Steady returns, inadequate cover

Before you buy a guaranteed-return product, fulfil your insurance needs.

With the stock markets taking a serious hit, insurance companies are now launching guaranteed-return products. For instance, LIC's Jeevan Astha and Religare AEGON's Guaranteed Return Plan are two such products. Though they are not new, it is a departure from the recent past when the insurance companies were focusing a lot more on promoting only market-oriented unit linked insurance plans (Ulips).

Of course, there is nothing new about these offerings. But in simple terms, the investor will get an assured return for a specified period. While this might seem to be a great thing when there is great uncertainty in all the investment options, there are a few things that will determine the attractiveness of the option. This has to be considered because it will help investors in their decision-making process.

Actual rate of return: The rates on offer are in the range of 6.6-7.5 per cent, which looks quite attractive because the return is tax-free in nature. That is, for someone in the 30 per cent tax bracket, a 7 per cent tax-free return is equivalent to a 10 per cent pre-tax return.

The return offered also has to be considered in terms of other opportunities available for a similar period. When these returns seem better than the other offerings, this insurance product looks attractive.

However, look at other features as well before you invest in such a product.

Higher investment: Most of the guaranteed return products are single-premium offerings. So, the entire amount of investment has to be made at one go. This often entails a higher upfront payment. Thus, there can be a situation where the minimum investment in such an option starts at Rs 40,000-50,000.

Investing lump sum can be a tough task for many investors. So though this may be an attractive option, the high-entry barrier can force many investors to stay away from them.

Time period: Another disadvantage for the investor is that in several cases, the duration of the scheme is slightly less. Often, the tenure of such schemes could be around 7-12 years.

Of course, this time period might seem to be longer than a 2-3 years’ timeline that many investors look to get returns. Sometimes there could be an issue of finding a similar instrument after the tenure is over.

This is typically because insurance companies would not like to lock themselves in for a very long period of time and hence, restrict the period.

Inadequate insurance: The most important aspect -- insurance. The product that is being offered to the investor is an insurance product. This means that covering the life of the policyholder also has to be taken into consideration. However, in guaranteed- return products, the coverage often turns out to be inadequate.

For example, if there is a premium of Rs 50,000 and the multiple is five times, then the cover available will be Rs 2.5 lakh. This figure by itself is inadequate at this stage and after a few years, it will seem even more inadequate as inflation takes its toll.

In that sense, this becomes an additional option and not a basic choice, for getting the required insurance.

Specific use: The investor has to be alert in understanding the use of such an insurance policy. This will not be useful for them to get themselves the required total amount of cover for their family because of the high initial investment and low coverage.

But it is a very good choice for several large investors who have the necessary funds at their disposal and have fulfilled their basic insurance requirement elsewhere. This can help in achieving several financial targets.

The writer is a certified financial planner