Invest in Credit Risk Mutual Fund or not?

While the main purpose of life insurance is to provide financial protection to the dependents of the insured person, often one is tempted to use some part of the sum assured for emergency use. This is known as partial withdrawal from a life insurance policy. But what is the exact practical application of this facility and will a partial withdrawal reduce your sum assured?

“Unit-linked insurance policies (ULIPs) come with a five-year lock-in period. It gives the policyholder some flexibility to withdraw a part of the sum assured post completion of five policy years. Partial withdrawal as per the IRDAI regulations of 2019 means any part of the fund that is encashed/withdrawn by the policyholder during the period of the contract, post-lock-in period,” said Atri Chakraborty, Chief Operating Officer, IndiaFirst Life Insurance Company Limited.

Partial withdrawals are also allowed in Unit Linked Pension Products post-2019 regulations for stipulated life stage events/exigencies like higher education or marriage of children, purchase or construction of a residential house or treatment of critical illness of self or spouse.

Partial withdrawals are not for every policy

However, Chakraborty noted, “The facility of partial withdrawal is not allowed for policies where the life assured is a minor, until the life assured attains majority, i.e. on or after attainment of 18 years of age. It is also not allowed during the settlement period for policies where the policyholder has opted for a settlement option. Under this, the maturity amount entitled to the policyholder is paid in structured periodic instalments over a stipulated period (maximum 5 years) post maturity.”

Withdrawals that lead to policy termination, a scenario where there aren’t enough funds to pay for the costs associated with a ULIP, are also not allowed. Insurers specify their limits as far as withdrawals are concerned.

How does partial withdrawal work?

With regards to the ULIP’s available with IndiaFirst Life Insurance, Chakraborty said the policyholder can make partial withdrawals any time after completion of the fifth policy year and payment of all due premiums for the first five policy years, under regular/limited premium contracts. The minimum and the maximum partial withdrawal amounts are Rs 5000 and 25% of the fund value respectively.

The fund value after the withdrawal should be at least 110% of the annual premium for regular and limited premium contracts. Partial withdrawals are usually paid by cancelling the units on the day the insurer receives the withdrawal request.

“While we do not charge our customers for partial withdrawals, there is a capping on maximum free withdrawals by some insurers post which it’s chargeable with an administrative fee. The sum assured for the policy may be reduced by an amount equal to the partial withdrawals, if any made during the two years immediately preceding the date of death of the life assured,” he added further. 

Implications

While partial withdrawals can come in handy when trying to meet short-term financial goals/needs, this facility needs to be used judiciously. ULIPs help builds a sizeable corpus along with the life cover it provides during the tenure of the policy. However, withdrawals will reduce the sum assured and may also impact the death benefit payable.