Guaranteed plans from life insurers could give better returns than FD


As interest rates on bank fixed deposits (FDs) have dropped to a decade low, life insurance companies are launching plans that offer “guaranteed” returns similar to that of a long-term deposit.

ICICI Prudential Life Insurance rolled out the Guaranteed Pension Plan on 18 December. Bharti AXA Life Insurance launched Guaranteed Income Pro on 16 December.

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Earlier in the month, Aditya Birla Sun came out with Life Insurance launched Assured Income Plus and IndiaFirst Life launched Guaranteed Protection Plan

In November, Aviva India started offering Aviva New Wealth Builder Plan and IDBI Federal Life Insurance came up with the Young Star Plus Plan. Both the plans have guaranteed payout options.

“As fixed deposit interest rates are low, there’s a need for products that can offer slightly better post-tax returns. Before buying, an individual needs to understand what are the returns on investment. If insurers are offering above 5%, they would be able to serve the current need of the market,” said Abhishek Bondia, managing director and principal officer, SecureNow.in, an insurance broker.

FLURRY OF PRODUCTS

Most life insurance products follow exempt-exempt-exempt (EEE) taxation. It means, there is tax benefit available on investment, there is no tax on accrual and when product matures. This is true where the sum assured is at least ten times that of annual premium.

Compared to post-tax returns of banks in the current environment, these products can give better returns for young policyholders – below 40. Returns are better for young policyholders as mortality rates – money that goes towards insuring the customer – are lower. For older customers, the mortality rates are higher and consequently, their returns would fall.

The long-term (5-10 years) deposit rates of State Bank of India is 5.4%. For a depositor in the 30% tax bracket, the post-tax returns would work out to be below 4%. In a guaranteed insurance plan, the returns are tax-free. If an insurance company is able to deliver above 5% returns in the long term, it would be attractive to traditional FD investors.

“Another reason insurers are coming out with such plans is the taxation season. In December and January, most companies ask their employees to fill up the investment declaration. People start investing and buying tax-saving products from December onwards,” said Mahavir Chopra, founder, Beshak.org, a research platform for insurance users.

Guaranteed income plans are traditional products. For agents selling them, they have a high commission. According to Chopra, it’s also possible that banks want to push such products to earn better commission as their core business (lending) is not doing well.

According to Prayesh Jain, lead analyst – institutional equities, YES SECURITIES, premium growth in the protection segment got a fillip from the price hikes implemented by the

companies. “This also drove VNB (value of new business) margins for most companies given that protection and guaranteed return products have higher margins when compared with unit-linked insurance plans (or Ulips) and par products,” he mentioned in a research note.

Calculating returns on your investment in a traditional plan is difficult for a layman. But before you buy, ensure that you are able to calculate them and understand the returns taking into account the mortality charges.

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