The catch behind guaranteed-income plans

Here's a typical scenario. An insurance agent approaches you with an investment plan that offers 10 per cent guaranteed annual income. He says the insurer can give a written guarantee mentioning this.

The confidence he exudes and the claim of written guarantee are enough to convince you to buy the plan without asking if the 'guaranteed return' is on the fund value or the sum assured (which remains the same throughout the policy period).

If this is too technical, how about asking a simple question such as the total amount you will get at the end of the policy period and how does the return compare with returns from other debt products?

Unfortunately, not many people ask these questions once the agent speaks the G (Guarantee) word.

HOW DO THE PLANS WORK?
The schemes we are talking about are endowment policies with features similar to money-back plans. The only difference is that moneyback plans pay a fixed amount at regular intervals throughout the policy term, while in guaranteed return plans, the policyholder starts getting money after all the premiums have been paid.

These plans offer additions/payouts as a percentage of sum assured, the amount the nominee gets if the policyholder dies. It is usually sum of the total premiums paid.

For instance, in ING Star Life, the buyer has to pay premium for three years, and the policy term is 12 years. The minimum premium is Rs 51,728 and the minimum sum assured is Rs 1,30,000. The death benefit is different from the sum assured. It is 10 times the annual premium for entry age up to 50 years. For others, it is five times the annual premium.

The guaranteed additions and maturity benefits are paid over the last three years (10th, 11th and 12th years) of the policy term.

"The policyholder is able to lock the guaranteed returns for all three premiums paid over the 12-year policy term," says Kshitij Jain, managing director and CEO, ING Life Insurance

A similar plan, Kotak Assured Income, where the premium-paying term is 15 years and the policy term is 30 years, promises 9.10-10.10 per cent annual income from 11th year onwards.

Aviva Life Insurance recently launched a plan-Aviva Family Income Builder-which pays double the annual premium from 13th year onwards. The policy term is 24 years and the premium-paying term is 12 years.

WHAT'S THE CATCH?
Claims such as 'guaranteed income' and 'doubling of money' are made to add spice to an otherwise not-so exciting product.

First, the 9-10 per cent guaranteed addition starts only after completion of a certain period-10 years or more in our earlier examples. This, however, is mentioned in the policy brochure only in fine print.

"The core purpose of the product is to encourage long-term savings and supplement the income of the customer. To serve this purpose, guaranteed income starts from the 10th policy year," says Suresh Agarwal, executive vice-president and head of strategic initiative and distribution, Kotak Mahindra Old Mutual Life Insurance.

The guaranteed income/addition is paid on the sum assured and not the fund value. The sum assured remains the same throughout the policy term while the fund value keeps rising with time. This means investors do not benefit from compounding of returns.



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