Insurance plan

Things to consider before opting for a guaranteed insurance plan

Amid the uncertainties and low interest rate regime, many investors have turned to life insurance policies that offer pure protection and guaranteed returns, insurance industry executives say.

“There is a clear shift in consumer preference towards guaranteed insurance schemes as they offer principal protection and stable returns. In addition, it allows customers to largely eliminate the uncertainty of future income streams, and life cover provides financial security for the family, which is essential at the present time,” said Amit Palta. , Head of Distribution, ICICI Prudential Life Insurance. Co.Ltd.

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Photo by istockphoto; graphic: Paras Jain/Mint

For example, SBI’s Five-Year FD offers an interest rate of 5.40%, while HDFC Life’s Sanchay Plus-Long Term Income offers a payout of 6.04%. Additionally, absolute returns from an FD bank may drop after tax deduction depending on your slab rate.

However, there are a number of pitfalls in these insurance policies. Let’s take a closer look at these plans and see if you should invest in them.

WHAT INVESTORS GET

During the sales pitch, it is mentioned that these are guaranteed plans and not tied to market returns. This makes these plans much more compelling from a sales perspective.

Short-term interest rates have fallen over the past five years. However, long-term rates on instruments such as government bond yields have not fallen much.

“That’s why guaranteed return plans offered by insurance companies, where the underlying instruments are government bonds, have been able to offer better returns than FDs,” said Vivek Jain, chief investment officer. at Policybazaar, an online marketplace for insurance.

Additionally, since these plans are tax exempt, investors receive a tax benefit under Section 80C and even the returns are tax exempt under Section 10(10)D provided that the insurance cover is at least 10 times greater than the annual premium.

“So for investors in the 20% and 30% tax brackets, FDs offer after-tax returns of 4-4.5%, while these plans offer after-tax returns of 5-6%,” Jain added.

A major snag in the value proposition is the political term, which acts as a blocking period. The minimum policy term is five years, but these policies also tend to have longer terms. Failure to pay a premium can cause the policy to expire, costing you some or all of the money you’ve already paid as premium, although a recovery period of up to two years is generally offered.

WHAT THE EXPERTS SAY

Financial advisors say mixing life insurance and investing isn’t a smart way to manage risk and money.

“Insurance is a separate topic from investing and when looking at life insurance, the first thing to consider is term insurance rather than unit-linked insurance or endowment plans. “said Abhishek Bondia, MD and Principal, SecureNow.in, an insurance broker.

Also, because some of the money in these plans is earmarked for term insurance, returns are capped.

As things stand, returns of 5-6% may look attractive today, but that may not be the case in the future. Experts believe that sooner or later interest rates are bound to rise.

“As these are guaranteed plans, a lot of the money has to be invested in debt securities, and the rates are going to be locked in at current rates, which have been low for the past few years,” said Suresh Sadagopan, founder. , Ladder7 Financial Advisories, an investment adviser registered with Sebi.

One of the big drawbacks of a guaranteed return product is liquidity, as the money an investor will get back will reduce the gains made if they wish to redeem the product.

Who does it work for?

However, according to Sadagopan, investors who have a very low appetite for risk, a long time horizon, do not want volatility and want to know the potential returns in advance can invest in these plans.

From a tax perspective, High Net Worth Individuals (HNIs) may find these schemes lucrative.

“If an HNI investor is looking for a 6% tax-free interest in guaranteed insurance schemes, he should look for instruments that offer an 8-8.5% payout to bring the tax payout type up to 6% after tax. . So there may be merit to these plans for ultra HNI clients, given the interest rate scenario,” said Kirtan Shah, Chief Financial Planner at Sykes and Ray Equities (I) Ltd.

Shah added that insurance as an investment is not something people should consider because investors won’t get anything more than 5-6%. Additionally, if an investor ties up their money for a longer period of time, they may miss out on any rate increases that may occur in the future.

Best options

If you opt for these products solely because of better returns or tax advantages, there are better alternatives.

For retail investors with a low-risk profile, there are options such as the National Savings Certificate (NSC), Post Office Monthly Income Scheme and RBI Floating Rate Notes. While the NSC currently offers yields of 6.8%, post office programs have a payout of between 4% and 6.7%, while RBI bonds offer an interest of 7.15%.

For a 35-year-old retail investor, the goal of debt investing should be strategic, not revenue-generating. A moderately risky investor should allocate 60% to equities and the rest to fixed income investments. However, investors should not opt ​​to lock their investment in the long-term debt portion.

An investment strategy for people in this age group could be highly rated non-convertible bonds or debentures or debt mutual funds.

“Potentially you can get better returns from these instruments and you don’t have to lock in investments for a long time. As interest rates rise, there may be more opportunities,” Sadagopan said.

For seniors who are looking for a stable income, have a low appetite for risk and need to protect their capital, the savings scheme for the elderly and Pradhan Mantri Vaya Vandana Yojana are better bets as they both offer returns of 7.4%.

The mantra for getting maximum returns in a guaranteed product is to invest at an early age and stay invested for the long term, but look at the liquidity factor, risk profile and interest rate returns while investing.

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