Personal Finance

Who said there are no guarantees in life?

Rajalakshmi Nirmal | Updated on May 19, 2019 Published on May 19, 2019

Non-participating insurance plans offer a guaranteed return of 4.5-6%, but if you exit early, you will lose money

If not with everything, at least with your investments, you can expect predictability.

While many brush aside ‘guaranteed’ products of insurers as ‘low’ return investments, in this article, we see how products in this category are actually attractive.

The non-participating traditional savings plans of insurance companies offer returns of 4.5-6 per cent and are tax-free.

Further, the advantage also comes from the fact that you can lock-in this rate for the next 20-30 years. There are no tools in the market today with assured return for such a long period of time. The recently-launched product under the guaranteed plans category — ‘Sanchay Plus’ from HDFC Life — gives about 6.3 per cent return under two of its plans — the highest in the market.

Bonus is not guaranteed

Every insurer has a bouquet of savings plans. You can’t make out the difference between guaranteed products and the rest from the name. For instance, a leading life insurer today offers 17 plans under the savings plans category with names like Guaranteed Monthly Income Plan, Monthly Insurance Plan, Money Back Plus, Smart Income Plus and Smart Growth Plus.

To know if a product is guaranteed, check if it is a participating or a non-participating plan. In participating plans, returns for an investor come from the ‘bonus’ component. The bonus is declared from the profits of an insurer and is not guaranteed. Sales brochures of these products indicate maturity proceeds, assuming annual returns of 4 per cent and 8 per cent. But many agents, today, mis-sell these to customers by saying that the 8 per cent return shown in the ‘benefit illustration’ is guaranteed.

It is actually only in non-participating plans that insurers guarantee returns upfront. These products offer income pay-outs from the end of the premium term. Until recently, the maximum return that guaranteed products from insurers were giving was 4.5-5.5 per cent, but now, HDFC Life’s Sanchay Plus offers 6.3 per cent IRR (Internal Rate of Return) under two of its plans - Life Long Income and Long Term Income, in case of 10-year PPT (premium payment term).

Guaranteed products

Every insurer has a laundry list of products under the savings category with many choices under ‘guaranteed’ products. Edelweiss Tokio Life Income Builder, Aditya Birla Sun Life SecurePlus Plan, Tata AIA Guaranteed Monthly Income, Tata AIA Smart Income Plus, Aviva Life New Family Income Builder and Max Life Guaranteed Income Plan, are a few. In all these plans, the basic structure is the same — you pay premium for 5/6/10 years and, at the end of the PPT, the income pay-outs start — either immediately or one/two years after the PPT and continue for 10/12/24 years. The income pay-outs are a percentage of the annual premium — generally 100/135/150 per cent of the premium. Some policies also make a lump sum payment after the last year of the pay-out.

On death during the policy term (which is equivalent to the PPT or PPT+1 or two years), the death benefit — that is, the sum assured under the plan is paid and the policy terminates, with no further benefits under the plan. On death after the policy term, though the SA (sum assured) under the policy will not be given, the nominee will continue to receive the pay-outs without a break.

If you are looking for a long-term plan among the guaranteed products, HDFC Life’s Sanchay Plus’ Long Term Income Plan should be your choice. It gives guaranteed income for a fixed term of 25 to 30 years depending on your choice of number of years of premium payment.

The pay-out term is less with others; with Aditya Birla Sun Life SecurePlus Plan, it is 12 years; with Tata AIA Life, it is 10/24 years; income term under Edelweiss Tokio Life’s Income Builder is a maximum of 18/20/23 years and with Max Life’s plan, it is 10 years.

All these products offer an IRR of 4.5-5.5 per cent on different combinations of PPT and PT (policy term). HDFC Life’s Sanchay Plus gives the highest return (IRR) of 6.29 per cent in its long-term income option (for a 30-year-old, paying ₹1 lakh premium for 10 years and drawing pay-out from the end of the 12th year to the 36th year end) and 6.34 per cent for the life long income option (for a 50-year-old paying ₹1 lakh premium for 10 years and drawing income pay-out till 99 years from the end of the 12th year).

At 6-plus rate of return that is tax-free, the HDFC Life Sanchay Plus plan is very attractive compared to bank FDs (where the post-tax yield reduces to 5-5.5 per cent or lower for those in the 30 per cent tax bracket). In PPF, while the interest is tax-free and the rate of return is 8 per cent per annum, it is revised every quarter. So, if interest rates go down, your deposit will earn a lower return.

The flip side

In the endowment plans of insurers, the insurance component is small. Even if you pay ₹1 lakh as premium, the SA (death cover) will be only about ₹10 lakh or so. So, if you are investing in a guaranteed-return insurance product, make sure you supplement it with a term life cover.

The other very important aspect is with respect to pre-mature exits.

There is, of course, a guaranteed surrender value (GSV) when you exit pre-mature, but for the product to acquire GSV, you should have paid premium for at least two/three years. And, from the year the policy acquires a surrender value too, you will get only a small portion of the premium paid if the surrender was made in the initial years. In HDFC Life’s Sanchay Plus itself, for instance, you will get only 30-50 per cent of the premium paid if you exit in the early years (before 5 years). So, don’t get lured and commit to higher sums. If you are not sure of paying huge sums as premiums every year, limit your investment.

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