In the last week of February, Life Insurance Corporation (LIC) rolled out a Bima Jyoti plan. The policy joins a long list of guaranteed traditional life insurance plans that are popular with those who seek some sort of guaranteed returns or regular income. In other words, they are non-linked, non-participating guaranteed savings products from life insurers that promise assured returns. Several life insurers including ICICI Prudential Life, Aditya Birla Sunlife, IndiaFirst Life and Bharti-AXA Life have launched such plans in the recent months. Are they any good?
The lure of guaranteed income…
Typically, these plans come with policy tenures of 10 to 20 years. Depending on the product structure, they offer a fixed lump-sum amount at the end of the tenure or ‘regular income’ pay-outs at pre-decided intervals. The pay-out amount depends on the premium that you pay. You can choose, say, a 5-10-year premium payment term. Let’s consider an example of a 35-year-old male paying Rs 1-lakh annual premium under ICICI Prudential Life’s non-par product. If he were to choose a premium paying term of five years and policy term of 10 years, he will receive Rs 7.42 lakh at the end of 10 years, as per the company’s website.
Returns are guaranteed, but you will have to make your own calculations to know the figures. “The IRRs (internal rates of return) offered by these plans to customers at maturity or the guaranteed income generated, vary between 5.50 to 6 percent. Such income is mostly tax-free and additionally offers insurance cover,” says Anil Kumar Singh, Chief Actuarial Officer, Aditya Birla Sunlife Insurance.
…and tax-free returns
Maturity proceeds – and any sum received under the policy – are tax-free. This combination can appeal to risk-averse investors, including high-networth individuals, who are likely to see value in the tax-exempt feature. “The prevailing environment of uncertainty and economic slowdown has made people increasingly conscious about the need to save, protect their lives and livelihood. In times of market volatility, customers tend to gravitate towards products that offer safety of capital and steady returns,” says Amit Palta, Chief Distribution Officer, ICICI Prudential Life Insurance.
Pankaj Mathpal, Founder, Optima Money Managers says that guaranteed traditional life insurance policies look attractive when compared to fixed deposits that offer pre-tax returns of around 5.4-5.5 percent for 5-10-year maturities. Five-year post office fixed deposits, which are also taxable, carry an interest rate of 6.7 percent. “The tax-free status is an added attraction,” he says.
Non-participating guaranteed policies are primarily targeted at risk-averse individuals looking for secure returns over the long-term. “They have a relatively low-risk appetite and prefer opting for long-term assurance with tax-free benefit payouts. These are among the few instruments available to retail investors that actually absorb the reinvestment risk in the long-run. Today, not many options are available that offer tax-free returns over 40 years, with an IRR of 5-6 percent,” says Sonia Notani, Chief Marketing Officer, IndiaFirst Life Insurance.
Surrender charges make premature withdrawals prohibitive
Although these plans come with tenures as long as 20 years and offer options of limited premium payments, the minimum term is usually five years, unless you choose the single premium option. If you wish to surrender prematurely, then exit barriers are steep.
If you were to surrender – that is, exit your policy prematurely – after paying two annual premiums, you will get 30 percent (the minimum guaranteed surrender value) of the annual premiums paid back. As per the Insurance Regulatory and Development Authority of India’s annual handbook of statistics 2018-19, the average 61st month persistency for the life insurance industry was just 38.22 percent. In other words, nearly 60 percent of the life policies were not renewed by year five, on an average.
Are there any better options, then? Check out the public provident fund (PPF), if your goals are several years away. The PPF comes with a lock-in period of 15 years, but offers 7.1 percent post-tax returns, besides partial, premature withdrawal options.
Life cover is small
Also, don’t be tempted by insurance-cum-savings-cum-tax-saving sales pitches by intermediaries. The life cover – that is, claim amount policyholder’s family will receive in case of her death – tends to be small. “It is best to keep insurance and investment needs separate. The life cover component in investment-cum-insurance policies is small and hence, inadequate. You will still have to buy a standalone term cover in any case. The returns rarely exceed 5-6 percent. If you have a longer horizon of over 5-10 years, you could look at investing in equities instead, provided you can stomach the market volatility in the interim,” says Kalpesh Ashar, Founder, Full Circle Financial Planners.
The life cover in such plans is 7-10 times the annual premium. Remember, if the cover is less than 10 times, your policy will not be eligible for tax benefits under section 10(10D), which makes maturity proceeds/any sum received under the policy is tax-free. Experts say that many high networth individuals who invest in these plans are unaware of this crucial detail.Only if you are a high networth individual sold on the tax-free feature, should you evaluate these plans, feel some financial planners. “Generally, such plans fail to meet the objective of insurance. But individuals in higher tax brackets can consider buying these plans as maturity proceeds are exempt from tax. Investors other than HNIs should avoid buying such traditional insurance plans,” sums up Mathpal.