Guaranteed return plans see renewed interest

While they offer assured returns, you may miss out on any upside when interest rates rise

Insurance is meant to provide protection against risk. That is why products offering guaranteed returns are popular, as they offer the protection of a stable income. Given that last year equity markets were volatile and interest rates were in a downward trend, insurers saw renewed focus in such policies. 

Guaranteed return plans that offer an assured income are a win-win for both the insurance company as well as the customer, says Karthik Raman, chief marketing officer, head-products and strategy, IDBI Federal Life. Customers get returns that are guaranteed irrespective of whether interest rate movement or equity markets. For companies the advantage is customers stay with the policy for a long time. 

Guaranteed return plans could be either participating or non-participating plans. In a non-participating plan, the guaranteed portion will be lower, because there may or may not be bonuses, depending on the investments made by the company. 

In non-participating plans, the investment is only in long-term government securities, where the return is guaranteed by the Government of India. In participating plans, bonuses depend on the investments in debt or equity funds. Hence they can fluctuate and are not guaranteed. 

All life insurance companies offer such guaranteed return plans. The returns offered by guaranteed plans are effectively around five-six per cent and are tax-free. In comparison, bank Fixed Deposits offer seven-eight per cent pre-tax returns for a period of five years. . 

“Post-demonetisation interest rates in India will not remain high for a long time. Even if interest rates will not go down significantly due to structural reasons, we will not return to the era of very high interest rates. In this backdrop we focused on a couple of our products that offer guaranteed returns and saw the highest ever growth in sales in December. The returns from such plans are not very high but in volatile times it is useful for customers,’’  Pankaj Razdan, MD and CEO Birla Sun Life Insurance. 

According to Santosh Agarwal, Business Unit Head- Life Insurance at PolicyBazaar.com, insurance companies are currently marketing such plans because they know that the current returns will not be sustainable once interest rates fall further and they may have to withdraw existing products.  

The downside to guaranteed return plans is that is that when interest rates start firming up, you will not get the higher return, as the investment is locked into long term G-Sec at a particular yield. As against this, in a participating plan, if interest rate firms up you may get higher returns. 

“When interest rates are falling guaranteed return plans are more secure. In the last couple of years stock market has been pretty volatile. And for goals like children’s education, customs don’t want any investment to disturb the plan. Then these kind of guaranteed plans come in handy.