Beware of banks' guaranteed plans

If you also have a large amount deposited in your account, then, your bank manager or a staff might sell investment products. They may tell you about various investment schemes. In fact, banks now have big sales target. These people get a part of their salary only when they complete the sales target. To achieve this, they convince customers to invest in bank FDs, mutual funds, and insurance policies. However, nowadays,  banks mostly emphasise on selling guaranteed insurance plans.

According to the insurance industry, guaranteed insurance policies are a big part of their products. However, insurance companies do not disclose how much premium they are earning through which scheme. In comparison to other schemes, there is a significant increase in the premium of guaranteed plans.

Your relationship manager gets lot of commission on sale of insurance policies  when compared to  FDs and mutual funds. Although the commission rate on insurance policies varies, the commission on the first year’s premium for guaranteed insurance plans is up to 40 to 50 percent. After the second year, this commission decreases to 20 to 30 percent. The maximum commission on the annual corpus of a mutual fund is up to 1%. In fact, in March, the Insurance Regulatory and Development Authority (IRDA) removed the commission limit on specific products. Insurance companies can now determine the commission based on their management expenses. Insurance companies are encouraging bankers to sell guaranteed insurance plans by offering them commission incentives.

Guaranteed insurance plans are investment options that guarantee you a certain amount of return along with insurance coverage. Most insurance companies in the country are selling such plans. A fixed amount has to be deposited as premium every year for a predetermined period. In addition, the insurance company guarantees you a predetermined amount along with insurance coverage. The policyholder can choose to take this amount in lump sum or in installments.

Tax and investment expert Balwant Jain says that people associated with banks and insurance companies will sell you the product in which they are earning more. Bankers get a bumper commission in guaranteed income plans. That’s why they are pushing hard to sell such types of policies. According to Jain, one should always keep his insurance and investment separate. Investment can be broken at any time. Take a pure term insurance plan with coverage of up to 15 times your annual income. Invest the remaining money in mutual funds through SIP. Guaranteed income plans are not a good option for investment.

Guaranteed income plans may sound very attractive when you hear for the first time but annual return is around 5-6 percent, which is not effective in beating inflation. If your bank manager also asks you to buy such a policy, then don’t succumb to the pressure. It is necessary to do profit and loss analysis before making any decision. It is better that you consult your financial manager on this matter.