What are Guaranteed Income Plans?

Business

oi-Roshni

By Roshni Agarwal

Published: Wednesday, November 20, 2013, 10:54 [IST]

Guaranteed returns with insurance cover is being increasingly promoted by several insurance companies across the industry to woo investors with high appetite for such products. But despite the title for the product of guaranteed income plans, such products fail to offer decent return to the investor class.

Here is a look at some of the features of such insurance plans that guarantee certain income flow :

1. Non-participating insurance plan: Guaranteed Income Plans are non-participating as returns on investment in such plan is not linked to the underlying fund performance.

2. Traditional plan: Such plans are categorized into traditional plans that includes typically term plans, endowment assurance plan and money-back policies among others.

3. Such plans being non-participating allow insurers to retain maximum profit with them. And only need to assure of some assured returns.

How do such Guaranteed Income Plans work ?

For certain pre-determined term, guaranteed income plans require the policyholder to pay premium for a number of years that majorly depends on the chosen insurance cover amount or sum assured and your age. After the premium payment tenures as per the terms of the plan is over, the guaranteed income plan begin to give a certain assured sum on a regular basis. It is at the policy term end that sum assured or some percentage is given to the life assured and policy stands terminated.

Should you be investing in such guaranteed income plans?

Though, at first such products are really enticing and insurance agents do not have to toil hard to sell across the product, such plans do not fetch decent returns to the subscriber of the product. Also with the mix of investment in the otherwise insurance plan, customers are able to get only a meager insurance cover for the premium amount paid. Also, it holds that returns from such plans are not able to beat the rate of inflation.

So before investing into this product class, it would be beneficial for you to know the net rate of return if you look to seek the benefit of insurance coupled with investment. However, the product serves well only in case of short-term. And reaps only nominal returns and the offered guarantee comes with the heavy cost that has to be borne by the policyholder.

Another catch associated with guaranteed income plans that though makes it to be highly enticing is that the guaranteed return criterion sets in only after the completion of certain policy term. Also, the return assured is paid on the sum assured value that remains constant throughout the term of the policy and not on the fund value that appreciates over time. So, gains generated fail to provide the benefits of compounding of returns.

Furthermore, guaranteed returns are actually not returns but a percentage pay-out of sum assured value that is tendered on a regular basis usually monthly given during the payout phase of the policy. So, in all the policyholder gets payout amount plus sum assured increased by some percentage on account of guaranteed additions at maturity. Usually, the net rate of return on investment in such products is computed out to be 4% i.e. perhaps a meager return considering the long-term investment horizon. This hardly beats inflation and is way below the bank deposit rates. Why would you want to get a measely rate of return for a little bit of insurance cover. You might as well put your money in a bank deposit and take a good term insurance plan, which would provide you substantial insurance coverage.

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