Home / Money / Personal Finance /  Long-term guarantees may not always work

A guaranteed return product never goes out of flavour, especially if it is from the stable of life insurance companies. One such guaranteed plan that was launched by HDFC Life Insurance Co. Ltd sometime back is called HDFC Life Sanchay Plus. In insurance parlance, guaranteed plans are called non-participating products as they guarantee the investment benefit upfront. HDFC Life Sanchay Plus bundles life insurance with guaranteed maturity benefits that you can choose to take either as a lump sum at the end of the policy term, or as periodic income for a certain number of years. Here are the details of the policy.

What do you get?

Sanchay Plus is an insurance-cum-investment plan that guarantees investment return upfront. Depending on factors such as age, premium and the premium payment term you chose, the policy promises a guaranteed payback at the end of the term. The policy designs this payback in four variants.

The first pays you a lump sum at the end of the policy term. The corpus is the sum of all premiums paid plus guaranteed accruals that take place towards the end of the premium payment term. These additions depend on your age and the premium payment term chosen.

The second version pays an annual income after the term for a certain number of years. The third version gives you annual income for life (till the policyholder is 99 years); the entry age, however, in this case is 50 years. The last version offers annual payment for longer tenures of 25-30 years. The last two options also return the premiums. The payouts are defined as a percentage of the annual premium and it varies as per the options chosen, age and term.

In terms of insurance benefit, on death of the policyholder during the term, the policy will pay the higher of 10 times the annual premium or 105% of the total premium paid or the guaranteed sum assured promised on maturity or death in addition to guaranteed accruals in the first option. In the case of periodic payout option, the death benefit would be the higher of the options listed above, but this list includes premium accumulated at a rate of 5% per annum. “We offer a slightly higher benefit if you buy this plan online. The benefits go up by 3% so the net return from the product will increase by 15-20 basis points," said Chinmay Bade, vice-president, products, HDFC Life Insurance Co. Ltd.

Graphic: Santosh Sharma/Mint
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Graphic: Santosh Sharma/Mint

How does it work?

According to the illustration mentioned in the brochure, if a 30-year-old chooses the first option, then for an annual premium of 1 lakh and for a policy term of 20 years and premium payment term of 10 years, the guaranteed sum on maturity will come to 10 lakh. The total accrued additions for this age group over the given premium payment term will be 1,400 per 1,000 sum assured on maturity. This would come to a total of 14 lakh. The maturity corpus, hence, would come to 24 lakh, which is a return of 5.72%.

In the second variant, for the same annual premium and age, but for a policy term of 13 years and premium payment term of 12 years, the policy will pay a guaranteed income that’s 225% of the annual premium from the end of the 14th year for 12 years. In this case, the annual payout will come to 2.25 lakh every year, and the net return is about 5.96%.

For the third variant, which works like a whole-life plan, the age at entry is 50 years. Again for an annual premium of 1 lakh, for a 50-year-old and for a policy term of 11 years and premium payment term of 10 years, the guaranteed payout till age 99 years will come to 100% of the annual premium which is 1 lakh per annum. Plus, at the end of the payout term or when the policyholder is 99 years of age, the policy will return 10 lakh. The internal rate of return in this case will come to 6.37%. The net return is similar for the fourth variant.

Should you buy?

Firstly, compared to other guaranteed products from the stable of life insurance companies, this product offers one of the highest guaranteed rates of return, making it a top-notch product in the space.

According to Bade, the product caters to the need of guaranteed income for various milestones in life which is ideal for risk-averse individuals but could also be considered by aggressive investors. “Individuals who invest in high-risk instruments can use this as a secured instrument where the interest rate risk can be transferred to an insurance company," he added. Suresh Sadagopan, founder, Ladder 7 Financial Advisories, said long-term income options can be looked into as one of the products in one’s retirement portfolio as they offer tax-free returns.

But with so many benefits packed into one policy, the product can be difficult to understand.

Before you decide if long-term guaranteed products should be a part of your portfolio, you need to understand a few things. Shyam Sekhar, chief executive officer, iThought, said the rate of return sounds good at the moment because we are in a benign inflation regime—the consumer price inflation is at 2.92%—however, when inflation increases, a rate of 6% may not be great. “I don’t recommend locking into long-term guaranteed products because they work when inflation is low. Investing in Public Provident Fund, in comparison, is better because it mirrors the interest rate trend and gives above-inflation rate of return," he added.

Remember that guaranteed returns come to you only if you stay the course. Even in this case, if you surrender the product mid-way, you will have to let go of your insurance cover, though bundled plans don’t offer a great amount of cover.

A very risk averse investor who buys insurance polices for safety of capital, may consider this plan.

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