Invest in an insurance plan and get 170% of your money back. Sounds too good to be true? It is. Stagger the figure over 10 years, and you merely get 5.45% each year. Account for the costs, and the return slip down to about 3%.
The Bajaj Allianz Life Insurance Co. Ltd’s latest 137-city Guarantee Express sales campaign promises fantastic guarantees. The company has included three insurance plans under its current campaign—Shield Plus, Max Gain and Invest Plus—with offers that seem difficult to resist. The return guarantees come along with both insurance covers and tax benefits. But put the numbers on an Excel sheet and the results are shocking. Shield Plus, a unit-linked insurance plan (Ulip) leading the campaign, claims to give 170% returns. But this is misleading because it is a point to point return over 10 years. This is against industry norms that use average annual returns. Average annual returns in this case are just 5.45%. Max Gain, another Ulip, guarantees the highest net asset value (NAV). True, but you may not always get equity returns. Instead, you get returns of a conservative balanced fund. Invest Plus, a traditional insurance plan promises a 7% return per annum. True, but this return works only for the current year. The company will announce this return each year and no promises that it will be 7%. We worked out the numbers to find the real story behind the guarantees.
Also See Behind the guarantees (Graphic)
What you get?
Shield Plus: It promises that a single premium investment of Rs1 lakh will become Rs1.7 lakh after 10 years and that is just a return of around 5.45%. Remember, this is the minimum you get back since the money will be invested in either debt or equity or both, your actual return will depend on the fund’s return.
Max Gain: This offers the highest NAV on maturity. You may understand that to mean that you get the upside of a full equity fund without the downside of risk. However, that is not entirely true. You would get this return only if the markets went only up. Each time the markets go down, the fund will sell equity to buy debt to assure the previous highest NAV. This means the debt part gets heavier and heavier, causing returns to get more moderate than a full equity allocation. So, the returns don’t really mirror the returns of the stock market.
Invest Plus: It promises 7% minimum returns per annum, but that’s not entirely true. This is a traditional endowment plan, structured like a Ulip. It deducts costs and invests your premium. This earns a rate of return that is declared every year by the company. The current rate of return is 7%. Says Akshay Mehrotra, head (marketing), Bajaj Allianz Life: “A 7% rate of return is only applicable for this financial year and not for the tenor of the policy.” What the company will declare in the next few years is a variable. On maturity, you get back the fund value and a percentage of the premiums you’ve paid. The reality: the only guarantee this plan offers is to pay back your premiums.
More fine print
First, if you die before the term of the policy, the guarantee does not work. The guarantees work only if the policy completes its tenor. And you live. Says Mehrotra: “These guarantees are linked to maturity benefits”. But isn’t insurance about death and planning for it?
Second, costs in the products are high. In case of Shield Plus, the minimum guaranteed value is a return of 5.45%, works out to about 3% after you deduct costs from the fund value. At a 10% return, the post-cost return is around 7%. Money Matters likes post cost returns at 8% and more on an assumed growth of 10%.
Three, these are thinly disguised investment products that compromise your insurance needs. Both Ulips offer only up to five times your premium as the death cover, that means a premium of Rs1 lakh will get you a cover of Rs5 lakh. Invest Plus does offer up to 20 times your premium as death cover but only if you invest for 20 or 25 years. Says Veer Sardesai, a Pune-based financial planner: “If a person needs only five times his premium as insurance cover then he doesn’t need insurance at all. Because he can manage that gap through his savings.”
What to do?
Guarantees are good but they need to be true. These guarantees are misleading and come at a cost that is hidden far under the surface of the glitzy ad blitz. If you want guaranteed returns with tax benefits, look at Public Provident Fund. If you have insurance needs, go for the simple and cheap term plans. Both give you the section 80C tax-break. And no heartbreak 10 year later.
Graphic by Yogesh Kumar/Mint