Life insurance policies have become attractive with tax-saving potential. There are endowment and money back policies which are offered with guaranteed benefits. Instead of offering a bonus on the life insurance plan, the insurance company will offer guaranteed returns. These guaranteed returns are not in line with the profits made by the insurance company. The guaranteed benefits are offered at various stages of the policy term. Hence, the policyholder will be lured to get maturity proceeds as well as monthly payouts.
If you get guaranteed returns of 10 to 12% on the premium, you will be tempted to buy the insurance plan. If the insurance company delivers the promise, the returns will be higher than traditional investment avenues such as bank’s fixed deposits and debt funds. In addition to the insurance benefit, you might get the income benefit.
The annualized addition is different from the guaranteed addition. The guaranteed returns are paid at the maturity date. The actual results will be different from the calculations shared by the insurance company or the agents.
When an insurance company offers guaranteed addition, it should maintain funds in high-yielding equity and other financial instruments. The insurance company may deliver the guaranteed addition after few years.
The actual earnings on the life insurance policy will be based on the following factors:
- Insurance term
- Internal rate of return
Considering the above factors, the actual returns will be in between 4% and 6%. If the insurance company offers guaranteed additions, the returns will be lower than 4 to 6%.
Different Types of Guaranteed Additions
The guaranteed returns differ from one insurance company to another insurance company. Some plans offer guaranteed additions from the second year and other plans offer additions from a later date.
Some guaranteed life insurance plans are similar to money back or endowment plans. You may get regular payouts (on monthly basis) or lump sum.
Guaranteed Life Insurance Plans
HDFC Life Sanchay
- Policy term: 15 to 20 years
- Premium Payment Term: 5 years, 8 years, 10 years
- Guaranteed benefits: 8 to 9% of sum assured each year
Bharti AXA Life Elite Advantage
- Policy term: 10 years or 12 years
- Premium Payment Term: 5 years, 7 years, and 12 years
- Guaranteed benefits: 8.5% to 9.5% of sum assured each year
Kotak Guaranteed Savings Plan
- Policy term: 14 years to 20 years
- Premium Payment Term: 7 years, 8 years and 10 years
- Guaranteed benefits: 35% of premium from end of 11th policy year to the end of 20th year
Bajaj Allianz Save Assure
- Policy term: 15 years or 17 years
- Premium Payment Term: 10 years or 12 years
- Guaranteed benefits: 115% of sum assured as death benefit or maturity benefit
Guaranteed Additions vs. Annualized Returns
The guaranteed additions pronounced by the insurance company will be different from the annualized returns. The policyholder should understand the complex jargon as well as complex calculations used by marketing personnel of insurance companies.
As there is a great craze for insurance products, the life insurance companies should use various kinds of tactics to lure customers. A novice or first time policy purchasing customer will not be aware of the difference between guaranteed additions and the bonus.
The guaranteed additions mentioned by the insurance product will be very less than the annualized yield. The annualized return is the benchmark for assessing the performance of the financial product.
Even though the insurance policy covers the risk and offers capital appreciation over a period of time, you can choose two different products to fulfill your financial goals. The insurance plan will cover the risk. The term policy is the cheapest policy with which you can make the most of your investment.
If you would like to save the income tax, you can subscribe a traditional insurance plan rather than the guaranteed insurance plan. You will pay a lower premium and the money will be paid at various life stages as per the option exercised while buying the plan. You should understand the fact that guarantees are offered at a price.
Guaranteed life insurance plan may not deliver the performance as offered by the insurance company in the information shared with the customer. The figures will be tempting so that insured will choose plans based on the returns. Intelligent customers will go through the statistics and past performance of traditional plans and they will compare these plans with guaranteed insurance plans. Instead of buying traditional insurance plans with guaranteed additions clause, you should go for term plan where the insurance premium will be low and the risk coverage will be high. After investing in a term policy, you can contribute to PPF or MF to build a corpus over a long period of time.