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Why Unit-Linked Plans are ideal for stable fund generation?

Why Unit-Linked Plans are ideal for stable fund generation?

Why Unit-Linked Plans are ideal for stable fund generation?

Unit linked insurance plans are very versatile when it comes to investing, especially when you want to invest with a specific purpose. You can customize your ULIP scheme as per your goal and investment horizon.

Building an income stream out of your investment corpus can be useful in many circumstances. Retirement pension, pension to a family member, or simply replacing your active income from a passive one, are few goals you can achieve.

What Is the Goal?

Before we get into the type of investment we need, we need to have a clear definition of the goal. Your goal must provide a SMART description:

  • Specific: There must be a number (finite) to achieve
  • Measurable: The measurement unit in case of financial goals will be currency; i.e. INR in this case
  • Attainable: You goal number should be humanly possible to achieve given your present situation
  • Relevant: The goal should be relevant for you and your family
  • Time-Bound: You should provide a definite timeline to achieve the goal

You can define an income goal using the SMART methodology like this:

Your Present Situation

Your present income is Rs. 4 lakhs per month, and age is 30 years. Your family consists of your homemaker spouse and two school going children. Your present household expenses are Rs. 1 lakh a month.

Your SMART Income Goal

Receive an income equivalent to Rs. 100,000, starting 30 years from now, where the income will grow as per the minimum expected inflation rate (3.5% in this case). The income should continue for a lifetime, that is till the age of 100.

Rs. 1 lakh will be close to Rs. 3 lakhs in 30 years counting in the long-term inflation of 3.5% p.a. So, in real terms, you will need a growing income with the first-year instalments at Rs. 3 lakhs a month.

Phases of the Goal

Income goals usually have two phases – accumulation and distribution. The accumulation phase is when you are investing money to build a large corpus. The distribution phase starts when you stop investing and start withdrawing money from the corpus.

Is the goal attainable for you?

At the nominal long-term rate of return of 8%, you will only need to invest about 11% of your monthly income to achieve the goal.

That is, by simply investing about Rs. 45,000 p.m. you can build sufficient corpus to take care of the inflation-adjusted income starting Rs. 3 lakhs p.m.

Ideal Investment for the Goal – A 30 years investment plan is a very long-term plan. If you add the distribution phase of your goal the total investment period becomes 70 years. Thus, you will need an investment option which not only allows you to invest for this long period but also, keeps your costs under control.

To summarize, here’s what you will need in your investment option for this goal:

  • Long holding period, possibly for a lifetime; i.e. up to 100 years of age
  • Possibility of equity exposure
  • The option of changing the asset allocation as the investment progresses
  • The flexibility of investment modes
  • At least tax-exempt withdrawals, so that your income remains tax-free

Why Should You Invest in ULIP?

Unit linked insurance plans or ULIPs have features which allow it to provide you with the best of long-term investment. For our case in this article, let’s consider Invest 4G plan from Canara HSBC OBC Life and see how it fits as an ideal investment for your goal:

Multiple Asset Classes - ULIP plans including Invest 4G offers four different types of investment funds. All of these funds have a different risk-return profile, which you can use for your long-term portfolio investment:

  • Equity funds: High-risk-high-return but requires a longer investment period. Best for wealth generation during the accumulation phase.
  • Balanced funds: A dynamic mix of equity and fixed-income investments. Carries lower risk-return than equity funds but higher than debt funds. Also, needs a long investment period.
  • Debt Funds: These are long-term fixed income securities’ portfolio. These funds have a steady return profile and carry lower risk than balanced funds. However, offer lower returns than balanced and equity funds in the long run. Best for parking your accumulated corpus for the distribution phase.
  • Liquid Funds: Safest of all funds, these funds offer lower returns but have almost zero return variation over a short period. This fund will be the best option to park your money you want to withdraw for the year. This fund is also useful when you are investing lump sum and you want to benefit from SIP mode of allocation to equity funds.

Automated Portfolio Management Strategies

Automated portfolio management strategies allow you to maintain your portfolio’s risk-return profile automatically and protect your accumulated corpus. The important part is you don’t have to bother about the adjustments. Once you have selected a strategy your asset allocation will be adjusted at a fixed interval automatically.

Invest 4G plan offers the following four automated portfolio strategies:

  • Systematic Transfer Option

    Best when you want to invest once a year and want to allocate to equity funds. This strategy allows you to create a systematic transfer to equity funds within the ULIP once you have invested.

  • Return Protector Option

    Liquidates your equity portfolio’s growth and parks it in a debt fund, after the return on equity fund reaches the selected threshold. Great if you have a minimum return target from your investment.

  • Auto Fund Rebalancing Option

    Once you set an asset allocation ratio between equity and debt funds, this strategy helps you maintain the same allocation. The fund will rebalance your equity and debt funds once in a quarter to make sure the allocation ratio remains the same.

  • Safety Switch Option

    Regardless of your choice of strategy at the beginning of the investment, you should always choose this strategy, if you are investing in equity funds. This strategy works only in the last four years of your investment and moves your entire equity holding to liquid funds.

    The transfer is done systematically over the last four policy years before maturity. Thus, keeping your accumulated wealth safe from market performance.

