ULIP To Pass On A Tax Free Estate To Your Grandchildren

2024-08-02

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Canara HSBC Life Insurance’s Invest 4G Unit Linked Insurance Plan offers a whole life feature, which can help you pass on the estate to your grandchildren. The plan’s whole life cover option continues the policy cover till 99 years of age. Meaning, it’s almost certain to pay-out to your nominees, instead of maturing within your lifetime.

The ULIP policy has numerous other features as well which can help you in achieving other financial goals in life, including wealth creation goal. Thus, you need to carefully select the option which allows you to use the ULIP investment as a wealth transfer plan.

How to Use Invest 4G Plan for Estate Transfer?

Estate or wealth transfer typically has two phases:

Wealth building or accumulation
Wealth distribution

While using Invest 4G plan for estate transfer we can add another step between accumulation and transfer, that is ‘preservation’. So, going step by step, first, you build the wealth you want to transfer, then preserve it until the transfer is feasible, and then transfer.

Transfer of wealth is usually automated, as legacy transfers will be executed only after your death. This rule applies more to ULIP policies or any other life insurance policies.

Wealth Building with Invest 4G

Invest 4G plan gives you many features to help you build wealth comfortably. You can use the following features of this plan to accumulate the financial estate:

Selecting the Correct Sum Assured

Sum assured for the life cover under ULIP plans plays an important role. The life cover increases the mortality charge on your investment. Thus, you can keep the sum assured to a minimum required amount unless you also want to use this policy as a life cover for your family or for tax saving under section 80C for the premiums.

If you have already exhausted your 80C limit with investment in other goals and plans, you are free to invest any amount in this plan. The logic behind this freedom is:

The death benefit is anyway tax-exempt under section 10(10D) of the IT Act
The policy is expected to only pay out the funds as a death benefit

However, if there is any chance for you to withdraw the money from the plan, you should keep the sum assured to at least 10 times of the annual investment amount.

For example, if you plan to invest Rs. 2 Lakhs every year into this plan, your sum assured has to be at least Rs. 20 lakhs. The rule applies regardless of the investment tenure.

Use Limited Premium Payment Term

Estate transfer to the next generation through life insurance generally means – ‘transfer upon death.’ So, the policy will continue for a lifetime. However, you should not have to pay premiums after your retirement.

Limited premium payment option allows you to limit your payments into the plan until your retirement. Invest 4G has options of a minimum of 5 years to 30 years premium payment term.

Even with the limited premium payment tenure, you should follow the 10% rule to avoid tax liability in case of withdrawals.

For example, whether you are planning to deposit Rs. 2 lakhs for only five years or 10 years, the sum assured should be Rs. 20 lakhs.

Invest in Multiple Funds

Based on the time available to you for the investment and your risk appetite, you can invest in a mix of equity, debt, balanced and liquid funds under the same plan.

Balanced funds are a dynamic mix of equity, debt and liquid assets. Fund managers will change the allocation according to market opportunities in these funds. However, they are usually equity heavy.

So, if you want a lower equity exposure for your investments, you can create a mix of your own.

Use Portfolio Management Strategies

Portfolio management strategies will help you manage the risk of your portfolio if you are investing in equity funds. These strategies will automatically adjust your portfolio so that you can benefit from market opportunities while keeping the risk in check.

For example, you can fix the ratio of debt and equity in your portfolio to 70:30. The plan will adjust your portfolio to match this ratio from time to time. This means as the markets outperform debt funds money will flow from equity funds to debt funds securing your gains. The reverse flow will happen in case markets are in a downtrend, which will boost your gains when markets rise.

Invest 4G plan offers four strategies for portfolio management:

Systematic Transfer: Best if you are more comfortable investing once a year but still want to be systematic about your equity allocation. This strategy will transfer the lump sum funds from liquid funds to equity fund every month. So, your equity allocation receives the benefit of rupee cost averaging.
Auto Fund Rebalancing: Lets you fix an investment ratio for equity, debt and liquid funds for your overall portfolio. The plan will rebalance your portfolio every three months to match this ratio of assets. This strategy helps you keep your investment risk steady while drawing value from market opportunities.
Return Protector: Protects your gains from equity funds by transferring them to debt funds as soon as they reach the threshold. You can decide the threshold for this rebalancing.
Safety Switch: This option works in the last four policy years. With whole life cover option, it is less likely to come into effect. But you can choose this option with any of the three strategies above. This option gradually transfers all your money in equity funds to liquid funds in the last four policy years.

Wealth Preservation with Invest 4G

The investment strategies help you accumulate your corpus in your earning years. While after your retirement you would want the accumulated money to at least not erode in value. For this, you can change your portfolio strategy to match your new goal of wealth preservation.

You can achieve this by moving your equity fund allocation gradually to a debt fund or liquid fund. Remember, however, that debt funds will be the right choice if your investment tenure is more than five years for wealth preservation.

Debt funds returns will help your corpus to stay safe from inflation, but the fund needs time to realise these returns. Liquid funds are a better choice if your remaining tenure is less than five years.

Wealth Transfer

This is perhaps the easiest part, as all you need to do is change the nomination to your grandchildren in the policy. You should use an electronic insurance account (e-IA) to store and manage your life insurance policies.

e-IA will make it easier for you to change nominations and monitor your policies during your lifetime. You can also assign an ‘authorised person’ to ensure that your family can access all your active policies and file claims. Thus, Invest 4G ULIP helps you pass on a tax-free estate to your grandchildren.

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