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How to insure returns

While a guaranteed return policy makes for a good pick in the current environment, make sure your portfolio is not heavily skewed towards such schemes, writes Tanvi Varma.

Tanvi Varma/Money Today        Print Edition: February 5, 2009

A decade ago, when life insurance was synonymous with LIC, guaranteed return policies were the rage. But the stock market boom and falling interest rates led to the phasing out of guaranteed return plans. Instead, private insurance companies started offering Ulips, which allowed people to invest in the funds of their choice. In a booming market, these plans gave attractive returns and Ulips were soon out-selling traditional insurance plans.

Why Capital Guarantee

Then came the stock market crash and investors saw a huge erosion in the value of their investments. "It is during times like these that investors appreciate capital guaranteed policies," says Gaurang Shah, MD, Kotak Life Insurance. The company launched Kotak Safe Investment Plan (SIP), a Ulip with a guaranteed return of premiums, way back in 2003. "It contributed to 80% of our new product sales from 2003-2005 but slowed down after that," says Shah. That's because the markets recovered and nobody was in the mood for guaranteed policies any longer. However, the bull run gave way to volatility in the stock market and a reduction in interest rates.

Single premium guaranteed return policies
Your capital is returned along with a certain assured addition to your investment.
Insurance CompanyPlan NameGuaranteed ReturnMin. Single Premium (Rs)Additional Return
LICJeevan Aastha7.5% on invested amount25,000Loyalty additions
Aegon ReligareGuaranteed Return Plan7.2% on invested amount50,000None
Reliance Life InsuranceGuaranteed Return Plan Series I (ULIP)6.85% on premiums, less charges35,000Growth in fund value
Bajaj Allianz Life InsuranceCapital Shield I (ULIP)Return of single premium paid25,000Growth in fund value
IDBI FortisBondsurance7.3% on invested amount20,000None
Note: The above yields are for a 10-year term policy for a healthy individual of 30 years.

Today, investors are looking for instruments that protect their capital and allow them to lock into returns for a longer period. Insurers are aggressively selling their capital guaranteed Ulips that offer the upside of the market but return the entire premium on maturity (see box). "In traditional products, the sum assured is guaranteed at maturity along with additions and bonuses. But in Ulips, the funds guarantee the full premium, including the service tax," says Leena Joshi, AVP, Life, Accident & Health Profit Centre, Tata AIG Life Insurance.

Kotak Safe Investment Plan II (SIP II), for instance, offers a guaranteed maturity value (GMV) of 2.75% per annum on premiums, net of all charges. In effect, the policy returns the entire premium on maturity. Additionally, the GMV remains the same for all funds irrespective of the equity exposure. The performance of the fund is not too bad either. The growth fund has delivered a CAGR of 17% since launch and bears one of the lowest premium allocation charges among its peers—14% in the first year. Although the growth fund offers an equity exposure of up to 80%, currently it is only 45%.

So it may be worthwhile to check the exposure of these funds to equities before investing. Chances are that the exposure may be kept low to avoid losing money. Also, though the guaranteed return of premium sounds attractive, it is important to check whether the guarantee applies on the invested amount net of all the charges or on the total premium paid. Since the premium allocation charges range from 14% to 35% in the first year, it could considerably reduce your maturity amount.

Many insurance companies do not offer capital guaranteed policies, but allow you to invest in a capital guaranteed fund. Tata AIG Life, for instance, offers the choice of investing in its capital guaranteed fund through InvestAssure Flexi and InvestAssure Future. There are also quasi guaranteed plans on offer. Policies like LifeStage Assure by ICICI Prudential Life promise a guaranteed return of up to 450% of the first year's premium on maturity, whereas the new Reliance Super InvestAssure Plan offers guaranteed loyalty additions.

The Costs

Although capital guarantee comes at no additional cost, insurance companies levy a fund management charge of up to 2.5% on these funds. "Traditional products are priced to offer returns which enable the customer to achieve the desired guaranteed maturity benefits. In Ulips, there is an annual fund management charge of about 1.5%," says Joshi. Also, the GMV is applicable only if the premiums are paid on time and no partial withdrawals are made from the account. The premium paying term for these policies ranges from three years to 25 years but the capital guarantee is applicable only if the minimum term is 10-20 years.

