Happy with low yields? Go for assured return policies

This is the third of a four-part series on how to strike the best deals in auto and home loans, fixed deposits and insurance products with assured returns.

When investors make money, they want to make a lot more. But when they lose money, they scramble to preserve whatever is left. Taking a cue from this basic investor psychology, life insurance companies have launched products based on guaranteed return funds, also known as assured return policies.

Life Insurance Corporation (LIC) pioneered these products with its Jeevan Astha scheme. Though LIC could not meet its target of Rs 25,000 crore, the insurer did manage to sell policies worth Rs 10,000 crore in just 45 days.

The state-run insurer’s success compelled other life insurance companies to launch similar schemes. Many of these were open only for a short period and are closed now.

Though there are a still few insurers that are offering similar schemes, like Reliance Life Insurance with its Guaranteed Return Plan Series I policy. Even IDBI Fortis Life Insurance markets Bondsurance.

Then ICICI Prudential Life Insurance is also in the fray, but its scheme is slightly different. Rather than creating a policy with guaranteed returns, the insurer has started a Return Guaranteed Fund (RGF) series.

All these polices are closed-ended, single premium plans. While Reliance Life Insurance has a five-year plan, IDBI Fortis’ policies have a tenure of five as well as 10 years.

ICICI Prudential’s Product Head Pranav Mishra feels that investors’ approach to investments has changed. During the stock market bull run, investors’ first preference was for returns. Now they have changed their preference for safety first, then liquidity and returns – in that order. This is also known as an ‘SLR’ approach to investing.

“We have collected over Rs 800 crore in the three series of the RGF funds,” Mishra said.

Reliance Life Insurance promises 6.85 per cent returns on the amount invested. This is after the company deducts all the charges pertaining to policy administration, premium allocation, mortality and fund management.

The minimum sum assured is 125 per cent of the premium and a maximum of five times of the premium. The minimum premium to buy the policy is Rs 35,000.

There is no cap on the investment amount. So, if a 35-year-old invests Rs 1 lakh in the policy, the guaranteed return at maturity is Rs 1,27,800. This means that the annual return is 5.03 per cent.

IDBI Fortis Life Insurance has given guaranteed return rates for different age groups. For instance, if someone aged between 8 years and 32 years needs Rs 1 lakh on maturity, the premium would be Rs 80,372.

This translates into a compounded annual return of 4.47 per cent. For persons in the 33-37 age group, the returns are around 4.29 per cent. Basically, the returns reduce as the age group increases.

IDBI Fortis also offers a discount on the premium if the amount is above Rs 1.5 lakh. For a five-year policy, between maturity benefit of Rs 1,50,000 and Rs 3,99,999, the insured can pay 2 per cent less premium. The discount gets bigger as the maturity amount increases.

ICICI Prudential Life Insurance does not have a policy that ensures returns. Instead, the company has started the RGF series that can be invested in through a dozen existing policies.
 

PROVIDING COMFORT
Policy	Tenure (yrs)	Sum assured (Rs)	Premium  (Rs)	Returns* (%)	Minimum maturity (Rs)
IDBI Fortis Bondsurance	5	4,05,325	81,065	4.29	1,00,000
IDBI Fortis Bondsurance	10	2,83,580	56,716	5.94	1,00,000
Reliance	5	3,91,825	78,365	5.00	1,00,000
* for a 35-year old

For instance, a person who wants to invest for retirement subscribes to the firm’s LifeTime Super Pension policy. If he wants to invest in the RGF series, only the first year’s premium will be invested in this fund.

Next year onwards, the investor will have to choose from funds available then. The money invested in RGF is locked for a five-year tenure.

The latest fund in this series, RGF IV, is open for investments till April 29. The returns are at 7.42 per cent. It will be lower if you calculate the returns on the entire premium amount due to the deductions. In fact, this is true for all the guaranteed return policies. As the age of the insured increases, so does the mortality charges.

Investment advisers, hence, believe that a person is better off putting the money in a fixed deposit or an income fund.

“The returns will be much higher. For life insurance needs, one should opt for a term plan only,” said Kartik Jhaveri, director of Transcend Consulting, a wealth management firm.