Traditional insurance plans better for risk-averse investors, say experts

If you can stomach volatility, you can earn more from equity funds than the 5-6% these plans offer

Since we are in the midst of peak tax-saving season, insurance agents are doing their best to sell to people who need a tax-saving product to fulfil their Section 80C commitment. With the commissions on unit-linked insurance plans (ULIPs) having come down, agents now push traditional plans. Low returns from bank fixed deposits (FDs) have also led investors to look for other guaranteed-return alternatives.

Guaranteed return over long term

Two types of traditional plans exist: non-participating (non-par) and participating (par). The benefit of non-par plans is that the buyer knows in advance how much premium he has to pay and the return he will get.

“In these plans, the insurer provides the assurance of a guaranteed return over a very long period, so the customer is safeguarded against reinvestment risk,” says Sonia Notani, chief marketing officer, IndiaFirst Life Insurance Company.

Today, says Notani, there are traditional plans that offer guaranteed returns to customers till the age of 99. Most products available to retail investors today guarantee returns for barely 10 years. Notani informs that a non-par product could offer a 30-year-old an internal rate of return (IRR) of around 5 per cent today.

Another type of traditional plan is the par plan. Here, the insurer provides capital protection, and in addition, pays bonuses that depend on its investment performance. The internal rate of return (IRR) for a 30-year-old could be around 6 per cent in par products, according to Notani.    

Return is linked to age

Age affects the IRR of such products.

“If a 50-year-old buys a non-par product, his IRR could be as low as 3 per cent in some policies,” says Deepesh Raghaw, founder, PersonalFinancePlan, a Securities and Exchange Board of India-registered investment advisor.

Make sure the sum assured is at least 10x the premium.

“If it is lower, the maturity amount will become taxable,” says Raghaw.  

The sum assured on these plans may not fulfil your need to have an insurance coverage equal to at least 10-15x your annual income.

Who should invest?

Risk-averse investors, who are unable to tolerate equity-market volatility and pull their money out when the markets correct, may consider these plans. Some people lack the discipline to save regularly. For them insurance premiums lead to enforced saving. Also, for many people, the bulk amount paid at maturity could prove useful in fulfilling an important goal.

“People who do not understand the capital markets, want safety of capital, and lack access to good advisors may go for these products,” says Raghvendra Nath, managing director, Ladderup Wealth Management.

Some high networth individuals, too, are buying non-par plans nowadays.

“They believe interest rates could decline as the Indian economy develops, and hence want to lock into current rates,” says Notani.

“Compared to a 5-5.4 per cent FD rate offered by State Bank of India that gets taxed at slab rate, a tax-free, guaranteed return of 5-6 per cent will appeal to many,” says Nath.

Not everyone agrees with the view that rates will head downward.

“It is hard to predict interest rates 25 years later. There could be cyclical upticks. If we remain a high-inflation economy, we may not see a secular decline in interest rates,” says Raghaw.

Investors who understand the capital markets or have access to an advisor may avoid these products and opt for a combination of term plan and equity mutual funds.

“With a 10-15-year horizon, you could earn a double-digit return from equity funds,” says Nath.

The risk of loss of capital in equities gets nullified after around seven years.