Guaranteed plan returns have gone up. Should you invest?

Recently, life insurance companies such as Aditya Birla Sun Life Insurance (ABSLI), IDBI Federal Life Insurance and Tata AIA Life revised rates on their guaranteed return plans.

There could be others too, given the upward trend in interest rates. Also, with the equity markets facing volatility, it is only natural that investors show a preference for fixed income investments. But how good are these insurance plans from an investment point-of-view? DNA Money spoke to insurance companies and financial advisors to understand more about these plans.

How guaranteed plans work

Guaranteed plans are traditional life insurance savings plans. These are non-participating plans and offer fixed and guaranteed returns at maturity. The rate of interest of interest is usually on the lower side, not more than 4-5%. Now some life insurance companies have revised the rates upwards in line with the rising interest rate scenario.

IDBI Federal Life Insurance revised the interest rate on its guaranteed plan to 5.2-5.3%, from close to 4.5%.

"If the interest rate is rising then we get long-term papers to invest in where interest rate is stronger. Then we are in a position to announce products with increased yield for customers,'' said Karthik Raman, CMO and head - products and strategy, IDBI Federal Life Insurance.

Similarly, ABSLI also increased the yield on its guaranteed plan by 25 basis points. So if the return was earlier 5.6%, now it will offer 5.85%. The final interest rate will vary depending on the customer's age and premium payment term.

The volatility in the equity market is one reason for increasing the rates, said Anilkumar Singh, chief actuarial officer, ABSLI. "We had been hearing from our customers and distributors that they are concerned about their critical goals. So we thought it was the right time to offer them a chance to lock into higher rates,'' he said.

Such plans are long-term products and the rate is guaranteed over the entire policy of the term. In addition there is also a life cover, and returns are tax-free.

In case of IDBI Federal, customers have to pay for the first seven years of the policy and can take payouts every year, starting from the eighth year. Or they can take a lumpsum payment at the end of 14 years. ABSLI offers policy term of 12-26 years and premium paying terms of six to 12 years.

Recently, Tata AIA Life Insurance revised the IRRs on its Fortune Guarantee series upwards and now at the longest end it offers up to 6% guarantee, said Samit Upadhyay, CRO and head, product, Tata AIA Life Insurance.

"Guarantees offer protection from volatility. So adding steady amounts of protection-- from the uncertainties of life or from economic uncertainties, can be a very healthy strategy,'' he added.

Benefits of these plans

Customers can choose tenures to match investment goals such as child's education, down payment for buying a house or retirement, since returns are fixed and guaranteed.

The lock-in for long-term periods is an advantage, as compared to say bank FDs, which offer maximum tenure of 10 years. Besides, FDs are subject to the rate of interest changing based on the prevalent market rates at that time.

As compared to FDs that offer 6.5-7% (10 year), returns on guaranteed return plans, at 5-5.5% may seem lower. But since they are tax-free, on a post-tax basis, they are comparable to FDs.

"Such products are suitable for risk-averse customers who are used to traditional modes of investment. Now they have an opportunity to earn higher returns. Even risk-taking customers who are used to investing in equities can invest a portion of their corpus, given the current volatility in the markets,'' said Singh.

"Unless one is very young young and high-risk taking customer, it would help to have a certain portion of your investment portfolio in guaranteed plans. The money is guaranteed so there is no fluctuation. That takes away a lot of stress for investors. Besides, if something happens to the investor, the insurance cover will come in handy,'' Raman adds.

Conditions to watch out for

The biggest disadvantage of such plans is the low interest rate, says Anirudh Jain, head-insurance, Centrum Group.

"In such products where there is guaranteed return, the profitability of the insurance company is always high. As per regulation, insurance companies have to pay the guaranteed rate to customers. So they know the entire payout that has to be done over the entire period of the policy, of 10 to 20 years. Hence, by promoting guaranteed return products, insurance companies can have stability in their own accounting. When they propose a non-guaranteed product, they have to follow the interest rate cycle in the economy and are bound to make more provision from capital adequacy point-of-view,'' he said.

Customers also prefer such products as it gives them a stable visibility of how much returns their investments will fetch them. Besides, now fixed income products and debt products are in demand, due to the market volatility.

"However, we would advise such products only for non-savvy customers who typically invest in FDs, as the returns are comparable. For HNIs and wealthy customers, we advise Ulips because they are better in terms of return and cost structure and offer tax advantage as compared to mutual funds,'' he said.

Another drawback is that guaranteed products lack liquidity, unlike FDs. "If you already have an existing product, you will have to either surrender that or make that into a paid-up one and buy a new one," said Santosh Agarwal, head of life insurance, Policybazaar.com

"If you withdraw before maturity, you will tend to lose a lot of money. So it is best to invest only that money which you are sure you will not need for the next 10-12 years or more. Also, you should have the ability to pay the premium over the payment term,'' she added.

KNOW YOUR GAINS

6.5-7% – Interest rates offered by 10-year bank FDs

5-6% – Interest rates offered by guaranteed return plans

10-20 years – Tenure for guaranteed return plans