804699 SIP myths you must know!

Guaranteed insurance plans are the flavour of the season. When fixed deposit interest rates are at a record low, these plans offer higher assured returns of around 5-6% for the tenure as long as 10-30 years. What makes them one up on the bank deposits is their tax-free status. The payouts under these plans are tax-free as it offers a combination of both insurance and investment. This lends them a huge advantage over similarly structured deferred annuity plans where pension income is taxable. For investors in the higher tax bracket of 20% and 30% tax brackets, a 5-6% tax-free return can be worth investing in the current scenario.

What are guaranteed plans?

These insurance plans offer the guaranteed payout at the time of buying the policy, which remains the same throughout the tenure of the policy. The payout can be either in the form of a lump sum or regular income for a certain number of years.

Here are various options offered under guaranteed insurance plans:

Maturity benefit

These plans offer a guaranteed amount on maturity as lumpsum at the end of the policy term provided all premiums are paid and the life assured survives the policy term. For example, HDFC Life’s Sanchay Plus offers a guaranteed maturity option for a term of 10, 12 and 20 years with the Premium Paying Term (PPT) option of 5 years, 6 years or 10 years. On maturity, the benefit equals to the guaranteed sum assured and guaranteed additions are paid. The guaranteed sum assured is total annualised premiums paid by the policyholder whereas guaranteed additions (GA) are paid by the company every year after paying a premium for a certain number of years.

Regular income

This option pays a guaranteed income for a certain number of pre-determined years ranging from 10-20 years. These are deferred plans where a policyholder first pays a premium for a certain number of years after which payout in the form of guaranteed income starts after the completion of the policy term. For example: Under HDFC Life’s Sanchay Plus for the policy with a term of 11 years and PPT of 10 years the regular payout starts from 12th year to 21st year. The annual payout ranges from 188% to 209% of annualised premium depending on the age of the policyholder.

Long term payouts

Under this option, a guaranteed income is for a longer duration of time ranging from 25-30 years. For the longer-term policy, many insurers also return the total premium paid at the end of the payout period. Here the policy year can be 10-15 years for the premium paying term of 5 to 12 years. For example, if the PPT is 12 years and policy term of 13 years then the guaranteed income is paid from the 14th year for continuous 25 years.

Life long payouts

There are some guaranteed plans that give you an option to earn guaranteed income up to the age of 99 years with a return of premium on maturity. Here the minimum age requirement can be higher at 50-60 years as the product is suitable for people closer to their retirement.

If you want to invest in a guaranteed plan, invest in the option according to your life stage and goals in life.