Suresh Agarwal, executive vice-president and head, distribution and strategic initiatives, Kotak Life Insurance, says policies that assure returns are designed to give a higher cover under a single plan. For example , Kotak Life Insurance’s Assured Protection Plan offers cover against the risk of death, accidental death and disability, critical illness and has the investment edge. Hence, these plans are meant for all age groups.
“This product is like a complete cover. The earlier you buy it the better it is as the premium increases with age,” says Agarwal. A 35-year-old male has to pay a premium of Rs 87,075 annually for a sum assured of Rs 2.50 lakh for premium payment term of 15 years (says the website of Kotak Life Insurance).
There are two ways to calculate premium — where the policy term is calculated by deducting the policyholder’s age from 60 and the premium is accordingly decided. So, if you are 40, your premium payment term will be 20 years. For a Rs 2.50-lakh policy, the premium will be over Rs 1 lakh, according to Kotak Life Insurance's customer service department.
The other method has a flat policy term of 15 years.
Aviva Life Insurance and Bharti AXA Life Insurance, offer similar plans. According to a survey conducted by IPSOS (consumer attitudes towards savings) worldwide, 56 per cent Indians are unwilling to take a risk on their investments and look for guaranteed returns. This led to Aviva Life Insurance launching Aviva Family Income Builder.
Taking the above example, for an annual premium of Rs 87,075, Aviva Family Income Builder will give a sum assured of Rs 1.74 lakh (policy term = 12 years).
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Rajeev Kumar, chief and appointed actuary of Bharti AXA Life Insurance, says potential policyholders prefer assured returns products over endowment plans. As the name suggests, these products guarantee returns at the time of buying (non-participating plans) as against the traditional endowment plans that declare returns in the form of annual bonuses over and above the fixed benefits (participating plans).
He says insurance agents also find it easy to sell assured returns products. “Here, the agent only has to inform the customer how much he will get on maturity or at the end of a certain period. But, in case of an endowment product, the customer needs to be explained two scenarios (interest rates assumed at six per cent and 10 per cent). That leads to a lot of confusion. Assured returns, that way, are easier to understand,” explains Kumar.
For new companies, it can get difficult to convince a customer to buy an endowment plan as they would not have a long bonus history like LIC. Hence, an assured returns plan works better for them. Policies assuring returns have a shorter tenure (15-20 years) as compared to endowment plans (25-30 years).
The internal rate of return (IRR), say insurers, are less in case of non-participating plans at three-four per cent. In comparison, an endowment plan promises 5-5.5 per cent IRR.
Kotak Endowment plan charges a premium of Rs 20,000 annually for a sum assured of Rs 2 lakh (policy term = 15 years). For the same sum assured and policy term, Aviva Life Insurance's money back plan Dhan Vridhhi will also charge a premium of Rs 20,000 yearly.
In comparison, a risk averse investor can be better off putting money in fixed deposits and debt mutual funds, which are paying 8.50-9.25 per cent annually (pre-tax).
Insurers say such products are meant for those with a low risk-taking ability and are looking for fixed returns. The proceeds can be used to fund goals or serve as income after retirement.
But, Deepak Yohannan of MyInsuranceclub.com, says, “If you have a health cover, you might not want this cover. Importantly, do not mix up health and life cover needs. Also, if you want to invest through an insurance product, unit-linked plans are much better as they are transparent and have a lower cost structure.”
Understanding how the product works and the payout structure, whether or not you survive the policy term, can be confusing leaving you in the dark about your actual benefits. Hence, financial planners advise sticking to a proper asset allocation for investment and buying a pure term plan and comprehensive health plan.