The Covid-19 pandemic has led to increased awareness, and interest, about life insurance and more importantly about in financial security. Taking cues from this, some life insurers have launched guaranteed income products — Assured Income Plus Plan by Aditya Birla Sun Life and New Assured Wealth Plan by Future Generali are a few of them to name.
These products are considered long-term savings plans that offer assured returns at a pre-determined rate at regular intervals. But they may not suit everyone. The premium for these products are on the higher side compared to term plans.
So, before you go for an assured income plan, you must understand the basics of the product to decide if it meets yours and your family’s requirements.
How does it work
Guaranteed income products are usually non-participating, non-linked policies. That means, these products are not market-linked and insurers don’t share profits of the company (in the form of bonus) with the policyholders. Instead of declaring bonus, life insurers provide guaranteed returns (at a pre-determined rate on total annualised premium paid) and sum assured will be paid on maturity.
Many insurers offer the choice on how you want to receive your maturity amount, provided the premiums have been paid regularly. You can receive the pay-out either monthly, quarterly, half-yearly or annually or as a lump-sum.
When it comes to premium, you have the option of paying for a limited period while the policy covers you for the entire period. Most insurers offer 3-4 options for premium payment term. That means, if it’s a 20 year policy, you could pay premium for, say, five years only, and the policy will continue to cover you for another 15 years.
In case of death of the policyholder during the policy period, most policies in the market would pay the sum assured to the nominee, higher of 10 times of annualised premium or 105 or 110 per cent (varies with each policy) of total premiums paid up to the date of death.
Guaranteed products come with a few advantages. One, the maturity proceeds from such products are exempt from tax. Two, policyholders get a fixed rate (determined at the time of policy issuance) until maturity of the policy. According to Vivek Jain, Head – Investments (Life Insurance), Policybazaar.com, the top guaranteed products in the market offer 5.5 to 5.8 per cent on average as return. This is in addition to the life cover they offer. On the other hand, guaranteed life insurance plans are suitable mainly for risk-averse individuals. Sarita Joshi, Product Head, Probus Insurance, says, “People who are aged 40-years and above should consider adding guaranteed product to their investment portfolio”
Also, guaranteed products usually entail high premium payments in the initial period when compared to plain vanilla term covers. The maturity proceeds are received only after a long period of, say 15 or 20 years. Your money gets locked-in for a long time and your returns may not always factor in the prevailing inflation.
Today, with interest rates having possibly bottomed out, and expected to rise going forward, you will be locking in to a conservative return for the next 10-15 years. Further, it is advisable to opt for a term plan for protection and consider other financial instruments, if one wants better returns.