Fixed income: Committed return products, and their comparison with company FDs

September 4, 2020 7:30 AM

Traditional non-unit linked insurance products offer tax-free returns and insurance coverage, but are for a longer tenure and liquidity is limited

In insurance, you pay for, say, seven years and get you money, i.e., maturity proceeds after, say, 15 years, depending on the terms of the product. In insurance, you pay for, say, seven years and get you money, i.e., maturity proceeds after, say, 15 years, depending on the terms of the product.

By Joydeep Sen

There are multiple options in the space of committed-return fixed income products—bank fixed deposits (FDs), company FDs, small savings schemes, i.e., post-office schemes, RBI floating rate bonds, etc. One product that may be discussed on a similar proposition, but is usually not discussed in the same breath, is committed-return traditional, i.e., non-unit-linked products from insurance companies. We will discuss the features of this product and compare it with the nearest comparison: company FDs.

What are these products?
There are certain products such as ICICI Assured Savings Insurance Plan, Bajaj Allianz POS Goal Suraksha, HDFC Sanchay Plus, etc., where the life insurance company indicates the maturity benefit. You can plot your fund outflows, i.e., premium payments and the maturity benefit as indicated, and calculate the IRR, which is your compounded annualised return.

For illustration purpose, in HDFC Sanchay Plus, for a 44-year-old male paying a premium of Rs 1 lakh per year for 10 years and receiving Rs 1.88 lakh per year for 10 years after a gap of two years in between, the IRR is 5.4%. In Bajaj POS Goal Suraksha, paying a premium of Rs 1 lakh per year for seven years and receiving a maturity benefit of Rs 12.77 lakh at the end of the 15th year, the IRR is 5.1%. This return may be compared with company FDs,
for perspective.

Company FD vs insurance policy

Safety: Let us talk of AAA rated corporate FDs, as these are relatively safer in the pack. For insurance company products, there is no credit rating as such. Since the providers are leading industrial houses with a brand reputation to protect, it has to be assumed they will stand by their commitment. Hence, presumably both are safe.

Tenure: The tenure for corporate FDs is relatively shorter and that of insurance company products are relatively longer. In insurance, you pay for, say, seven years and get you money, i.e., maturity proceeds after, say, 15 years, depending on the terms of the product. The decision depends on your investment horizon; if your horizon is relatively shorter, corporate deposits are better for you. Insurance products are not only of longer tenure, as we have seen above, but liquidity is limited, i.e., go for it only if you are sure of the horizon.

Taxation: Insurance products are effectively tax free, under Section 10(10D) of Income Tax Act. As long as the premiums paid in a year are less than 10% of sum assured, maturity proceeds are tax free. Corporate deposits are taxable, at your marginal slab rate. Hence your effective net-of-tax return from deposits is a function of your tax slab. As an example, if you get 6% per year from a corporate deposit and your tax rate is 30%, then your net return is 4.2%. However, if you are in a lower tax bracket, say 10% (new tax regime) then your effective return is 5.4%.

Underlying investments: In traditional insurance, investments happen in a common pool of funds as per IRDAI guidelines. There is no separate identification like in ULIPs, where you have a choice of equity funds, debt funds, etc. In corporate FDs, you are aware of the business line of the company.

Insurance

To state the obvious, but just in case we overlook, insurance products have insurance coverage (in a feature packed mobile phone, you can talk as well).

Conclusion

There are multiple products available, you have to choose as per your requirements and suitability. The purpose is to give you a perspective on this option. To summarise, insurance company committed-return products have the appeal of tax-free returns and insurance coverage, but are for a longer tenure and liquidity is limited.

Sen is a faculty, author and columnist

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