What is premium redirection in ULIPs?

Feb 07, 2018 | 2 years ago | Read Time: 3 minutes | By iKnowledge Team

Premium redirection means allocating the funds from one unit to another either partially or fully.

Many times, in life, we wish we could go back and change the way things panned out. At other times, we learn and plan to implement changes in future actions. Such retrospective and prospective changes are a part and parcel of life. Even in your money matters, changes are constant.

Take the example of your investments in Equity and Debt markets. In some market conditions, you allocate more investments in Equity. In other conditions—like when interest rates are on the fall, you prefer to invest more in Debt.

Flexibility, thus, is an important characteristic of your investments. This is one reason why Unit-Linked Investment Plans (ULIPs) turn lucrative. They provide a cost-effective way of entering the equity and debt markets. And their features like the fund switch and premium redirection options help you switch between markets and effectively manage your returns.

Retrospective and prospective changes

Switches are options given to policyholders of ULIPs to move their investments from one fund to another, within one plan. You can transfer units fully or partially between fund options — equity, debt and equity to debt. Meaning, you can instruct that all your prior investments be rebalanced, or you can ensure that only the fresh investments in the future be changed. The former is called a Fund switch; the latter is called premium redirection.

In a fund switch, you change the funds in which existing units are held. For example, you allocated 40% of your investments to debt in the past and 60% to equity. Now, you ask that 80% of your funds be switched to equity. So, the fund manager will move 20% of your debt investments to equity. This way, after the switch, 80% of your investments will be in equity and 20% will be in debt assets.

Premium redirection means changing the funds in which units are bought by future premiums. Let’s understand the example as earlier. A few months after instructing a fund switch, you expect that interest rates to fall. So, you want to capture the opportunity of making higher returns in the debt market. So, you instruct the fund to redirect 60% of your premiums towards debt. As a result, all the future premiums of your policy will be invested 60% in debt and 40% in equity. Your existing units, meanwhile, will not be shifted into a debt fund.

So why should you redirect your premiums?

While investing, often you may not want to redeem older investments. They continue to be lucrative or give consistent returns. At the same time, you may want to explore newer opportunities. Let’s take the example of Stock A that you bought for Rs 50 apiece 10 years back. It is still a good company. You expect the price to rise to Rs 5,000 apiece in the next 5 years—up from the current price of Rs 3,000. This investment is lucrative because you bought it at a cheap rate. A new investor, meanwhile, may not consider this stock because of its high current price. They may prefer Stock B that is sold cheap today at say Rs 100 apiece. If you too were to invest fresh in the market (without selling off older stocks), you too may prefer Stock B.

Similarly, you may have existing investments in Equity that you purchased at the right time. It’s still lucrative today. You may not want to sell it. At the same time, you may want to invest fresh in the Debt market.

At such times, you don’t opt for the fund switch option. You opt for the premium redirection option. After all, there are no loss-making funds to redeem. You are just slowly rebalancing your portfolio with an eye on the future.

Conclusion

Markets go through bull and bear trends. So why should your investments be left constant? With premium-redirection option, you can manage your ULIPs as per the changing needs of the market. Of course, remember, it requires expertise to correctly time the markets. Your risk appetite, age, goals and dependents are the other factors to consider before switching. So, consult your financial advisor or the fund manager before you redirect your funds.

To know about AegonLife’s life insurance products like term insurance plans, visit our home page.


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