In financial planning, every individual has different financial needs and every investor has a unique investment plan. While some individuals invest in a lump sum, while others want to choose their investments. Some investors want to grow their money, while others just want to get regular income from their investments.
To meet the expectations of different types of investors, life insurance companies in India now offer different two types of withdrawal options - Systematic withdrawal option (SWO) and Milestone-based withdrawal option (MWO).
A Systematic Withdrawal Option (SWO) is a systematic approach, unwinding your investments at regular intervals. On the other hand Milestone-Based Withdrawal Option (MWO) is a milestone-based route, targeting specific financial goals. But the question is which one to choose between these two options. In this article, we delve into the pros and cons of these two options and discover the best withdrawal option that will empower you to make informed decisions and optimize your financial well-being.
What is a Systematic Withdrawal Option?
A Systematic Withdrawal Option (SWO) stands as a strategic tool in financial planning, providing individuals with a structured means for partial withdrawals from their investment portfolios. Under this option, a pre-determined percentage of the fund value is systematically withdrawn and distributed to the policyholder at specified intervals throughout the remainder of the policy term.
The best feature of the Systematic Withdrawal Option is its flexibility, allowing policyholders to choose this option either at the initiation of the policy or at any time during its term. However, the outstanding policy term must be a minimum of 5 years.
Essentially, SWO empowers investors with the ability to tailor their withdrawals according to their unique financial requirements. This predictable and customizable approach to withdrawing funds provides a steady income stream, making it particularly appealing for retirees or those seeking regular financial payouts. Moreover, the continued participation of the remaining investment portfolio in market movements during withdrawals offers the potential for overall growth.
Features of Systematic Withdrawal Option
Here are the features of the Systematic Withdrawal Option (SWO)
- The Premium Payment Term must be 10 years or more.
- Policyholders have the flexibility to select a withdrawal percentage between 1% and 12% of the fund value per policy year.
- The life assured should have reached 18 years of age when receiving payouts.
- Withdrawals under the Systematic Withdrawal Option (SWO) commence from the 11th policy year or the policy year immediately following the SWO request, whichever is later.
- The withdrawals will be payable on a yearly, half-yearly, quarterly, or monthly basis, as selected by the policyholder. The chosen annual percentage for the Systematic Withdrawal Option (SWO) will be evenly distributed across the policy year, depending upon the chosen withdrawal frequency.
- The Systematic Withdrawal Option (SWO) can be resumed or discontinued at any point throughout the policy term, with the condition that, for reactivation, the outstanding policy term must be at least 5 years. However, any reactivation or discontinuation of this feature will be implemented only from the policy anniversary following the receipt of the request.
- Payout Option can be chosen and changed up to any time before the payout starts. Once the payout has started, the policyholder cannot switch his/her withdrawal option or opt for another withdrawal option.
- Policyholders can only opt for Milestone-based withdrawal or Systematic withdrawal option at any time even after the withdrawals have started but will not be allowed to opt for other withdrawal options available in the plan.
- The SWO payout will be payable till the end of the policy term or till the policyholder stops the option, subject to conditions applicable for this feature being fulfilled.
- The SWO percentage is flexible and can be adjusted at any point throughout the policy term, even after the SWO has been activated. Any change in the percentage will take effect from the subsequent policy anniversary following the submission of the request. However, a request for change in SWO percentage cannot be made after the death of the life assured, when premium plus has been selected.
- The SWO feature is available for selection when the policy is in a reduced paid-up state.
- SWO cannot be initiated during the settlement period or within the last 5 policy years.
- The exercise of this option does not incur any charges.
What is a Milestone-Based Withdrawal Option?
The Milestone-Based Withdrawal Option (MWO) is a structured approach to partial withdrawals within an investment policy. Under this option, a systematic withdrawal occurs at specific intervals, at the end of the 10th policy year and every 5th year thereafter, excluding the milestone coinciding with the policy maturity date.
During these withdrawal milestones, 20% of the available fund value on the payment date is disbursed to the policyholder. It’s important to note that this payout depends upon the life assured attaining 18 years of age as of the payout date. This unique feature ensures a balance between providing liquidity through withdrawals and aligning the payouts with the policyholder’s life stage, enhancing financial flexibility for various needs and goals.
Features of Milestone-Based Withdrawal Option
- Payout Option can be chosen and changed up to any time before the payout starts. Once the payout has started, the policyholder cannot switch his withdrawal option or opt for another withdrawal option.
- Policyholders can only opt for Milestone-based withdrawal or Systematic withdrawal option at any time even after the withdrawals have started but will not be allowed to opt for other withdrawal options available in the Plan.
- The Milestone-Based Withdrawal (MWO) payout involves redeeming units from the funds, maintaining the same proportion as the fund value in each fund. These redemptions will occur at the unit price applicable on the date of each MWO payout.
- After any withdrawal, the remaining Fund Value must be a minimum of 120% of the annualized premium for Regular/Limited Premium policies at the policy’s inception, and at least 25% of the Single Premium for Single Premium policies. If either of these conditions is met during a scheduled withdrawal, no MWO payout will be processed, and future withdrawals under MWO will be halted. To reinstate this option, the customer must submit a new request.
- You can only select this option at the policy inception or anytime later in the Policy Term. In the event of your demise after opting for this feature while having selected premium plus, the option will be executed at the specified time.
- The Milestone withdrawal option feature can be re-activated or stopped anytime during the policy term. However, any re-activation or stopping of this feature will take place only from the milestone policy anniversary following the receipt of the request for the same.
- The Milestone-Based Withdrawal Option (MWO) feature can be initiated or discontinued at any point during the policy term. Nevertheless, any re-activation or stopping of this feature will only come into effect from the milestone policy anniversary after receiving the request for the change.
- The MWO feature can be opted for when the policy is in a reduced paid-up state.
- MWO cannot be exercised during the Settlement Period.
- The exercise of this option does not incur any charges.
Systematic Withdrawal Option Vs Milestone Withdrawal Option – Which is Better to Choose?
The Systematic Withdrawal Option (SWO) offers a systematic approach, allowing investors to receive a predetermined amount at regular intervals, ensuring a steady income stream. This method provides financial stability, especially for retirees looking to manage their living expenses effectively. On the other hand, the Milestone withdrawal option (MWO) introduces a dynamic element by aligning withdrawals with specific milestones, such as reaching certain financial goals. This approach adds a layer of flexibility, allowing investors to tailor their withdrawals based on significant achievements or changing financial needs.
To determine which option is better suited to individual financial goals, it’s crucial to consider factors such as risk tolerance, income needs, and long-term objectives. The SWO provides a structured and predictable cash flow, ideal for those seeking consistency. Meanwhile, the MWO offers a more adaptable strategy, catering to investors with evolving financial milestones. Ultimately, the choice between Systematic Withdrawal and Milestone-Based Withdrawal depends on the unique circumstances and preferences of each investor.