax benefits may not be applicable for those who are paying taxes via the new tax regime.
We hope the article has increased your knowledge of what a ULIP is, and how one can make the most of ULIP partial withdrawals.