Guaranteed Returns Insurance Policy Low Risk Low Return

Today, the market is flooded with various types of insurance products, presenting a plenty of choice for an individual to match his/her needs. One category that has caught investors' attention lately has been the 'Guaranteed Return' product. True to its name, it not only ensures return on your investment but also helps you achieve your objectives, which is quite a task in this uncertain economic environment.

Before anyone goes for a guaranteed return plan he/she should be aware of the fact that the return will be guaranteed on the net invested amount after deducting various charges and hence the figure to look out for is the compounded annual return which will be lesser than the advertised rate. For example, Aegon Religare Guaranteed Return plan gives a return of 7.2 per cent on an annual compounded basis. The plan could be bought with two maturities of 7 years and 10 years and the life cover is 5 times the single premium paid. Rs 1 lakh invested in the 7 years' option will provide Rs 1,62,690 on maturity. Reliance Life Insurance also has a Guaranteed Return Plan with a guaranteed compounded annual return of 6.85 per cent for a period of 5 years. Here the life cover can be chosen from 1.25 times to 5 times of the single premium paid.

Smita has been considering various insurance options for some time now. She was looking for a cover that is adequate and comes with a lesser amount of risk. She also did not want to stretch her payments over a longer period of time. Of a few newer options available to her in the last few months, most are actually guaranteed return products. Smita was wondering whether such a policy actually made sense for her.

Analysis

Guaranteed return products are used for specific reasons – to eliminate risk factor by ensuring a predictable return, to achieve a specific target, and even in poor overall conditions. Insurance field provides a lot of options to an investor and by choosing the right policy, the investor can ensure that he/she has made the best use of these options to meet their requirements. The difference in the types of returns generated by these policies can be attributed to the variations present

What are Smita’s options?

Firstly, Smita has to look at the nature of the guarantee a product provides. Insurance companies guarantee either the capital that will be invested or a specific rate of return on the amount invested, which is the common route adopted in the insurance field. The latter is usually available on the premium invested. In case of a unit-linked plan, there can be a big difference between the total premium and the amount actually invested.

Apart from insurance, which other instruments Smita can consider?

Smita can also check out other options that guarantee a specific rate of return like fixed deposits and small savings. Fixed deposits generate return at the rate of around 7-7.5 per cent for a period up to 5 years, while the rate is 8 per cent for small savings schemes like post office monthly income plan and National Savings Certificates. 

How insurance scores over other options?

Insurance policy can be best for those who want to ensure a minimum rate of increase for their investment along with a specific insurance cover. This is when the person does not want to take much of a risk. 

Will this policy work for Smita?

Normally, guaranteed return products are considered by people slightly older in age because they would not like to lose their capital and thus accept a slightly lower rate of return.

Most of the guaranteed return plans are single premium plans and also open for subscription only for a specified period of time. Smita is young, can afford to take some risk as far as the investment is concerned and would prefer the single premium option. It will be beneficial for her if she is considering a long-term investment.  

In what conditions one would need this product?

In some situations, you might need a specific amount of fund at a specified point of time. And that time it becomes important that the amount is invested wisely plus there is an insurance cover available to take care of one’s objectives, which are also Smita’s objectives.

The product comes with variations like a pension plan or a plain vanilla scheme. Usually, the returns remain the same but some companies offer different returns for different time periods.

Finally, it will be very useful when the overall situation in various other asset classes might not be very conducive as far as the overall investments are concerned. In such a situation it would be better to ensure that there is some amount of a guaranteed return coming in and this would act as the base on which the other developments can be based.