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Partial withdrawal from life insurance policy reduces sum assured

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You can partially withdraw money from unit-linked life insurance policies, but this will automatically decrease the sum assured for two years from the date of withdrawal. The sum assured is restored to the original level after two years provided no further partial withdrawal is made during those two years. Therefore, it becomes crucial to use this facility wisely.

The partial withdrawal facility is only available in case of unit-linked insurance plans (Ulips) and unit-linked endowment plans. You cannot partially withdraw from traditional insurance policies which are not unit-linked.

New rule for partial withdrawal from life insurance policy
The new Insurance Regulatory and Development Authority of India (IRDAI) rule came into effect on February 1, 2020 and as per the new guidelines, life insurers will now have to launch revised insurance plans in the market after withdrawing the current life insurance plans on offer.

There are few terms and conditions that you need to be aware of to partially withdraw from a unit-linked insurance policy.

As per the change in rule, now, policyholders get the option of partially withdrawing from the fund value three times during the entire term of the policy.

Rakesh Goyal, Director, Probus Insurance Broker, said that there is a limit on the amount that can be partially withdrawn. "You can partially withdraw the minimum amount of either Rs 1,000 or Rs 2,000. This amount varies from policy to policy. On the other hand, the maximum limit for the withdrawal is around 25 percent of the fund value (the value at the time of withdrawal) and these withdrawals are linked to certain life events such as the marriage of children, the child's higher studies, and critical illness, purchasing or building a new property."
Apart from these, there are a few more conditions.

Naval Goel, Founder, PolicyX.com said, "You have to be at least 18 years of age to make a partial withdrawal. You are allowed to partially withdraw money only after the completion of 5 policy years and also only if all due premiums have been paid on time and the policy is in force."

Also read: Life insurance policy guidelines set to change from February 1. Here's how it will impact you

How partial withdrawal works
Let us assume you bought a unit linked life insurance plan whose fund value is Rs 2 lakh after five years into the policy term. The annual premium of this policy is Rs 30,000 for a sum assured of Rs 5 lakh. As per the new rules, you can partially withdraw a maximum of 25 percent of your fund value and not more than that such that at least one year's premium remains in the fund.

So in this case, you can withdraw only 25 percent of Rs 2 lakh, that is, Rs 50,000 subject to the fact that at least Rs 30,000 remains in the fund. Thus, as soon as you withdraw, not only your fund value but your sum assured will also decrease by Rs 50,000.

The sum assured will get reduced to Rs 4.5 lakh from the original Rs 5 lakh, for a tenure of two years, after which it will get restored to Rs 5 lakh automatically. However, the restoration will only happen if you continue to pay your premium for the next two years. This way you have actually paid the cost of risk cover in the policy. Further, it is also subject to a condition that you have not made more withdrawals in those two years.

However, if insured dies within 2 years of a withdrawal the nominees will not get the original or full sum assured / death benefit. In such a case the nominee will only get the reduced sum assured (reduced for 2 years after withdrawal) on death of insured or the minimum guaranteed death benefit i.e. 105 percent of the premiums paid. In this case the sum assured/ fund value does not get restored to original level. The nominee would get the full death sum assured only if death happens after the sum assured is restored to original level.

Karthik Raman, CMO and Head-Products, IDBI Federal Life Insurance said, "In case the fund value is more than the sum assured, for instance, if the fund value is Rs 6 lakh and the sum assured is Rs 5 lakh, then when there is a partial withdrawal of say Rs 1.5 lakh (25 percent of the fund value), both fund value and sum assured will again fall by Rs 1.5 lakh. But only sum assured will get restored automatically after two years. Fund value gets restored to the extent of additional premiums being paid and/or increase in net asset value (NAV)."

He added, "Earlier, post the age of 60 years, any partial withdrawals done was reduced from the sum assured permanently and would not get restored. However, there has been a change brought about by the new regulations. Now, even post the age of 60 years, the sum assured gets restored to the original amount 2 years after the partial withdrawal."

Also read: Should you opt for ULIP with minimum sum assured?

Points to note
No penalty charges are applied on making a partial withdrawal. Also, the policyholder will not be taxed on partial withdrawal of funds.

Under section 10(10D) of the Income Tax Act, for life insurance policy where the premium payable does not exceed 10 percent of the sum assured, the amount received on partial withdrawal is exempt from tax. However, for policies purchased before April 1, 2012, the premium should not exceed 20 percent of sum assured for the proceeds to be tax-free.
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