There has been a spurt in new guaranteed income plans offered by life insurance companies recently. In the last four weeks, several life insurers including Tata AIA, HDFC Life, ICICI Pru Life and Aditya Birla Sun Life have come up with their versions of guaranteed income plans that promise guaranteed payouts at predetermined intervals against the payment of certain premiums. Following are the pros and cons of these plans that may help you make a better decision.
Advantages
Stable income: Guaranteed income plans can provide a stable and predictable source of income in retirement. “One of the main advantages is that they offer a guaranteed payout, regardless of market fluctuations, which can give peace of mind to retirees worried about running out of money,” says Shilpa Arora, co-founder and COO, Insurance Samadhan.
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Income for various goals: A guaranteed income plan may offer a holistic income solution if you buy it for a defined goal. “Be it retirement, child financial planning, or an alternative income building, these can offer an income payout at predetermined intervals throughout the tenure of your policy,” says Anup Seth, chief distribution officer, Edelweiss Tokio Life Insurance.
Safety of money: Even if the insurance company fails, there is little to worry about the safety of the funds paid as premiums under these plans. “Irdai has the provision to preempt the deteriorating financial position of an insurance company. The interest of the policyholder is protected through mergers and acquisitions,” says Arora.
“Insurers are required to keep a mandatory level of capital adequacy (reserves) to support these guarantees. Insurers also need to maintain a mandatory solvency margin of at least 150% that acts as an additional protection over and above the investments held to support these guarantees,” says Seth.
Disadvantages
High fees and low returns: These plans often come with higher fees and lower returns compared to other investment options. “As this category falls under traditional endowment plans, where the majority of the investment is in government bonds, the ideal yield is 4-7%, which may not be profitable in the long run to overcome inflation,” says Manju Dhake, VP, Insurance at 1 Finance.
Return not on invested amount: Guaranteed payouts under these plans are typically expressed as a percentage of the sum assured (SA). “The seller may say that you are getting a 10% return but this is misleading because you are getting a 10% return on the sum assured,” says Arora.
Income depends on survival: “The catch here is that the guarantee is on the payout one receives, which is dependent on the precondition of survival of the policyholder during the policy term provided all due premium(s) are paid,” says Dhake.
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SECURED INCOME
- In the last four weeks, Tata AIA, HDFC Life, ICICI Pru Life and Aditya Birla Sun Life have launched guaranteed income plans
- The percentage return offered is not the return on investment but the return on the sum assured
