Investment query: I am a freelancer, my income irregular. How should I start investing? 

I am 35 years old and considering starting an investment plan, but my income fluctuates due to my freelance work. There are times when my earnings are substantial, while other times there is minimal income.

Would it be possible for me to invest different amounts in ULIPs based on my income fluctuations? Also, what are the consequences if I miss payments during months with low income?

Name withheld

Response from Satishwar B., MD and CEO, Bandhan Life Insurance

We appreciate your thoughts on parking your money with a life insurance solution, which also helps in building disciplined savings. We understand that your irregular income flow and lifestyle expenses may create an obstacle in establishing disciplined savings towards Unit Linked Insurance Plans (ULIPs). I’m happy to share that majority ULIPs offer certain flexibilities that can help you to eliminate your concern.

How to invest in ULIP with irregular income flow?

•    Start small and keep it comfortable: The first step in investing is to commit to a premium that you can comfortably pay in a year, even during low-income periods. For instance, you can start with a premium amount of, say, Rs 40,000 – Rs 50,000 annually. When your earnings are higher, you can invest more through a top-up payment.

•    Adjust payment frequency as per income flow: Life can be unpredictable, and so can your finances. If your income fluctuates, yearly payments might be the easiest option. ULIPs give you the option to choose how often you want to pay your premiums — monthly, quarterly, or yearly. You can set aside smaller amounts over the year and make a single annual payment. This way, you’re not burdened with monthly commitments. Later, if smaller monthly payments feel more manageable, you can inform the insurer and switch to a different payment frequency. This flexibility means you can adapt your plan to match your income flow.

•    Keep it short and flexible: For someone with an irregular income, starting with a shorter premium payment term (PPT) can be a practical choice. This means you commit to paying premiums for a limited number of years, say 5 or 7 years, instead of the entire policy duration. For example, if you take a 20-year ULIP policy but choose a 5-year PPT, you only need to pay premiums for those 5 years. Your investment will continue to grow for the remaining 15 years without additional payments. Later, if your income improves, you can extend the payment term to invest more and build a larger fund.

•    Withdraw funds to manage emergencies: After completing the 5-year lock-in period, ULIPs allow partial withdrawals from your investment. This can provide much-needed liquidity to cover premiums or any unexpected expenses. Bear in mind that the fund value will be reduced by the amount of partial withdrawal you make.

What Happens During Low-Income Months?

It’s normal to have months when money is tight. Here’s a simple breakdown of how ULIPs can work for you and what happens if you can’t make a payment during lean months:

•    Grace period: You get a 30-day grace period to arrange your payment if you miss the due date. This gives you some breathing room without losing your policy benefits. Even if you miss payments after the grace period, you don’t lose your policy entirely. You can revive it by paying the missed premiums within 3 years.

•    Premium reduction: Most ULIPs allow you to lower your premium after a certain period, so you don’t feel pressured to pay the initially committed amount, remain insured, and continue investing. 

•    Discontinuance mode: If you can’t pay premiums for an extended time, your policy will shift into a “discontinuance mode.” In this mode, your policy becomes inactive, and what happens next depends on how long you’ve had the policy:

a)    Before payment of first 5 policy years (Lock-In Period): Your insurance cover ends, and your fund moves into the discontinued policy fund, which typically has a lower growth rate than the funds you would originally have invested in. Thus, your policy may stagnate. As per regulatory guidelines, you won’t be able to withdraw funds till this lock-in period of 5 years is over. However, you can revive the policy during the 3-year revival period to regain its benefits. 

b)    After payment of first 5 policy years: Your investment stays in the fund and continues to grow, even if the policy becomes inactive. Your insurance cover continues with a reduced amount. You can still revive the policy within 3 years and continue your benefits as planned. 

The good news is that Unit-Linked Insurance Plans (ULIPs) are designed to be flexible and can adapt to your income pattern while providing an element of financial security. Though they are market-linked and come with their share of risks, if used smartly, ULIPs can help you build the future you have always dreamt of. 

Overall, even with fluctuating income, you can definitely grow your wealth and achieve your dreams. It’s about taking small, steady steps. By starting small, staying flexible, and, most importantly, staying invested for the long run, you can make the most of ULIP features and build a secure financial future.