Promise of guaranteed return plans are appealing, but compare their IRR

A combination of term plan, MFs may be volatile but is likely to get higher returns

Recently, two insurers — Aditya Birla Sun Life Insurance and IndiaFirst Life Insurance —launched their non-linked (traditional), non-participating plans. The former’s plan is called ABSLI Child’s Future Assured Plan, while the latter’s is called IndiaFirst Life Guaranteed Benefit Plan. Both these plans promise guaranteed returns to customers. Whatever is the final value promised to the customer, he will get it, irrespective of what happens in the equity or debt markets.

Experts say since the lockdown began, people have shown a preference for either pure protection (term) plans or for guaranteed-return products. The loss of salary/income in recent months has led to a rise in risk aversion. “Customers are worried more about return of capital rather than return on capital. Many don’t have the appetite to stomach the volatility in equities or the fall in G-Sec yields. Hence, they are shifting towards non-participating, guaranteed-return products, says Rushabh Gandhi, deputy chief executive officer (CEO), IndiaFirst Life Insurance.

These plans remove uncertainty from the customer’s financial plans. As Kamlesh Rao, managing director and ceo, Aditya Birla Sun Life Insurance says of his product: “With the Child’s Future Assured Plan, you can secure two significant milestones in your child’s life – education and marriage. The plan provides fully guaranteed benefits and the required cash flow to help meet a child’s goals.” At a time when the 7.75 per cent GoI Bond has been discontinued, and returns on small-savings schemes and bank fixed deposits get revised downward regularly, the promise of a guaranteed return is likely to appeal to many.

The internal rate of return on these plans will be around 4-5 per cent. The returns are tax-free. These products can also assure a rate of return for a very long span—15-20 years. The customer also gets a life cover. These plans come with the waiver-of-premium feature—even if the purchaser passes away, the plan remains in force and the beneficiaries get the promised benefits.

 

However, the long-term guaranteed return comes at a cost. “The risk in these plans is borne primarily by the insurer, hence returns are on the lower side,” says Arnav Pandya, certified financial planner and founder, Moneyeduschool. A return of 4-5 per cent may barely match the long-term average consumer inflation rate.

To ensure the guaranteed returns, these plans invest in long-term G-Secs and highly rated corporate bonds. The current yield on the 10-year G-Sec is 5.88 per cent. Insurers need to deduct their costs. They also need to be conservative in promising returns because interest rates could decline over the next 10-20 years.

A customer who has an investment horizon of 15-20 years can safely invest in equity mutual funds as the risk of generating negative returns from them declines drastically after about seven years. "Equities have the capacity to generate double-digit returns over a 15-20-year period,” says Arvind Rao, chartered accountant, Sebi-registered investment adviser and founder, Arvind Rao & Associates.

Those with a very low risk appetite, who don't want to venture into equities at all, and those looking for absolute certainty of returns may opt for these plans to meet their long-term goals. These plans can also meet diversification needs. "Someone who derives his income from the equity markets may invest in them to diversify risk," says Rao.

On the other hand, those who have moderate to high risk appetite, or have a financial advisor to handhold them, can avoid them. The advisor can build a portfolio consisting of term insurance and mutual funds that is likely to beat the returns from these plans.

Before buying these plans, compare the internal rate of return (IRR) offered by various insurers.