Learn All About Guarantee Life Insurance Plans in the Next 3 Minutes
The main purpose of life coverage is to offer protection to the financial dependents of the insured person. However, there are saving-oriented life coverage plans, which apart from providing protection, help you in saving for your long-term objectives. These plans may either come with a bonus (participatory) or without a bonus (non-participatory).
The guaranteed life insurance plans that come without bonus might carry a guaranteed addition or return instead of the bonus that may change depending upon the profits of the insurers. The guaranteed return element in terms of guaranteed additions under life insurance policies makes these plans attractive for the ones who are looking for assured and fixed returns on their savings.
Let us explore these guaranteed plans to check whether they are worth investing in or not.
The Promised Returns
The most common (and it would be safe to say favorite) sales pitch for the guaranteed income plan is that they provide 8 to 9% of return on insurance premium or in fact, 100 percent return in a few cases. We understand it is easy to fall for these returns that are also assured and fixed for the long term.
However, hidden under these complex terminologies of insurance policies is the structure of payout. The terms & conditions of these plans are so complicated that understanding it may become a difficult task for a lot of you.
The Practiced Returns
First of all, you need to understand that the guaranteed addition is not the exact same as a guaranteed return. The guaranteed benefits will be received only upon maturity, therefore, the actual return won’t be exactly the same as told to the customer.
You should always remember that guarantee comes with a cost. Hence, the returns you will get after adjusting the costs due to the guarantee are low in these plans.
Although the actual amount of returns is dependent on your age, premium amount, and the term of the policy, the average rate of return in most of the traditional plans is between 4 & 6% per annum, including endowment and money-back plans.
The plans that come with a guarantee have even lesser returns. You must compare the rate of return of 2 or 3 selected plans and take the payout structure into consideration for matching with your needs.
Payout Structure Based on Requirements
Since the payout structure of different plans are not the same while the returns are mostly similar, selecting a suitable plan is mainly dependent on the structuring of the payouts. This, in turn, will depend upon the structure of the plan.
A few of these guaranteed life insurance plans are the same as money-back policies in which there is a constant flow of income at regular intervals. On the other hand, there can be a lump sum payment at the time of the maturity of the plan in some cases.
Furthermore, in the case of a few life insurance policies, the payouts will be made for a particular tenure after the plan matures. However, the death benefit remains almost the same across all these plans.
Hence, you must go for a guaranteed plan if assured and fixed returns are preferred above low returns obviously. The structure of payout, especially in the case of money-back schemes, may be used for making sure there are funds available during important events in the future, like payment for purchasing a house or for your kid’s higher education.
The structure of a guaranteed income plan may vary from one insurance provider to another. Some may provide you with a guaranteed return dependent upon the premium while some may provide returns on the cover amount or sum assured.
There may be a difference in the guarantee depending on the policy term or even the term for making the payment of premium. Moreover, in case of a few policies, guaranteed returns will get added to the plan starting from the second year. While in other cases, you may start getting the returns from a later date.
The Downside of Guaranteed Life Insurance Plans
Since these plans are traditional, they are pretty inflexible in nature. Policy term once selected cannot be changed later. Suppose, for somebody who has begun his savings for 20 years, may need to access his or her savings during the 16th or the 19th year of the policy term.
Surrendering your insurance plan at that time may prove to be expensive. There are many such policies that don’t allow partial withdrawals also. You are not even allowed to change the coverage amount or sum assured.
What Can Be Alternatives for this Policy?
You can opt for a pure term plan as an alternative and at the same time save through long-term recurring or bank deposits because the returns are fixed in that case. A suitable plan would be the one that is a combination of traditional plans and term insurance plans, based on the taxation & cash surplus available with the individual.
In a Nutshell!
The life insurance plans that come with guaranteed additions are comparatively costly. They are suitable for conservative investors who don’t wish to for any volatility in return, rather they wish to receive a particular fixed amount at the time of maturity.
Those investors who are willing to accept some uncertainty in the amount received at the time of maturity may prefer traditional guaranteed life insurance plans.