Belying the notion that investments in stock and crypto markets are more popular than fixed income instruments, the exposure to non-participating policies with guaranteed returns continues to grow for life insurers, commanding a lion’s share of the total product mix.
“There is a clear shift in what products people are opting for. For example people are moving more towards non-participating plans. At IndiaFirst Life non-par contribution has moved from 15 per cent in FY19-20 to 35 per cent in FY20-21 to over 45 per cent in the current FY,” said Rushabh Gandhi, Deputy CEO, IndiaFirst Life Insurance Company.
Guaranteed plans offer capital protection where policyholders can choose to receive the payout in the form of a lump sum or regular income for a certain number of years. The return from these policies is around 5-6 per cent, which gets fixed at the time of buying the policy and remains the same throughout the tenure of the policy. HDFC Life’s Sanchay Plus is among one of the popular plans in the market, which offers guaranteed payouts for different tenures. For example: The Long Term Income option offers a guaranteed income for a fixed term of 35 years with a premium paying term of 5 years.
Vibha Padalkar, CEO and MD of HDFC Life, said that their guaranteed product is properly hedged for interest rate risk and the company has a cap to such exposures. “We have said that our non-participating portfolio will be around 30 per cent. Even certain variants have their own natural hedge. These might be shorter tenure guarantees and not long tenure guarantees. So long tenure guarantees will be less than 50 per cent of the overall portfolio of 30 per cent. We have a fully hedged portfolio which means that we have next to no fluctuations versus some of the interest rate sensitivities.”
The guaranteed plans have also become popular as retirement plans given the fixed amount they pay over the long term just like pension plans. However, what makes them separated from annuity plans is their tax treatment. Considering guaranteed plans are treated as an insurance policy under the Income Tax Act (as it offers insurance cover), the payout becomes tax-free. Deferred annuity plans however have a disadvantage on this front as pension income is taxable. Experts say 5-6 per cent tax-free return acts as a deal clincher for fixed income investors, especially to those in the high tax bracket of 20 per cent to 30 per cent.
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