Low returns, but steady

Buyers of traditional insurance products — endowment and money-back policies — could soon be flooded with options.

Insurance companies, which have been unable to launch new investment-cum-insurance plans, better known as unit-linked insurance plans, following the turf war between the Securities and Exchange Board of India and the Insurance Regulatory Development Authority, are launching a number of traditional products to attract customers.

Some recent launches are Bajaj Allianz (BA) Invest Plus Premier, Birla Sun Life (BSLI) Bachat Endowment Plan, Reliance Life (RL) Traditional Investment Insurance Policy and Reliance Life Traditional Golden Years Plan.

The RL Traditional Investment Insurance Policy is the third addition to the traditional products portfolio of Reliance Life. Malay Ghosh, executive director and president, RL Insurance, said, “The transparent cost structure of the policy is an attractive feature for customers.”

The unique feature of the product is that it offers a fixed rate of return – a number which will keep changing every year. This year the rate of return will be 7.75 per cent. The next year, a new rate will be announced depending on market conditions and the interest rate scenario. The only assurance: The return will not fall below the savings deposit rate, which is 3.5 per cent at present.

In addition to guaranteed returns, the sum assured in case of RL Traditional will be 7.5 times the premium paid in the first year. There will also be riders that one can add by paying extra.

The sum assured, however, will be inconsequential once the accumulation account amount touches the sum assured — a common feature of all traditional insurance products.

The costs include an allocation fee of 30 per cent in the first year and 5 per cent in subsequent years, which is deducted from the premium paid.

Besides the allocation fee, mortality rate (charged per Rs 1,000 of sum assured), policy administration fee (Rs 40 per month) and account administration fee at the rate of 1.25 per cent per annum will be charged.

Therefore, if an individual plans to invest the minimum regular base premium of Rs 10,000 this year, Rs 3,500 will be deducted as allocation and policy administration fees.

The rate of return offered is not very competitive compared to other instruments such as the Public Provident Fund, which gives 8 per cent and has negligible costs.

Does it make sense to invest in this or similar policies? Financial planners would most probably say no. That’s because the rate of return is quite low. Also, the sum assured is not very high. In comparison, a 30-year-old can buy a 20-year term plan with a sum assured of Rs 20 lakh for a premium of Rs 4,700.

Govind Pathak, director, Acorn Wealth, said, “For adequate insurance, a simple term plan can be sufficient and a more cost-effective option. And for investment, one can always look for multiple options which will assure higher returns, such as the PPF on the debt side.

On the equities side, there are many more options like mutual funds and stocks. This combination would possibly give higher returns as well as a larger life cover than the Reliance traditional policy.