Guaranteed plans will give lower returns than FDs, debt funds

Life insurers are launching these again. Invest if you are conservative

Last month, two life insurance companies launched plans that offered guaranteed savings and income — SBI Life Insurance's Smart Guaranteed Savings Plan and Max Life Insurance's Guaranteed Income Plan. But equity and debt markets are giving good returns. Should you buy such plans that deliver lower returns? Is the benefit of life cover attractive enough to settle for lower returns for a guarantee?

According to Prakash Praharaj, founder, Max Secure Financial Planners, the current guaranteed savings and income products have to invest in government and other fixed-income securities, in line with Insurance Regulatory and Development Authority (Irda)’s norms. Additionally, these have to be loaded with guarantee cost and, hence, cannot offer better returns than endowment products.

"Guaranteed plans offer insurance against loss of portfolio. This calls for a specific portfolio allocation strategy, which could have an added cost," he said.

Both these plans will invest a large share in government securities, with a smaller share in corporate bonds and fixed deposits (FDs). SBI’s plan offers guaranteed addition of bonus of 5.5 per cent (for annual premium under Rs 30,000) or six per cent (for annual premium over or equal to Rs 30,000). These are payable on maturity of the policy, with basic sum assured or on earlier death of the insured with sum assured on death.

"It is true over the last few months both equity and debt markets have given good returns. Besides, there is a general outlook that equity would outperform any other asset class. However, there are risks and volatility in equity investments. Hence, people are careful in choosing their asset allocation, based on their risk appetite and experience," said Sanjeev Kumar Pujari, executive director, actuarial and risk management, SBI Life Insurance.

Since these are money-back plans, they provide lower returns compared to fixed deposits or debt funds. The only advantage is these provide a return coupled with life cover, says S Sridharan, head, financial planning, FundsIndia.com. "One should not mix insurance and investment. One should have adequate life cover using a pure term plan and invest in better debt/equity-based investments based on their risk profile," he said. Max’s plan has a six-year premium term and a 12-year premium paying term. It guarantees monthly income for 10 years after the policy term. After five years, the income doubles. The death benefit in case of the 12-year policy term is 18.5 times the premium and in case of the six-year policy term it is 12.75 times the premium. By regulatory requirements, the death benefit has to be 10 times the premium paid and most traditional plans stick to this.

Renjith R G, national head, distribution, Geojit BNP Paribas, said in the case of Max Guaranteed Income Plan, the returns for the 12-year policy term can be around 4.6 per cent, which is normally much lower compared to other instruments even net of tax. However, there is a life insurance benefit, which is not offered by other fixed income products.

But a Max Life spokesperson said, "Policyholders are willing to trade off between a lower certain amount versus a higher unpredictable amount."

Irda had banned the earlier version of guaranteed plans because of mis-selling. "In the earlier version, too, portfolios were heavily skewed to debt closer to maturity. While this guaranteed the net asset value, the returns on a compound basis never exceeded those of fixed-income securities," Praharaj said.

ALSO READ: Insurers shift to non-guaranteed products

ALSO READ: Looking to phase out insurance plans?