For the uninitiated, the first question would be what is ULIP? A unit-linked insurance plan (ULIP) is a life insurance solution that allows policyholders to diversify their money. It offers them the financial security of life coverage and gives them a chance to create wealth through investment. This means that you can rest easy when it comes to your family’s financial future. At the same time, you can freely pursue bigger things with your hard-earned money.
Apart from being a well-rounded insurance product, buying a ULIP has many advantages that cannot be found in other insurance plans. One of these advantages is that before your policy reaches maturity, you can withdraw a part of the fund value you have accumulated. Known as partial withdrawal, this feature allows you to deal with many financial problems. For example, you can work through a financial crisis without having to take a loan or selling some other valuable asset.
How partial withdrawal works?
Partial withdrawal is a very useful feature offered by ULIPS. However, before you make use of it, it is better to know exactly what you are getting into.
When you choose to buy a ULIP, you need to pay a fixed premium just like you would in any other type of life insurance product. The premium you would have to pay for ULIP heavily depends on the amount you choose as the sum assured. Your premium invested into equity and debt funds is converted into units. Each of these units has a specific monetary value. Essentially, you pay money to buy a fixed number of units. In the case that you face any financial emergency, you remove some of these units from the fund and essentially sell them for their monetary value at the time. The ULIP NAV (ULIP Net Asset Value) of your fund will give you an idea of how much each unit is worth.
Effect of partial withdrawals
Everything in the world, especially finance, is based on the principle of cause and effect. The same applies to partial withdrawals as well. Once you take something out of your ULIP, there is an effect on it. This effect can either be a mild change or a major development. Hence, it is important that you are aware of these effects and can make a more informed decision.
Being as helpful as it is, partial withdrawal also has some conditions you need to pay attention to. Here is an example to help you understand better.
Assume you bought a ULIP and the sum assured was fixed as ₹ 5 lakh at the time of inception. Now, you decide to withdraw units worth ₹ 1 lakh. There are 2 ways that your plan can be affected:
- Your fund value decreases by the exact number of units and the amount of money that you withdraw. In this example, this amount comes to be ₹ 1 lakh.
Or
- The withdrawal leads to a decrease in your life insurance sum assured. In this example, if you remove ₹ 1 lakh worth of funds, your sum assured goes to ₹ 4 lakh. Hence, if at this time, any unfortunate event occurs forcing you to make a claim, your nominee would only receive ₹4 lakhs.
The fund and the sum assured eventually grow after you have withdrawn a part of it. But there is no telling what the market condition will be. Hence, you should be very careful while considering going for a partial withdrawal.
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