Product Review. Guaranteed, but low returns

Does the market volatility make you anxious about the future? There are some investment products that can help protect your capital and give small returns.

Life insurers’ guaranteed monthly income plans are one such. Unlike annuity plans where the monthly pay-out is taxed, the income the policyholder receives here is tax-exempt.

Tata AIA recently launched the Guaranteed Monthly Income Plan, a non-linked, non-participating life insurance plan that offers guaranteed monthly income for 24 years from the date of expiry of the policy term. This is the longest term for which any insurance company offers guaranteed return. A review of the plan.

What’s on offer?

Tata AIA’s Guaranteed Monthly Income Plan offers the option to choose a premium-paying term (or policy term) of either of 5/8/12 years with an income term for 10/16/24 years correspondingly. A guaranteed monthly income is paid during the income term starting from the end of the first month after the policy period.

The guaranteed monthly income is a percentage of the premium paid, depending on the age at entry and the chosen policy term. It ranges from 8.35 per cent (for a 55-year-old individual choosing a 12-year policy term) to 13.03 per cent (13-year-old and a five-year term policy). On the death of the policyholder, the sum assured is paid. If death happens during the income term, the future guaranteed monthly income is paid to the nominee. The nominee will be given the option to receive the commuted value of the monthly income payable as lump-sum (discounted at 7.5 per cent per annum).

The product offers three riders to enhance risk coverage. One, the accidental death and dismemberment rider, which ensures protection of one’s family by paying his/her nominee an amount equal to the rider sum assured in case of accidental death.

Two, the waiver of premium plus rider, which provides for the waiver of all future premiums of the policy in case of death or while the proposer is totally and permanently disabled. Three, the term rider, which pays an amount equal to the rider sum assured in the event of untimely death of the insured.

Our take

Clearly, this is not a plan for investors eyeing returns. It is for ultra conservative investors looking at capital protection and who don’t want to take the risk associated with market-linked products.

For someone aged 35 years and investing ₹1 lakh in Tata AIA Guaranteed Monthly Income Plan for 12 years and taking an income ₹1,12,800 annually (₹9,400 monthly) for 24 years, the IRR works to around 4.8 per cent. Shorter the income term you choose, higher the IRR; it may not be over 5 per cent in any case.

The returns are low because there is a cost for the guarantee. Also, unlike endowment plans where the maturity amount is given lump-sum (where IRR works out to 5.5-5.8 per cent), here, the pay-out is monthly. So, the corpus that generates return for you is lower to that extent, and, hence gives lower return.

Generally, equity is the best option for investors who want to accumulate wealth in a time-frame of 8-12 years.

Risk-averse investors can consider Public Provident Fund (maximum investment in a year is ₹1.5 lakh). The fund will be locked for 15 years, but you can withdraw (partially) after the seventh year. It enjoys EEE status (tax-exempt on investment, tax-exempt on return and tax-exempt on maturity proceeds). The rate of interest (with effect from October 1) is 8 per cent; this is reset every quarter.

At maturity, the corpus accumulated can be invested in an annuity plan to draw regular income. The only pain-point here is that the income received by the annuitant is taxable. Even so, higher rate and an EEE status makes PPF a good option.

That said, if you have exhausted your limits under PPF or are looking at shorter term of say, five years, for building your corpus, then you can consider insurance products with guaranteed returns that insulate you from market volatility. Tata AIA Guaranteed Monthly Income Plan is then a good option.

COMMENT NOW