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Life Insurance

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GUARANTEED LIFE INSURANCE PLANS: A safety net for retirement planning

20-Dec-2023

Individuals are preferring to buy guaranteed insurance plans which pay fixed regular payments after a specific period and also come with a life cover which is 10 times the annual premium paid. These plans offer tax-free returns, unlike fixed deposits

 

Purchasing a guaranteed plan ensures locking in guaranteed returns for 10-20 years, a feature not commonly found in other fixed deposit instruments. For those prioritising stability and predictability, these plans can be appealing, assuring a known amount at maturity with minimal risk. However, these plans have limited access to funds before maturity, which might not be ideal if the individual requires financial flexibility. Also, investors must ensure that the annual premium does not exceed Rupees 5,00,000 for tax-free returns.

 

State-owned LIC has launched Jeevan Utsav, a non-linked guaranteed product offering income benefits of 10% of the sum assured annually. The income benefit starts after the periods specified in the policy linked to the premium paying term.

 

As timing plays a crucial role in determining an individual’s investment corpus, the current period presents an opportune moment for investing in these plans. These plans provide flexibility, allowing policyholders to choose between a lump-sum amount or a regular income stream on a monthly or yearly basis, decided at the policy’s outset.

 

Vivek Jain, head, Investments, Policybazaar.com, says when interest rates are high, guaranteed return insurance plans can indeed be an attractive option. “These plans offer a sense of security with assured returns, making them appealing for individuals seeking a stable and predictable income source amidst fluctuating market conditions.”

 

Similarly, Rakesh Goyal, director, Probus Insurance Broker, says as interest rates are high, guaranteed return insurance plans provide an attractive option for fixed returns. However, there are risks like lack of market linkage, high costs and commissions charged. “These plans are good for those who struggle to generate regular income as they provide a fixed monthly/annual income even if markets are volatile,” he said.

 

Tax-free returns

The returns from guaranteed return insurance plans are tax-exempt because of the life insurance component. The maturity profits or death benefits received from these policies, including guaranteed returns fall under the exemption from income tax as per Section 10(10D) of the Income Tax Act, provided the annual investment remains below Rupees 5,00,000, maximising the investment’s growth potential while qualifying for tax benefits. In fact, Section 10(10D) provides a tax exemption on the amounts received from a life insurance policy, which includes the sum assured plus any bonus or additions.

Shailesh Kumar, co-founder and head, Insurance Samadhan, says the tax exemption is what makes the maturity proceeds of these plans effectively ‘tax-free’. “This tax exemption applies to the maturity proceeds. If you surrender the policy before its term, the tax treatment may be different, and you might not get the same tax benefits,” he says.

Points to check

Before selecting a guaranteed return insurance plan, individuals should align the plan with their financial goals and clearly understand the policy tenure, lock-in period, and surrender value terms. “Also, do not forget to evaluate the affordability of premiums and ensure they fit your budget comfortably,” says Jain.

 

A word of caution

Individuals must understand the distinction between investment and insurance. While a guaranteed plan is a blend of the two, it might not be the most efficient approach for everyone. These plans are suitable for those who are not disciplined in their savings habits. In the long run, a regular premium paying term plan is better for those who can take some risks and invest in equity-oriented instruments. “Term plans offer life cover at low cost while the premium amounts can be invested separately to gain from market movements through mutual funds or other instruments. This provides better returns than guaranteed return plans in the long run,”says Goyal.

 

A significant aspect to consider is the cost structure of guaranteed insurance plans. When an individual pays the premium, a portion of it goes towards covering the insurance aspect, known as the mortality charge, along with other administrative expenses.

 

“This means that the actual amount invested is less than the total premium paid. In contrast, mutual funds invest a larger portion of your contribution, leading potentially to better returns,” says Kumar.

Source : Financial Express

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