‘Guaranteed and tax free returns’ may be the two magical words that can bring smile on your clients’ face. The appeal of such products increases even more in volatile markets such as the one we are currently experiencing.
Known as non-participating, non-linked, savings insurance plans, these products communicate the investment returns upfront. So long as the investor regularly pays his insurance premium, he enjoys an insurance cover plus an assured kitty. While guaranteed return plans are nothing new, historically, these plans received bad press as the investment returns were low (4.5%-5.5%). However, the recently launched HDFC Life Sanchay Plus offer higher returns of over 6% (in three of its plans).
With current 10 year g-sec yield in 6.80% range, does it make sense to recommend an assured return product? Let’s have a look at HDFC Life Sanchay Plus, the recently launched and popular guaranteed return endowment plan.
What is offered?
As a return generating insurance product, Sanchay Plus offers investors four guaranteed payout options at the time of maturity. The first one, guaranteed maturity is a lumpsum payout option. The second guaranteed income offers fixed income for a fixed term of 10 or 12 years. The third option offers fixed income for longer periods (25-30 years) + return of premium while the last option offers fixed income till 99 years + return of premium (however, minimum entry age for this option is 50 years).
The amount of payout depends upon various factors like the investor’s age, premium payment tenure, premium and term.
What can investors expect?
According to the brochure, a healthy 30 year old male paying annual premium of Rs. 1 lakh may enjoy the following maturity benefits
|
Plan Option |
Policy Term (years) |
Premium Paying Term (years) |
Maturity Benefit (Rs.) |
Effective return at maturity |
|
Guaranteed Maturity |
20 |
10 |
24 lakh |
5.72% |
|
Guaranteed Income |
13 |
12 |
Guaranteed Income of Rs. 2.25 lakh annually from 14th year to 25th year (payout period of 12 years) |
5.96% |
|
Long Term Income |
11 |
10 |
Guaranteed Income of Rs. 1 lakh annually from 12th year to 36th year (payout period of 25 years) + Rs. 10 lakh at the end of payout period (36th year) |
6.37% |
|
Life Long Income |
11 |
10 |
Guaranteed Income of Rs. 1 lakh annually from 12th year till age 99 years (39 years) + Rs. 10 lakh at the end of payout period. |
6.37% |
Should you recommend this product to your clients?
The positives:
Competitor check: Sanchay Plus offers higher returns compared to other guaranteed return products in life insurance space. This makes it an excellent choice for investors seeking a guaranteed return insurance plan.
Risk-return profile: On risk-return perspective, the product is comparable to 10-year g-sec. Currently, 10 year g-sec yields are hovering in the 6.80%-6.90% range. In addition, as it is a guaranteed return product, the risk of non-payment is extremely minuscule.
Tax angle: As maturity proceeds of life insurance policy are tax-free, your clients can receive tax free income post maturity by investing in long term guaranteed return products, say experts.
The negatives:
GST: While returns are calculated based on premium paid, the policy holder also has to pay GST on his premium. If we account for GST, the return on his policy will be effectively lower.
Inflation: Currently, the inflation is benign (3-4%), however, if it shoots up to 5-6% as it was a few years back, the investors will not earn any real returns on his investments. Moreover, if interest rates increase (as they generally do in high inflation environment) then the investor loses any potential upside. Alternatively, experts recommend PPF or government schemes for conservative investors as these schemes revise interest rates periodically in line with g-sec yields. However, government schemes have investment limit or may attract tax on returns.
Returns are only guaranteed if investor stays the course: The policy benefits are reduced if the investor decides to surrender his policy or misses insurance premium payment. So, they are only suitable for investors who can make long term commitment.
Overall, the product is only suitable for conservative investors who can commit to premium payment over a long term and want safety of capital. In case your client is comfortable with a little higher risk then other market linked products may offer better returns over long –term.