"We follow a judicious asset allocation to ensure that we match the liability at the end," says Shah. At the time of maturity, the higher of the fund value (actual return generated) or the GMV is paid. On death, the higher of the GMV, the fund value or the sum assured, is paid. "These products are best suited for people who have a low risk appetite," says Manik Nangia, Corporate VP, Product Management, Max New York Life. In fact, Vikas Agnihotri, CEO of Religare Macquarie Wealth Management, considers investing in these policies as a protection asset, as they can form a higher allocation for conservative clients.

Guaranteed unit-linked policies
These are structured to offer guaranteed returns along with a potential upside if the markets rise
Insurance CompanyPlan NameGuaranteed Value/ReturnEquity Exposure
Kotak Life InsuranceSafe Investment Plan IIMaturity guarantee of 2.75% per annum on premiums, net of all charges, allocated to the main account.Up to 80%
ICICI Prudential Life InsuranceInvestShield Life NewSum of all premiums paid is guaranteed on maturity of the policy or death of the policyholder.Up to 40%
Birla Sunlife InsurancePlatinum Plus Policy*Guaranteed maturity value will not be less than starting unit price of Rs 10; maximum unit price recorded on 15 of each calendar month* till 15 Dec 2015.Up to 100%
Birla Sunlife InsuranceFlexi Save PlusMinimum guaranteed returns of 3% per annum on premium and any top up amounts, net of all policy charges.Up to 35%
Reliance Life InsuranceMoney Guarantee PlanThe sum of all premiums paid is guaranteed on maturity. Also available is the unique Return Shield feature to protect your returns.Up to 60%
ING Vysya Life InsuranceGuaranteed Growth Plan*5% guaranteed return on premium along with a potential upside of the equity markets.Up to 40%
* Single premium as well as three-year premium paying term

Premium Options

If you are looking at a one-time investment, go for the single premium plans. Besides returning your capital, these plans also guarantee certain returns on your investment. To qualify for tax benefits under Section 80C and 10D, these policies offer a sum assured of 125% on a single premium and a minimum lock-in of three years. The recently launched Jeevan Aastha by LIC has been a hit with investors as it offers the desired mix of fixed returns, capital guarantee and tax benefits.

On a 10-year term, the plan offers a 10% guaranteed addition— a fixed return calculated at a rate per Rs 1,000 of sum assured plus a loyalty addition. After accounting for the guaranteed addition, the yield works out to 7.5% for a 10-year term, and if one were to assume a conservative 5% loyalty bonus, the yield would be 7.8%.

Another popular option is the IDBI Fortis Bondsurance single premium policy, which offers a guaranteed return of 7.3% on maturity. If the maturity benefit exceeds Rs 1.5 lakh, you get a discount on the single premium amount up to a maximum of 5.25%, taking the yield up to 7.5%. Reliance Life also offers a 6.85% return compounded annually till maturity on its Guaranteed Return Plan Series I. "The investor also benefits from any growth in the fund value in excess of the guaranteed amount," says P. Nandagopal, CEO, Reliance Life Insurance.

Before You Buy

Remember that most of these plans are for 5-10 years and the yield is equivalent to a pre-tax yield of 10-11%. This is a good alternative to FDs for investors in the highest tax slab but with limited liquidity. There is a surrender value, but you end up losing part of your investment if the funds are withdrawn before three years. Compared wth Ulips, the premium allocation charge in a single premium plan is much lower. However, since these plans do not offer a high insurance cover, they must be looked at purely from an investment perspective.

Since insurance is a long-term product, insurers can offer longer guarantees. However, in case of policies with higher guaranteed returns, there can be a concern of an asset-liability mismatch. This charge is nonetheless refuted by industry experts. "All guarantees are managed well and we also carry certain reserves in order to meet the odd scenario," says Kotak's Shah. Not to mention the fact that the capital adequacy for plans with capital guarantee is double that of the regular plans.

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