Decoding traditional life insurance policies
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Kotak Premier Income Plan by Kotak Mahindra Old Mutual Life Insurance Ltd, is a bundled policy that offers insurance as well as investment. The plan is designed to give fixed income payouts to the policyholder. As it’s a participating plan, the maturity corpus will depend on the bonus that the policy generates. Let’s understand the plan in detail.
The policy term is divided between premium-payment term and the payout term. The premium-payment term is longer than the payout term by a year. So, if you choose a premium-payment term of 12 years (maximum for the policy) you get a guaranteed annual income for 11 years. The amount of guaranteed income depends upon the premium payment term chosen. So, for a premium-payment term of 12 years you get guaranteed annual income, which is 113% of the annual premium, for 11 years. For a premium-payment term of 8 years (the shortest premium-payment term for the plan) the guaranteed annual income for 7 years comes to 103% of the annual premium.
Then at the end of the policy term—premium payment term plus payout term—the policy gives a lump sum. This maturity corpus is the accumulation of all the bonuses that accrued during the policy term. Being a participating plan, this policy will declare a bonus at the end of each year, depending on the performance of the participating fund. The bonus is declared as a percentage of the sum assured. The sum assured in this case is calculated on factors such as your age, policy term and annual premium. Once the bonus is declared it becomes guaranteed, to be payable either on death or maturity. The insurer may decide to give a terminal bonus as well.
In case of death of the policyholder during the policy term, the beneficiary will receive higher of 11 times the annual premium or 105% of the premiums paid till date, plus all the accrued bonuses.
This plan offers a better sum assured rate for women. Keep in mind that you don’t get the sum assured on maturity, but since the bonus is declared as a percentage of the sum assured a higher sum assured means a higher bonus. The policy also offers optional riders such as term insurance, waiver of premium benefit and personal accident insurance.
Calculating the returns
Suppose a 35-year-old male buys this plan for a 23-year policy term, for an annual premium of Rs1 lakh. The sum assured in will work out to be about Rs9 lakh. Policyholder pays annual premium for 12 years and from the beginning of 13th year he will get a Rs1.13 lakh per annum for 11 years. On maturity, assuming the participating fund grows at 8% each year, the corpus will be about Rs14.27 lakh. This is as per the illustration shared by the insurer which includes a terminal bonus. This is a net return of about 5.61%.
Should you buy?
The costs in this plan are competitive when compared to similar plans in the market, but overall this may not fit your money box. “This plan is aimed at combining two important financial goals of investment and insurance, but it doesn’t manage to achieve either effectively. The insurance cover is poor, at just 11 times the annual premium, and in terms of investments the costs in a bundled plan is very high,” said Nikhil Vikamsey, partner, Alpha Capital, a multi-family office. “Individuals will do well by keeping their risk manager (who provides insurance) and investment manager (who provides returns) separate,” he added.
The advantage of this plan is that it structures an income stream, but the trade-off is returns. According to insurance experts, traditional plans typically return in the range of 3-6%. You can consider other debt products such as the Public Provident Fund, which currently offers 8%, in the debt space to build a corpus first and subsequently structure an income stream.