Should you invest in guaranteed insurance plans?

The word “guarantee” generates a lot of curiosity among investors, especially during a low interest rate regime. Cashing in on the sentiments guaranteed insurance plans have become hugely popular in recent times. These are long-term plans where guaranteed return gets locked in at the time of buying the policy. The surety of stable income is what draws millions of investors towards such guaranteed plans. But are these guarantees good enough? How much do they exactly return? We have tried to evaluate how much they offer compared to other options available.

What are guaranteed plans?

These plans offer you a guarantee either in the form of a lump sum or regular income after payment of premium for a certain number of years. Under the lumpsum option, you pay a premium for a fixed term and then on maturity you are paid the guaranteed amount as an enhanced sum assured.

If you go for a regular income plan then a fixed payout is paid in yearly, half-yearly, quarterly or monthly instalments, as chosen by you at the inception of the policy. Generally, after the premium paying term, there is a gap of a couple of years before payouts start, which can go for as long as 25-30 years. For example, HDFC Life Sanchay Plus -Long Term Income option offers a guaranteed income for 25 years with a premium paying term of 10 years and a policy term of 11 years. The payout starts from the 12th policy year, which means 2 years of the waiting period in between.

Return from guaranteed plans

These plans also offer capital protection by returning the premium at the end of the payout period. The table below shows that on average these policies give a return of 5-6%  over the long term.

What to do?

Comparison with FDs:  Guaranteed plans seem to be a better option especially if these are long-term investments. The benefit of tax-free maturity gives them a huge edge over FDs where interest income is taxable beyond Rs 10,000. For conservative investors, it can be a good choice, but before getting swayed remember that these are regular premium payments and not one-time investments like FDs.

Comparison with annuity plans: The guaranteed plans qualify as an insurance scheme under the Income Tax Act because it offers insurance cover as well, which in turn allows cash flow to be tax-free. This lends them a huge edge over similarly structured deferred annuity plans where pension income is taxable. For investors in the higher tax bracket, a 5-6% tax-free return can be a good deal in the current market.

Comparison with mutual funds: Another one of the tax-efficient ways is investing in mutual funds. You can invest in a diversified scheme, as equities tend to give higher returns of 12-15% over the longer term. After accumulating lumpsum one can opt for a systematic withdrawal plan (SWPs) to create a regular stream of income from the funds accumulated. Moreover, SWP is a far more tax-efficient way to save your taxes over FDs. Similarly, debt fund investment based on the average 5-year returns of gilt funds and corporate bond funds has given an average return of 8%.

An individual needs to decide depending on needs and risk profile. For conservative investors, it can be a good option while for aggressive investors, equities tend to give higher returns over the long term period.