- Experts say mixing insurance, and investments is never a good idea.
- In a guaranteed return insurance plan the investor pays the premium for the chosen number of years, and starts receiving a guaranteed payout for a specified term.
- In the current interest rate scenario, guaranteed return
insurance plans can fetch an internal rate of return (IRR ) in the range of 6% to 6.50%, which does not really beat inflation.
These guaranteed return plans are basically insurance plans. They sound promising, because who does not want a guaranteed income? Plus, they promise to pay a fixed amount of money every month for a certain period. The invested amount is also eligible for tax deductions, and there is also a life cover provided for the entire policy term. All of this sounds good, but should you invest in such a plan? Let us dive a little deeper.
First, let us understand how guaranteed return insurance plans work. “In the guaranteed return insurance plan (non-participating plan), the investor pays the premium for the chosen number of years, and starts receiving a guaranteed payout for a specified term,” says Rahul Jain, President and Head, Nuvama Wealth, a wealth management firm.
For example, Suresh, a 30-year-old engineer, purchases a guaranteed return insurance policy with a 10-year premium term, and a 30-year policy term with a two-year waiting period. In this case, he will first pay the premium for ten years. After the twelfth year, he will start receiving guaranteed payouts for the remaining policy period.
“These plans can simplify the lives of those who are not good with money management and struggle to generate regular income through fixed deposits and bonds by offering regular cash flows and/or a lump sum payout based on the investor's preference,” says Jain. But investing in guaranteed insurance plans may not be a good idea.
“The way the numbers are represented in the policy, they are only numbers. There are never any percentage figures which specify the returns,” says Renu Maheswari, co-founder and principal advisor, Finscholarz Wealth Managers. In case a percent return figure is mentioned, it will mention ‘up to’ 7.5%, or ‘as high as ‘7.5%’, which itself is a misnomer, since they are advertised as guaranteed return plans.
“These numbers make no sense- one number is of 2023, the other number is of 2048. The time value of money is not incorporated in these numbers,” says Maheswari. She says that what the investor misses out on is that the payout, let us say ₹40,000 per month today, and ₹40,000 per month after 25 years will not have the same value. The purchase value will be less, so the planning part totally goes out of the question.
Why you should not invest
Experts say mixing insurance, and investments is never a good idea. Also, returns from guaranteed insurance plans are on the lower side.
“What rate of return we are getting is not clearly mentioned anywhere. As registered investment advisors (RIAs) we look at the numbers and then we calculate the IRR, and based on it we judge a policy,” says Maheswari.
“In the current interest rate scenario, such plans can fetch an IRR in the range of 6% to 6.50%. It's easy to figure out the IRR of these plans. The investor just needs to plot the premium expense, and future income flows from the benefit illustration on an Excel sheet and use the IRR function to calculate the IRR,” says Jain. Mostly, IRR of guaranteed return insurance plans are even lower.
Moreover, when you are investing in such a product, you are locking in the money for a very long term. “You are locking it predominantly in an instrument, that is a structured investment. Most of this money is invested in fixed income securities. When you have the leeway to lock-in the money for 25-30 years, if you invest in the equity markets, your gains can be more than double of what you get here,” says Maheswari. Basically, guaranteed insurance plans provide returns that do not beat inflation, so over a period of time, they do not grow your money.
Certain investors might be risk averse and not want to invest in equities. “ Guaranteed return insurance plans are not a good investment. If you are a conservative investor, you should buy a term plan and invest the rest of the money in savings bonds issued by RBI, then you will make more money,” says Gaurav Mashruwala, financial planner and author of Yogic Wealth. The interest rates on these floating rate bonds are reset every six months, and currently are at 8.05%.
Investing in such a product gives you a false sense of security, and it is more of an emotional reason why you are buying such a product. From a financial point of view, it is not a wise decision.