Why You Should Not Fall for Guaranteed Life Insurance Plans?

Life insurance plans are a great way to save tax. They are the most sought-after tax-saving instruments that also guarantee insurance. There are seven different kinds of life insurance plans in India.

Of them, the most preferred ones are term insurance plans, money back plans, and endowment plans. These life insurance policies come with certain guarantees. These plans are always a hit amongst those preferring tax benefits because they come with a guarantee.

 

Most life insurance companies endorse their best life insurance plans with guarantees. Unlike the regular policies that offer a declaring bonus that differs based on the profits made by the insurers, the plans with guarantees offer a specific amount as returns instead of the bonus. There are guaranteed returns at every stage of the policy however there are myths about the investments. The basic returns that are guaranteed include:

• A specific amount upon maturity
• Monthly payouts

Understanding Guarantees of Life Insurance Plans

Guarantees are offered as a part of certain life insurance plans and term insurance plans. They include the payment of a certain percentage of premiums per annum or a payout of a certain percentage of the annual premium each year.

The percentage of premium payments that are promised per annum vary between 7 to 10% per annum. Some insurance companies also offer maturity benefits and/or death benefits that are more than 100 of the sum assured. Certain insurance companies also offer cash benefits every month that range anywhere between 1 to 3% of the overall maturity benefit that is guaranteed.

Be it endowment plans or term insurance plans or any other kind of life insurance plans, the guarantees offered are not the same across plans. These vary from one insurance company to another. Some companies offer guarantees based on the premium the customer pays every month while some offer the guarantees based on the overall sum assured.

Some of the aspects in which the guarantees vary are:

• • The policies of the insurance company
  • The overall policy term
  • The term of premium payment (monthly/quarterly/half-yearly/annual)
  • The year in which the guarantees get added to the scheme
  • Method of payment of guarantees (monthly or lump sum)

In some plans, the guaranteed amount gets added to the plan as returns from the second year of policy induction whereas in some plans it may take a few years to receive guaranteed returns. In some plans, the returns are added to the term insurance plan or life insurance plan monthly or every quarter like a regular income whereas in some plans the guaranteed amount is paid as a lump sum only after maturity.

How Do Returns Work in Life Insurance Plans?

The guaranteed amount that is offered as benefits accumulates only on maturity. The actual returns are not what the customer perceives by calculating promised percentages. What is commonly not understood by the customer is that be it any form of life insurance like a term insurance or a money back plan, the guaranteed amount comes at a cost. The returns that a customer receives after the costs are adjusted are pretty low.

Here are some of the factors that influence the guaranteed returns:

• • Age of the customer
  • Term of the plan
  • The premium amount paid through the period of the plan
  • The mean average of the internal rate of return

For most life insurance plans including the term insurance plans, the calculated internal rate of return falls in between 4% to 6% per annum. The plans that offer exclusive guarantees offer even a lesser percentage of this return.

A Look At Life Insurance Plans That Offer Guarantees

The life insurance environment including plans like term insurance has undergone a sea of change in the last few decades. The terms that govern the plan are explained with jargon and terms that a common man may not be able to comprehend.

The following is an example of how a life insurance plan with guarantees typically works. Suppose if there is a plan with guarantees with a ten-year term in which the customer has to pay premiums for eight years. If the plan were to offer guarantees of 150% of the premium after maturity every year for a total time-frame of eight years, a customer paying a premium of Rs 10,000 for the first eight years will receive a payout of Rs 15,000 from the tenth year of the policy to the 17^th year.  In such a scenario, the internal rate of return for the above plan comes only to about 2.9% per annum.

While customers always believe in the percentage stated by the insurance company, in this case, 150%, they forget to count the number of maturity years and the internal rate of return.

Conclusion:

Choosing the right plan for you should ideally depend on the way the payouts are made. If you are someone who is looking for a regular income, choose a plan that makes payments regularly after maturity and don’t fall on the guaranteed life insurance plans rather look and go through the documents carefully. If you are not in need of such an income, choose a plan that hands out the payment as a lump sum on maturity from these life insurance companies.

Some tips to remember while choosing guaranteed plans:

• Choose it if you are looking for fixed returns
• Choose this if you have financial targets for the future
• Choosing guaranteed plans only to save tax is a bad idea
• Do not forget to calculate your ideal returns in the long term and decide if the plan is worth it
• A financial adviser would be able to offer you the best-guaranteed plans while considering your needs

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