During the end of the financial year, insurance companies try to tap tax-payers with innovative schemes, including guaranteed returns products.
Life Insurance Corporation of India (LIC) recently launched Wealth Plus, which gives guaranteed returns. Last year, it had launched Jeevan Aastha, which promised to give Rs 9 and Rs 10 for every Rs 100 invested, depending on the policy tenure. The earlier policy invests in debt instruments such as government bonds. Wealth Plus, on the other hand, invests in equities and assures returns linked to the highest net asset value (NAV) of the fund over a seven-year period.
LIC is not alone in the market with such a product. Reliance Life Insurance has Reliance Life Highest NAV Guarantee Fund, which assures the highest NAV for the entire term of the policy. Many other players have similar plans. Tata AIG Life insurance sells such a scheme under the name InvestAssure Apex Pension Plans; Birla Sun Life Insurance has Platinum Premier Plan; SBI Life Insurance calls it Smart Ulip; ICICI Prudential Life Insurance sells Pinnacle; and Bajaj Allianz Life Insurance’s Max Gain gives a similar guarantee.
These plans capture the highest NAV of the fund and lock it. Thus, a customer gets returns based on the highest NAV, even if stock markets undergo a correction. However, before buying, there are a few things you should look at.
Working: To give the highest NAV-based returns, insurance companies follow a trading strategy known as constant proportion portfolio insurance (CPPI). Institutions around the world use this model to ensure a fixed minimum return for investors who are risk-averse.
In CPPI, a fund allocates the corpus between safe assets (debt-based papers) and risky assets (equities), depending on stock market performance and interest rates. Depending on losses or gains from the equity investment, the insurance company constantly rebalances the equity-debt mix to lock the highest NAV.
Returns: Most of these products are available for a limited period. In the initial phase, the company decides the asset allocation between equity and debt. “The debt portion could be small if interest rates are high and equity markets have low volatility,” said Sashi Krishnan, chief investment officer at Bajaj Allianz Life Insurance Company. He explained that if the market falls, the allocation to debt is increased and vice-versa. “As it is not a pure equity product, it will definitely not give pure equity-based returns,” said Manish Kumar, head of investments at ICICI Prudential Life Insurance.
Costs: Most insurance companies charge a guarantee fee over and above the 3 per cent cap that the Insurance Regulatory and Development Authority (Irda) has prescribed. “This is primarily to make up for any shortfall,” said Krishnan.
Insurance companies normally charge 0.2 -0.5 per cent. For example, LIC’s Wealth Plus has a guarantee charge of 0.35 per cent of the fund value every year. While Bajaj Allianz levies a charge of 0.25 per cent on the fund value every year, ICICI Prudential’s Pinnacle charges 0.10 per cent annually to give the guarantee. “This also includes the cost the insurance company incurs for setting up algorithms and other infrastructure related to this product,” Kumar said.
Should You Buy? For small investors, products based on this structure are available with insurance companies only. High net worth individuals (HNIs) can approach wealth management companies for such arrangements.
Risk-averse investors who want to avoid insurance due to high costs can look at monthly income plans (MIPs) of mutual funds. These are essentially for investors who have low appetite for volatility. They invest 10-30 per cent in equities and the rest in debt. In the MIP category, the top 10 funds by returns have given yields of over 10 per cent in the past five years.
