Guaranteed return plans are insurance products that provide a guaranteed rate of return on an investment over a specified period. In these plans, you pay a fixed premium to the insurance company for a specified period, after which you receive payouts. The payouts may be in the form of a lump sum or as a recurring income, and the amount of the payouts is determined by factors such as the premium paid, the chosen insurance coverage, and the duration of the premium payments. "The key feature of these plans is the guarantee of returns, which provides a sense of security and stability for the policyholder compared to other investment options," says Venkatesh Naidu, CEO, Bajaj Capital Insurance Broking.
Advantages Of Guaranteed Return Plans
The greatest advantage of these plans is the certainty of a fixed monthly income when the policy matures, as the returns are guaranteed. This stability in regular income provides peace of mind in planning for the future and achieving one's goals. "Additionally, these plans ensure the financial protection of your loved ones in case of an unfortunate event, as they offer both guaranteed long-term income and life coverage," says Naidu.
He adds that the investments in these plans are protected from market uncertainty and fluctuations, so whether interest rates drop or the stock market experiences another decline, the interest rates remain the same, and so does the future income from the plan.
Are They A Good Choice For You?
"Just because it's guaranteed and a low-risk product, one should not conclude that it's a safe investment. Just as you feel that market volatility is a risk, losing purchasing power over time is another form of risk," says Arijit Sen, a Sebi-registered investment advisor and co-founder of Merry Mind, a Kolkata-based financial advisory firm.
When making investment choices, it's important to know why the investment is to be made. "Depending upon your life stage, the objective of investment, the time horizon of investment, the macroeconomic scenario, your risk-taking capacity, and your willingness to accept market risks, you need to choose suitable investment products," says Sen. Based on the above-stated factors, if guaranteed income products appear to be suitable, then they definitely can be a part of the products basket.
"The downside of these plans is that such plans do not provide adequate returns. Even now, most plans provide returns in the five-seven percent range. Compared to term plans, the coverage is limited," says Rakesh Goyal, director, Probus Insurance Broker.
Guaranteed income insurance plans are thus not a good choice for wealth accumulation over the long term.