What are systematic withdrawal plans in ULIPs?
A Unit Linked Insurance Plan (ULIP) combines the benefits of life insurance with that of a high-return generating investment over the long term. If you’re wondering, ‘what is a ULIP policy?’ then the simple answer is that it is a plan that takes a part of the premium you pay to provide a life insurance cover and the remaining is invested in funds of your choice.
You can choose between equity funds, debt funds, and balanced funds depending on your risk tolerance and financial goals. This helps earn returns, while the ULIP insurance component works as a safety net for the family’s financial future in the event of the policyholder’s demise. ULIPs come with a host of benefits and one of them is the systematic withdrawal plan facility.
Systematic Withdrawals in ULIPs
Some ULIP policies come with a Systematic Withdrawal Plan (SWP) under which you can withdraw a certain amount of the funds at a regular, predetermined interval to help fund different life goals. Such withdrawals are only possible after the completion of the mandatory five-year lock in period. ULIP insurance that come with the SWP facility does not levy any penalty on the withdrawal of funds post the lock-in period. The insurer does not reduce the life insurance sum assured of the ULIP insurance either.
The SWP facility is helpful in financial planning because you can map certain goals to the SWP withdrawals and help fund them. It can also provide a regular income stream in case of retirement or for a certain period when you are not working.
ULIP insurance that comes with the SWP feature gives you the opportunity to customise the cash withdrawals as per your preference. You can decide whether you want to take out a fixed amount at a regular frequency or only withdraw the capital gains from your investments.
It’s important to note that while some insurers don’t provide a SWP feature, all ULIP plans come with a partial withdrawal facility. The difference is that in case of the partial withdrawal facility, you can withdraw a lumpsum amount in case of a financial emergency upon which you may be charged a certain fee for withdrawal.
Partial withdrawals reduce your ULIP insurance sum assured for two years from the date of the withdrawal. If you do not make any additional withdrawals during that period, then the initial sum assured amount is restored at the end of the two-year period. Hence, it’s essential to go over with your insurer what the terms and conditions of their partial withdrawals facility is and whether there is the option to choose a SWP ULIP policy.
Past performance reveals that ULIPs are capable of generating returns of 12 to 15% in longer investment horizons. Hence, even though ULIP plans have a lock-in period of five years, experts recommend staying invested for a longer period of about 10 years to truly benefit from the returns.
ULIP plans also offer tax benefits under section 80C and section 10(10D) of the Income Tax Act, 1961. This means that the premiums you pay for ULIP insurance are eligible for deduction up to Rs 1.5 lakh per year and also that the maturity amount is tax-free. Compared to other tax saving investment instruments, such as the National Saving Certificate (NSC) and Public Provident Fund (PPF) that typically offer about 7 to 8%, ULIPs offer higher returns.
When you do opt for withdrawals from your ULIP policy, the amount invested in funds also decreases. However, you can later, when you have the funds, opt for a premium top-up. The premium top-up benefit allows you to increase the premium paid at any time during the policy up to a certain limit. This is especially beneficial when the markets are doing well and you want to capitalise on that.
Life is full of uncertainties and financial emergencies may often crop up. Hence, having the option to access funds is always helpful even if you don’t end up exercising that option. In addition to the SWP benefit, ULIP is a comprehensive financial product to include in your investment portfolio because it also has benefits of good returns, insurance cover, and tax-saving.