All guaranteed return policies guarantee is low returns

They are as good or as bad as a fixed deposit

Guaranteed return policies: All they guarantee is low returns

dhanak हिंदी में भी पढ़ें read-in-hindi

It is the tax-saving season, and individuals are hurriedly engaging in activities to save an extra buck on taxes. Ideally, tax planning should begin at the start of every financial year, i.e., in April, but many find themselves initiating this process at the last minute.

Taking advantage of this human behaviour, certain products offering enticing tax benefits are prominently presented during this time. One such product is life insurance policies making claims of 'guaranteed returns' or 'money-back' assurances. These products, aggressively marketed, are nothing but endowment plans in disguise.

Endowment plans combine life insurance coverage with investment. The premiums paid into these plans are a) invested and b) used towards life insurance cover. Although these plans offer a tax deduction under Section 80C of the Income Tax Act (in the old tax regime), here, we evaluate if it makes sense for you to buy one before April.

Limit on tax exemption

Besides the tax shelter, the maturity benefits of endowment plans are tax-free under Section 10 (10D), provided the insurance cover is at least 10 times the premium paid in any year.

However, for policies taken after April 1, 2023, a limit has been imposed on tax exemption. Suppose the annual premium exceeds Rs 5 lakh (excluding GST). In that case, the maturity benefit becomes taxable under 'Income from other sources' and as per the income tax slab rates applicable to an individual's income.

Low returns

Taking a look at some endowment plans, HDFC Life Guaranteed Wealth Plus offers a measly 5 per cent return on investment for its lump sum variant. Similarly, the annuity variants of SBI and ICICI plans yield approximately 6 per cent. These returns are for plans with an annual premium below Rs 5 lakh.

Only Bharti AXA Life Secure Income plan offers a slightly better 8 per cent of sum assured per annum. However, in reality, this translates to a meagre 4.28 per cent return.

Return of endowment plans (guaranteed income plans)

HDFC life Guaranteed Wealth Plus Bharti AXA Life Secure Income Plan SBI Life - Smart Platina Plus ICICI Pru Guaranteed Income For Tomorrow (Long-term)
Type Lump sum Variant - Limited Pay Income plan with Assured Benefit Income Plan Option Life Income Income with 110 per cent ROP (return of premium)
Premium payment (in years) 6 10 10 10
Premium (annual) Rs 2 lakh Rs 50,000 Rs 1 lakh Rs 1 lakh
Policy tenure (in years)  12 20 26 41
Annual payout - Rs 24,885 Rs 1,03,220 Rs 93,187
Maturity amount Rs 18,84,000 Rs 6,22,122 Rs 11 lakh Rs 11 lakh
Return 4.83 per cent 4.28 per cent 5.91 per cent 5.98 per cent
Note: Premium as per brochure; GST may affect the IRR (internal rate of return) calculations.

Even lower post-tax returns

As mentioned earlier, the maturity benefits are taxable if the annual premium exceeds Rs 5 lakh. So, considering HDFC Life Guaranteed Wealth Plus plan with a Rs 6 lakh annual premium, it offers a post-tax return of 4.05 per cent. This is even less than the post-tax returns of a typical five-year fixed deposit (FD) at 4.66 per cent. The calculations assume you are in the highest tax bracket of 30 per cent in the old tax regime.

Lower post-tax returns of endowment plans

In comparison to FDs

Plan name SBI fixed deposit HDFC Life Guaranteed Wealth Plus
Type 5-year FD (6.50 per cent quarterly compounded) Income Variant
Payment (in years) 6 6
Annual premium Rs 6 lakh Rs 6 lakh
Tenure (in years) 10 37
Annual payout Rs 8,28,252 Rs 2,83,500
Maturity amount - Rs 36 lakh
Returns (Post tax-30 per cent) 4.66 per cent 4.05 per cent
Note: Premiums as per brochure; GST may affect the IRR (internal rate of return) calculations. The payment/investment is done at the beginning of the year.

So, while an endowment plan with an annual premium below Rs 5 lakh might seem attractive on a post-tax return basis, the difference is only marginal. In addition, most of these policies have a long-term horizon and stringent surrender value norms.

Our word

  • Don't delay and begin planning and implementing tax savings at the beginning of every financial year, i.e., in April.
  • Do not mix insurance and investment. Investing in products like endowment plans prevents you from maximising the benefits of both insurance and investment.
  • Opt for a term plan , which is an affordable and more efficient form of life insurance. They offer extensive coverage at a reasonable cost. Remember, the main purpose of a life insurance policy should be protection, not returns.
  • For a tax-saving investment, consider equity-linked savings schemes (ELSS funds) . Their ten-year category average returns (of direct schemes) stand at 17.6 per cent, as of January 8, 2023.

Also read: Do not mix insurance and investment

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