How to Withdraw Funds from ULIPs before Maturity

Unit Linked Insurance Plans (ULIPs) are a popular investment option that combines insurance with market-linked returns. While they are designed for long-term wealth creation, financial emergencies or changing investment goals may lead investors to withdraw funds before maturity. However, ULIP withdrawals are subject to specific rules, charges, and tax implications. Understanding the withdrawal process, eligibility criteria, and alternative options can help investors make informed decisions. In this article, we explore how to withdraw funds from ULIPs before maturity, the applicable conditions, and the ideal strategies to optimise ULIP returns while maintaining financial stability.

Can you withdraw money from ULIP before maturity?

Yes, ULIPs allow partial withdrawals after the mandatory lock-in period of five years. However, conditions and charges may apply based on the policy terms.

Conditions for withdrawing funds before maturity:

Lock-in period completion:

Withdrawals are only permitted after five years from the policy start date.

Minimum balance requirement:

Some insurers mandate maintaining a minimum fund balance post-withdrawal.

Maximum withdrawal limit:

Policyholders can typically withdraw up to 20-25% of the fund value, depending on the insurer.

Impact on sum assured:

Withdrawals may reduce the death benefit sum assured.

Age restrictions:

Some policies impose age-based limitations on withdrawals.

Frequency of withdrawals:

Insurers may restrict the number of free withdrawals allowed per policy term.

Eligibility criteria for ULIP withdrawals

Each ULIP provider has specific criteria that policyholders must meet before making withdrawals.

Key eligibility requirements:

Completion of lock-in period:

ULIP withdrawals are only allowed post the five-year lock-in.

Policyholder’s age:

Some policies restrict withdrawals based on the policyholder’s age.

Minimum fund value:

A minimum balance should remain in the policy post-withdrawal.

Policy type and insurer guidelines:

Withdrawal limits and conditions vary by policy type and insurer.

Premium payment compliance:

The policy should be active, with regular premium payments.

Steps to withdraw funds from ULIPs

The withdrawal process varies by insurer, but general steps remain consistent across policies.

Steps to follow:

Check policy terms:

Review your insurer’s ULIP withdrawal conditions.

Complete withdrawal form:

Fill out the necessary withdrawal request form.

Provide required documents:

Submit identity proof, policy documents, and bank details.

Await processing:

Insurers typically process requests within 5-7 working days.

Confirm fund credit:

Ensure funds are credited to your registered bank account.

What are the charges and tax implications on ULIP withdrawals?

ULIP withdrawals may attract specific charges and tax liabilities based on policy terms and withdrawal amounts.

Charges on ULIP withdrawals:

Fund management charges:

A percentage of the fund value is deducted.

Partial withdrawal charges:

Some policies levy a fixed charge per withdrawal.

Mortality charge adjustment:

Sum assured may be reduced post-withdrawal.

Discontinuation charges:

If withdrawn before the lock-in period, significant charges apply.

Tax implications:

Tax-free withdrawals:

ULIP withdrawals are tax-exempt under Section 10(10D) if annual premiums are within 10% of the sum assured.

Tax on high-premium ULIPs:

Policies exceeding Rs. 2.5 lakh annual premium may attract capital gains tax.

Tax deduction at source (TDS):

TDS may apply for withdrawals exceeding Rs. 1 lakh in some cases.

What are the alternatives to withdrawing ULIP funds?

Instead of withdrawing, investors can explore alternative options to preserve wealth accumulation and insurance benefits.

Better alternatives to ULIP withdrawals:

Loan against ULIP:

Borrow funds instead of withdrawing to retain investment benefits.

Fund switch:

Reallocate investments within ULIPs to better-performing funds.

Top-up premiums:

Invest additional funds rather than withdrawing to enhance corpus.

Emergency fund utilisation:

Use separate savings or contingency funds for short-term needs.

Policy surrender:

As a last resort, consider surrendering the policy, keeping in mind the associated penalties.

Conclusion

While ULIP withdrawals before maturity are possible, they should be considered carefully to avoid financial setbacks. The five-year lock-in period, potential charges, and tax implications make early withdrawals less attractive. Exploring alternative options such as loans, fund switching, or top-up premiums can help maintain long-term investment growth. By making well-informed decisions, investors can maximise their financial gains and ensure continued policy benefits.