Photo: iStock
Photo: iStock

Should you invest in a long-term insurance product that gives guaranteed returns?

Given an investment return of about 5%, financial planners advise caution and do-it-yourself approach.

The latest life insurance product by Tata AIA Life Insurance Co. Ltd, called the Tata AIA Life Insurance Guaranteed Monthly Income Plan, is a non-participating traditional insurance policy that offers guaranteed investment benefits. Not just that, the guaranteed benefit in this plan is designed in a way that it gives you a guaranteed monthly income for a defined number of years.

The proposition of guaranteed income looks attractive, but there is one major pitfall with long-term guaranteed products and that’s the rate of investment return. Read on about the product to understand why.

What do I get?

There are three premium payment term (PPT) options in the policy with a corresponding income payment term. For instance, the shortest PPT in this plan is five years with an income payment term of 10 years; the longest PPT is 12 years with an income payment term of 24 years. This means you pay premiums for 12 years and get a monthly income for 24 years. Given that the income term is twice of premium payment term, don’t get taken in by extra payouts. You will have to understand the net return from the policy.

The policy will calculate your monthly benefit depending on the PPT and the premium that you choose to pay and your age at the time of buying the policy. The annual income ranges from 8.35% to 13.03% of the total premium paid and gets divided by 12 to reach the monthly income figure. Further, if you choose to pay a higher premium, the policy boosts the monthly income by a certain percentage. 

Let’s understand this through an example. Suppose a 35-year-old male pays a premium of 1 lakh per annum for a PPT of 12 years. At his age, the policy will pay him an annual income at 9% of the total premiums paid.

But since the annual premium is high, the policyholder is entitled to a further booster of 0.4%. In all, the policy guarantees 9.4% of 12 lakh or around 1.13 lakh per annum for 24 years or 9,400 every month.

In terms of insurance benefits, the sum assured under the policy is 11 times the annual premium. In the example above, the sum assured will come to 11 lakh. On death of the policyholder anytime during the PPT, the policy will pay the higher of the sum assured or 105% of all premiums paid till the time of death.

You can also take lump sum payment instead of monthly payouts. Even if the policyholder dies during the income payment term, the monthly benefits continue to accrue as planned and the beneficiary has the choice to take lump sum payment. 

How does it work?

In the example taken above, suppose the 35-year-old male buys the policy with a PPT of 12 years and an annual premium of 1 lakh, he is guaranteed an annual payout of 1.13 lakh per annum for the next 24 years. A quick internal rate of return or IRR of the annual payout shows that the policy returns 4.86%. 

“The returns from this policy will typically be in the range of 4.5% to 5% but it’s guaranteed," said Samit Upadhyay, chief risk officer, Tata AIA Life.

What you should do

According to Upadhyay, the policy needs to be seen more in the space of a pension product. “Unlike annuities that are taxable, this pays a fixed guaranteed benefit every month and this money is tax free. So, with a higher policy term, it could act as an ideal pension product," he said. 

However, given an investment return of about 5%, financial planners advise caution and a more do-it-yourself approach. “Taking a term plan and investing in balanced funds can give you at least 30% higher monthly income. The fact that insurance companies can ‘guarantee’ income helps sell such products to customers," said Shweta Jain, CEO and founder, Investography Pvt. Ltd. 

“Further, lack of liquidity should be factored in by investors in these products," she added. Traditional insurance plans come with a steep exit load, if the investor decides to quit midway.

If you decide to go ahead with this plan because it offers guaranteed return, remember you are settling for a lower return. Avoid parking a huge sum of money.

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