Flexible withdrawal facility during emergencies makes these schemes more lucrative
Considering the market conditions and the high volatility that we all have been witnessing since the last year owing to the onset of Covid-19 pandemic, maintaining financial stability has become the utmost priority. Moreover, with most traditional investment products, bank fixed deposits mostly and losing attention of the investors due to drastic fall in the rate of interest, it is time to park your money in products that have guaranteed returns. The rate of interest on bank fixed deposits have fallen from 8.5 per cent in the year 2014 to 5.4 per cent in the year 2020. While investing your money, it is not only important to look for products that guarantee returns but also cater to reinvestment risk and most traditional products lack. The maximum tenure for which most investment products available in the market today guarantee returns is five to ten per cent. None of the products available in the market today caters to reinvestment risk besides guaranteed return products that have emerged as the most successful alternative to bank fixed deposits which is the most trusted savings instrument of middle-class Indian.
Fight Re-investment Risk
One of the most prominent reasons why guaranteed return products have created a niche for themselves in the savings-cum-protection products category is that these plans not just guarantee returns for five or ten years but up to a maximum of 40 to 45 years, rightly catering to the reinvestment risk. Reinvestment risk is amongst the most important elements worth considering when planning investing your money for the long term especially considering the falling interest rate of most investment products. Moreover, these plans are specifically designed to meet the specific needs and requirements of risk-averse investors who wish to keep their hard-earned money safe and only invest in products that do not work as per market performance. The USP of the plan is that these savings-oriented life insurance plans in addition to helping one to save for long-term goals also provides life cover that is as high as up to ten times the annual premium paid.
Higher Returns than Fixed Deposits
These non-participatory plans, instead of declaring bonuses that may vary depending on the profits that insurers make, offer a guaranteed return in lieu of a bonus that is much higher than the interest offered on most bank fixed deposits. As per market reports, the maximum returns that most banks are offering for a five year fixed deposit is between 5 – 5.5 per cent. However, the rate of returns on guaranteed return products is as high as six per cent. In fact, this is happening for the first time in 21 years that the rate of returns on guaranteed returns/traditional products is much higher than returns offered by fixed deposits.
Varied Payout Options
Moreover, the structure of the guaranteed return plans is not the same across insurers and customers have a wide array of payout options to choose from. While some may offer returns in form of monthly instalments, there are also plans available in the market wherein you can choose to avail the payout options as annual income. Additionally, in some plans, guaranteed returns are added to the policy from the second-year onwards while in some cases, returns may start after the policy pay term. The payout structures, especially in guaranteed return plans, can be used to ensure cash flows at important future goalposts, such as higher education of a child, child’s marriage or payment for a home loan.
Since the structure of payout is not the same while returns are almost similar, choosing the right plan will depend primarily on the way the payout is structured. The death benefit, however, is more or less the same across all such plans and is higher than the sum assured on maturity or 10 times of the annual premium or 100 per cent of the monthly premiums paid.
Most people have a misconception that guaranteed products being traditional plans are inflexible in nature and money once invested cannot be withdrawn or the policy cannot be surrendered in case of any emergency like healthcare expenses. Today, insurers have come up with plans wherein you can surrender the policy within the first five years of investment without paying anything extra. This caters to the liquidity risk that often many traditional products lack as customers can anytime surrender their policy to receive their premiums back. There are also plans available in the market, wherein customers start receiving a monthly income from the second year of investing their money hence offering customers early liquidity.
Guaranteed Return Plans are one of the most trusted and affordable savings-cum-insurance products available in the market today. These plans suit conservative investors who do not want any volatility in returns and want a certain fixed amount on maturity. Conservative investors who wish to avail tax-free returns and want to avail tax benefits on the premiums invested must stick to these plans for the best returns.
The author is Head-Investments, Policybazaar.com
DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.