Know the perils of guaranteed return insurance plans

What do you understand by participatory and linked insurance policies? Here is what you should know about them.

Insurance policies become participatory when policyholders get a share of the surplus of insurers. As for linked products, policyholders get benefits determined by the value of underlying assets like equity or debt. But these guaranteed plans are non-participatory and non-linked products. Insurance companies provide guaranteed benefits when you buy these plans.

Guaranteed return plans are generally considered to be low-risk investments.

Venkatesh Naidu, CEO of Bajaj Capital, said, “While guaranteed return plans may offer a predictable, stable return, they may not offer the same potential for high returns as other investments, such as stocks or mutual funds. These plans may not be the best choice if you want a decent profit in future.”

Moreover, like every other insurance policy, there are mortality charges, policy administration charges (which varies depending on the insurer), premium allocation and partial withdrawal charges. Atri Chakraborty, COO of IndiaFirst Life Insurance Company, said, “There are no explicit charges as such. However, there are administrative and mortality charges, and charges associated with management of guarantees within the product framework.“

Besides generating low yields, these plans are unpopular for other reasons as well.

Rakesh Goyal, director of Probus Insurance, said, “When a policy lapses, the policyholder gets a surrender value if the premium has been paid for at least the first two years and just one premium in case of the single premium policy. While you can revive a policy within five years, no benefits are payable if the policy lapses.”

Do note that the surrender value is tax-free only if policyholders have paid the premium for the first two years of the policy tenure. Even for the single premium life insurance policy, the surrender value will be tax-free if the plan is in force for at least two years.

However, the proceeds will be taxable if the policyholder doesn’t meet the above criteria. The surrender value that the policyholder may get will not be tax-exempt under Section 10(10D) of the income tax act. The amount received will be treated as ‘income from other sources’, and taxed as per your existing tax slab. Moreover, claims made under section 80C will also get reversed, and you will have to pay tax on the deducted amount you claimed when the plan was active.

Mint take: You must always carefully review the terms and conditions of any guaranteed return plan before buying it, and check for the lock-in period and any surrender charges that may apply. This will help you to make an informed decision about whether the plan is a good fit for your financial needs.