Tax-Free Systematic Withdrawals

ULIP is a life insurance policy with a lock-in period of five years. After the lock-in period, you can withdraw partially from your accumulated corpus completely tax-free. Thus, your withdrawals in the distribution phase are completely tax-free.

Also, to help you build the regular income stream without continuous effort, the Invest 4G plan offers a systematic withdrawal option. You can set your amount and frequency and the insurer will transfer the money regularly to your savings account.

Other Benefits of Using ULIP Plans

ULIPs like invest 4G are created to meet the challenges of long-term investment goals such as the one we are unravelling here. Other benefits of using ULIPs include:

  • Allocation of bonus units for long-term investors
  • Life cover equal to the higher of

    o 105% of total premiums paid

    o Sum assured under the policy (Rs. 54 lakhs in this case, which is 10 times the annual premium investment)

    o Corpus value

Thus, ULIPs not only are a great instrument to build your wealth but also to build a steady stream of tax-free income.

Speak to an insurance specialist now!


In order to understand ULIP NAV, you first need to understand how ULIPs work. In ULIPs, a portion of premium from different investors is accumulated to create one investment corpus. This money is invested in several different market instruments. So to divide the returns properly among all the investors, the fund manager divides the net asset value in to small units with a specific face value. NAV is the per market share value of a fund. To better understand the definition of NAV, take a look at the formula below -

Net Asset Value = [Assets-(Liabilities + Expenses)] / Outstanding Units

It's not risky to invest in ULIP if you chose a safer path. Risk factor in ULIPs depends on the investment option you choose. If you are not okay with sharp movements, then choosing a low risk investment is a better idea. For people with high risk appetite, it's good to choose equity funds while risk-averse investors can go for debt funds.

You can opt for settlement option if you want to take your fund value in periodic installments. With the settlement option, you can get your maturity amount in installment as per the frequency chosen by you over a maximum period of 5 years. You can choose complete withdrawal of fund value at any point of time. Although, you will not get any life cover during this period.

ULIPs are life insurance products that provide paths to invest. And just like other investment option, there's no guaranteed investment return in a ULIP. Although, if you like taking risks and want to earn more returns on your investment, then opt for equity funds.

At the time of maturity of ULIP policy, you will get the fund value on your prevailing NAV. Fund value is the number of units of policy multiplied by NAV (net asset value).

Value of the fund = Total units of policy x NAV (Net Asset Value)

Well, discontinuing your premium payment will disrupt your savings as well as financial goals. In such case, you can approach your insurance company and ask for the revival of discontinued policy within the stipulated timelines. Also, you will have to pay all the unpaid premiums.

ULIP plan is a combination of investment and insurance. Thus, one must hold this plan for a duration of at least 10 years so as to get investment benefits out of it. As an early exit will have its own consequences. ULIPs have a lock-in-period of 5 years. Thus, you may surrender your policy before the completion of 5 years, but you will be paid only after the end of 5 years.

Generally, minimum lock-in period for ULIP is 5 consecutive policy years. During this time period, if the policyholder discontinues or surrenders the policy, then he/she will not able to receive any payouts. Withdrawals are only allowed at the end of the lock-in period. In addition to this, if you surrender your policy before the lock-in period ends, then you will have to pay surrender charges as well. Also, it is advisable not to exit your plan after the completion of 5 years of lock-in period, because if you stay invested for a longer duration it will help you reap better benefits.

The amount that you pay towards the Unit Linked Insurance Policy is eligible for tax deduction as per Section 80C of the Income Tax Act, 1961. This means that the premium amount paid will be deducted under section 80C from your taxable income up to a maximum limit, which is currently ₹1.5 Lakhs. However, the aggregate amount of deductions under section 80C, section 80CCC and 80CCD (1) shall not, in any case, exceed ₹1.5 Lakhs. Also, upon the maturity of the policy, the payout amount you receive will be exempt from income tax, subject to the applicable provisions of Section 10(10D) of the Income Tax Act, 1961.

Here’re the following major benefits of buying ULIP

1. Tax Benefits – It helps you to reduce tax liabilities. This means you are liable to enjoy tax benefits on the premiums paid towards the policy as per Section 80C of the Income Tax Act.

2. Long-term growth– One of the major benefits of buying a ULIP plan is that it offers long-term benefits. ULIPs come with a lock-in period of 5 years which will keep you invested for a longer period.

3. Dual benefits – ULIPs not only offer life coverage but also come with a wide range of investment funds that will help you earn great returns. This includes balanced funds, debt funds or equity funds. You can invest in any of them depending on your need and risk appetite.

4. Flexibility – It gives you the flexibility to switch between funds basis your risk appetite. You could select multiple funds and different investment strategies.

5. Partial withdrawal option – It allows you to make partial withdrawal in case of any uncalled medical emergency or contingency after completion of lock-in period.

ULIP is a perfect investment option if you are looking for long term wealth creation. It could be buying your own house, a new car, going on a long vacation, or your child’s higher education or marriage, ULIP helps you to meet all your long-term financial goals. Moreover, it comes with a lock-in period of 5 years which keep you invested for a longer period and helps you earn better returns. The lock-in period is calculated from the date when the policy is issued.

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