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Does Rupee Cost Averaging Work In Unit-Linked Insurance Plans?

Does Rupee Cost Averaging Work In Unit-Linked Insurance Plans?

Does Rupee Cost Averaging Work In Unit-Linked Insurance Plans?

Unit-Linked Insurance Plans are quite flexible when it comes to accepting and managing investments. You can invest in ULIPs is a mode most convenient to you, and you can invest in a portfolio most suited to your risk profile.

ULIP investment plans are suited for both safe investors seeking stable growth and risky investors looking for market-linked returns. If you are one of the aggressive investors looking to invest in equity funds and want to use the SIP mode of investment, ULIP has the solution for you.

Rupee Cost Averaging (RCA) in ULIP

The distinct advantage of SIP mode of investing in equity funds is the rupee cost averaging. But can you create SIP to an equity fund in ULIP plans? Yes, you can. In fact, there is more than one way of creating rupee cost averaging In ULIP plans:

  • Paying premiums in monthly mode
  • Using Systematic Transfer option

RCA by Paying Monthly Premium

When you start investing in a ULIP plan you can choose to allocate your invested money into different fund options, including equity funds. Thus, your premium automatically creates a systematic investment plan to an equity fund, which in turn creates the rupee cost averaging for you.

Using Systematic Transfer Option (STO) for RCA

You can use the systematic transfer option available in online ULIP plans like Invest 4G from Canara HSBC OBC Life, in case you want to invest in any other modes than monthly. Systematic transfer option ensures that your money is invested safely and then transferred systematically to the selected equity fund in monthly SIP mode.

The only difference would be that even your parked money will keep on growing. Thus, instead of investing a fixed amount to the equity fund, the ULIP’s STO liquidates the total number of units in equal monthly parts. At the time of transfer, the ULIP will liquidate one part of units and invest the money into the equity fund.

For example, you want to invest Rs. 1 lakh a year in a ULIP plan and want to use the rupee cost averaging advantage as well. The entire investible premium will be first invested in a liquid fund, and then transferred to the selected equity fund in the following manner:

Month Liquid Fund Unit Price Unit Balance Transferred Units SIP to Equity Fund
1 10 10,000.00 833.33 8,333.33
2 10.1 9,166.67 833.33 8,416.67
3 10.1 8,333.33 833.33 8,416.67
4 10.15 7,500.00 833.33 8,458.33
5 10.25 6,666.67 833.33 8,541.67
6 10.25 5,833.33 833.33 8,541.67
7 10.3 5,000.00 833.33 8,583.33
8 10.4 4,166.67 833.33 8,666.67
9 10.4 3,333.33 833.33 8,666.67
10 10.5 2,500.00 833.33 8,750.00
11 10.6 1,666.67 833.33 8,833.33
12 10.65 833.33 833.33 8,875.00

Table 1: Figures in the table does not account for the regular or initial expenses on the policy

As you can see in Table 1, your SIP amount to the equity fund keeps growing with the growth in a liquid fund. However, since the growth in liquid fund NAVs is usually nominal, this increment does not affect the rupee cost advantage much.

Although, if you invest in monthly mode, your monthly instalment into the equity fund will be exactly the same. The systematic transfer option is better than investing your annual premium directly into the equity fund.

Safeguarding Your Corpus from Equity Investment in ULIPs

While SIPs and rupee cost averaging do reduce your risk of investing in equity markets, your entire portfolio still remains in an equity fund. Thus, as you approach closer to your financial goal, you can change your strategy to start a reverse transfer.

At the beginning of the investment, you had transferred the funds from liquid fund to equity fund systematically. Withdrawing from the equity market should also be a disciplined systematic approach. Instead of withdrawing your entire equity portfolio in one instance, let your portfolio subside over time.

Invest 4G plan offers an automatic portfolio management option specifically for this purpose – safety switch option.

If you select safety switch option in your Invest 4G ULIP investment, the plan will automatically start moving your equity fund units to liquid fund. However, this movement happens over a period of four years, in the same manner as STO.

So, in the last four policy years, the fund will stop investing any new funds into equity. It will only move the existing equity corpus to liquid fund. Any new premiums will also go to the liquid fund and stay only there.

The purpose of this strategy is to safeguard your accumulated wealth from market risks when you are too close to your financial goal.

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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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