Life insurance is a popular tax saving instrument and should be a part of financial planning and goals set. There are several kinds of life insurance plans in the Indian market. Guaranteed life insurance plans sound like a good deal. However, these guaranteed life insurance plans are expensive and inefficient. We will see how.
Difference between term plans and guaranteed life insurance plans?
Simple term plans provide insurance as a simple contract. Premium and benefits under the policy is for a fixed term. The insured pays a small fixed premium every year through the term. If he dies during the term, his nominees get the entire sum assured. If he survives the term, there is no payout. Thus, term insurance is a pure form of insurance.
Guaranteed policies, on the other hand, promise and guarantee a variety of benefits. They offer to atleast give back the money which has been paid as premium. This sounds lucrative, isn’t it? Now the truth. The actual returns depend on the age of the insured, term and the premium amount. The average IRR (internal rate of return) in most guaranteed plans, including money-back, endowments, lie between 3 and 6% p.a. The plans with guarantees carry lower returns, higher premiums, longer maturity periods.
Why should you stay away from guaranteed life insurance plans?
A thumb rule worth remembering is that in insurance, there are no freebies. Guarantees always come at a calculated cost and should be aligned with your financial planning and risk taking capacity. The following points are worth considering.
- Guarantees are always at the cost of the customer. PPT (Premium paying term) is short, and the benefits promised are 115% of SA at the end of the term. For Example, a policy has PPT of 5years to receive the 115% SA at maturity of 10 years. SA is the amount of premiums paid plus dividends on the amount accumulated in premia. The rate of return is less than 3% versus even a savings account which yields ~4%. What people do not realize is “A Rupee today is worth more than a Rupee tomorrow”.
- There is no uniformity across the insurers by guarantee. Some say 115% of SA, while others say GA (guaranteed additions) of 8 to 9% of SA postmaturity payouts for 15 years of 200% premiums paid etc.
The term plans have a small monthly or annual premium and come with a large life insurnace cover. In the guaranteed plan, on the other hand, the premium are large and the life cover is small. Clearly, they are a very expensive form of insuring one’s life.
We can see that it is always better to buy term life insurance plans. You should align your investment with your long term plans. Look out for Equity Linked Savings Scheme (ELSS) mutual funds if you are also looking to save tax under Section 80(C). Never forget that life insurance provides a big amount against an untimely death and should not be confused with investments.