However, its actually NOT "ALL" bad. As I mentioned before, one would really need to analyse with the real numbers and not just depend on a bare concept. Lets look at this particular case.
Current way of deducting units is GOOD in an uptrend market. Basically you buy more units initially and then deduct less units as the market price goes up. However it is VERY BAD in a down trend market.
And ofcourse the insurance company HAS TO assume their investment would continously be going up when they are convincing you to buy it. That is why they calculate the units the way they are !
You may think the insurance company should deduct the money first and then only invest to the units. That way it would be like Dollar Cost Averaging, isn't it ? Well ... slightly better but still NOT stable enough !
If you do that, you would just get a similar effect except it is BETTER in down trend market but WORSE during up trend.
Refer to above summary table, you can see that during up trend its better to deduct units to make payment; However during down trend, its better to make payment first and then buy the units. Either way, you are still widely open to market risk.
The TRUE dollar cost averaging application in this situation is to invest your money monthly and NOT yearly ! Since the insurance company is going to deduct the insurance coverage fee monthly, there is really no reason for you to prepay your premium without interest.
In short, when you buy an investment link policy, you should set your payment mode to Monthly ! That way, it doesn't matter if the insurance company deduct the units first or pay the coverage first, you would most probably always get the same amount of investment units !
In above example, you will always get 816.39 units no matter if the market goes up or down !
This example shows that Dollar Cost Averaging is a simple concept and easy to execute but sometimes can be overlooked and become very confusing. The 3rd part ( if ever published ) may explains why we have such confusion. Which venture a bit into the philosophical side of Financial Planning and Human Nature.
