Watch Out For ‘Guarantee’

As humans, our innate instinct always makes us buy products with guarantee. Irrespective of whether the guarantee would ultimately payoff or not, we would love to jump on those products that have a guaranteed feature attached to them. Similar is the situation when we are buying for insurance policies. Because of the manipulative language and hidden terms used, it becomes all the more  important to find out whether guarantees that come with insurance policies act like real guarantees or are just making false promises.

In insurance, we typically come across two categories — ‘Guaranteed Additions’ and ‘Guaranteed Bonus’. It is important to understand the difference between these two before taking a buying decision.

Guaranteed additions are also known as ‘Loyalty Additions’. These additions are broadly available in three forms.

• Guaranteed additions in fund value-These additions are calculated as a percentage of fund value, which are added into fund value after certain years of investment. These additions are given in the form of reward to investors for staying in for a long-term. For example, ICICI Pru’s Lifestage Wealth II is one such product among many others that has same features. Once you complete 10 years of investment in this product, additional 2% will be added to your fund value in 10^th year. In regular premium pay, 0.75% p.a. will be added till maturity; whereas in limited premium pay, 0.5% p.a. will be added in your fund value, 11^th year onwards.
• Guaranteed additions in Sum Assured-Under this type of additions, your sum assured would increase by a certain percentage of either the sum assured or that of premium. A classic example of this type of additions is the IGain III of Bajaj Allianz, where, from 6^th policy year onwards, the sum assured would increase by an annual premium and new charges would be levied on enhanced sum assured.
• Guaranteed addition in maturity value on the basis of premium-Last but not the least, loyalty additions on the basis of premium paid. IDBI Retiresurance is a glaring and latest example of such guarantees. The table below depicts the additions in guaranteed maturity value as a percentage of annualized premiums.

One has a take a keen look on the plans to choose one on the basis of its real applicability, worth of guarantees and benefits and your goal of investment. Products involving guaranteed additions in fund value are suitable for those who look at insurance as an investment and a source of capital creation and protection; whereas, additions in sum assured are suitable for those who want protection of their loved ones after them.

Another way to look at it is whether these guaranteed additions will still pay in case you do not wish to continue with premiums (investment). To simply this, let’s see a comparison between Bajaj Allianz Invest Plus and Tata AIG InvestAssure Apex. If you invest in Bajaj Allianz Invest Plus, you will get 10% of each net premium added as loyalty addition from 11th policy year onwards. In comparison to this, if you invest in TATA AIG InvestAssure Apex, you would be awarded with an addition of 1% of regular premium fund value at maturity. Two vital points to note here are – Firstly, guarantee of addition at maturity would be applicable only if your investment horizon equals to the term of the plan, otherwise there will be no additions. On the other hand, plans which give you regular additions, keep adding value to your funds from a certain year onwards. This means that from our earlier example, if you surrender your Bajaj Allianz Invest Plus in the 15th policy year, you would still be in a position to enjoy 4 years of loyalty additions. But if you surrender TATA AIG InvestAssure Apex even one year before maturity, you will not get any addition. Secondly, there are no free lunches and everything comes for a cost. Therefore, compare premiums across products to find out the suitability of a product.

The other type of guarantee that needs to be looked at is the guaranteed bonus. Guaranteed bonuses are added to your fund value or sum assured. These bonuses are awarded only if the insurer/company is running in profit. This actually means that on the face of it, nothing is guaranteed. When the insurer runs in profits you will get bonus. The amount of bonus declared and the period of bonus is again not fixed. In this scenario, some plans defer this scheme till maturity, which is called Terminus Bonus.

Guaranteed bonuses are categorized in two broad – Simple Reversionary Bonus and Compounded Reversionary Bonus.

• Under Simple Reversionary Bonus, the amount of bonus declared is added to the sum assured, which is termed as vesting.
• Under Compounded Reversionary Bonus, the amount of bonus declared will be added to new sum assured (including vested bonus).

Due care should be taken to not to confuse ‘Guaranteed bonus’ with guaranteed additions. It is commonly seen that insurers would always want customers to make this common mistake and boost their sales. For the same, they use this marketing gimmick to make people  believe that guaranteed bonuses are actually guaranteed. Take the example of LIC Jeevan Saral. The sales material displayed on their website displays the following matter under the heading of loyalty additions..

“This is a with-profits plan and participates in the profits of the Corporation’s life insurance business.  It gets a share of the profits in the form of loyalty additions which are terminal bonuses payable along with death benefit or maturity benefit.  Loyalty Additions may be payable from the 10th year onwards depending upon the experience of the Corporation.”

The subject matter clearly indicates that these are guaranteed bonuses and the not loyalty additions or guaranteed additions. But as a marketing gimmick, it has been put under the heading of loyalty addition to make it look as if it is loyalty addition. Another consideration here is that even if it is a guaranteed bonus, it has been deferred for the first 10 years.

So stay informed and do not fall into trap.