HDFC Life Sanchay Par Advantage: A ‘novel’ traditional insurance plan

Radhika Merwin, BL Research Bureau | Updated on December 24, 2019 Published on December 23, 2019

Flexible payouts, whole-life cover and guaranteed income among the attractions

With unit-linked products losing some sheen in the current volatile market and falling interest rates hitting returns on fixed-income products, traditional life insurance plans are back in focus.

The HDFC Life Sanchay Par Advantage is the new kid on the block.

Generally, inadequate cover, hidden expenses and uncertain returns are the pitfalls in participating policies. However, the HDFC Life Sanchay Par Advantage boasts some distinguishing features. Here’s a review of the plan.

What it offers

The HDFC Life Sanchay Par Advantage is a participating life insurance plan that provides you with an option to take up cover for your entire life (till the age 100). You can choose between immediate income and deferred income. Under immediate income, you can opt for a premium-paying term of 6, 8, 10, or 12 years. Under the deferred income option, the premium-paying term can be 8, 10 or 12 years. The policy term can be chosen (30-40 years) or is taken as 100 minus the age at entry.

Under the immediate income option, cash bonuses (if declared) are provided from the first policy year until death, or the end of the policy term, whichever is earlier. On maturity, the policyholder gets all the premium paid plus accrued cash bonuses, if any, and also a terminal bonus (if declared). On death during the policy term, the sum assured under the policy along with accrued cash bonuses and terminal bonus (if any) are paid.

Under the deferred income option, there is a guaranteed income for a specific period and variable income by way of cash bonuses (if declared) throughout the policy term. The policyholder receives a guaranteed income from one year after the end of the premium-paying term. For instance, if it is an eight-year premium-paying term, you receive guaranteed income from the 10th year for a period of 25 years, or the policy period minus 10 years. The cash bonus (if declared) is also payable from one year after the premium-paying term until the end of the policy term. The maturity/death benefit is similar to the one under the immediate income option.

Immediate income option

Per the benefit illustration given by the company, under the immediate income option, it assumes two scenarios — 4 per cent and 8 per cent return — which is the standard practice. For a 30-year-old male, an annual premium of ₹1 lakh paid for eight years, in an 8 per cent return scenario, will fetch ₹30,000 every year from the end of the first policy year until the end of the policy period (till the age of 100). This apart, at the time of maturity (when you turn 100), the sum assured (₹8 lakh) and the terminal bonus (declared at 8 per cent) of ₹1,59,34,000 are paid.

You may get swayed by the 6-6.5 per cent IRR that this product may seem to offer in this scenario. But don’t take these returns at face value.

There are a few points to remember here before you jump the gun on returns in participating products. In those such as HDFC Sanchay Par Advantage, the policyholders get a share of the profits from the investments of the insurance company, which is declared as bonus. But bonuses are not guaranteed. They depend on the profits of the insurer and you may get them only in good years. Hence, the returns you earn on such products are difficult to ascertain at the start of the policy.

Also, remember that the 8 per cent return displayed in the illustration is only an assumption. The actual return may be lower. And, the 8 per cent return is gross; net returns come to 6-6.5 per cent, which implies that 1.5-2 per cent may be the expense of the policy which eats into your returns.

Deferred income

Under the deferred income option, aside from a discretionary cash bonus, there is a guaranteed income — the rate depends on the age and premium-paying term. For instance, if a person is 30 years old at the time of taking the policy and opts for a 10-year premium term, the guaranteed income rate is 40 per cent of annualised premium; in the case of a 12-year premium term, the guaranteed rate is 50 per cent.

If a 30-year-old male opts for an eight-year premium-paying term, paying a premium of ₹1 lakh, he gets a guaranteed income of ₹28,400 from the 10th policy year for 25 years. Aside from this, cash bonuses if any are given until the end of the policy term (till 100 years of age).

Here again, while the guaranteed portion is assured income, cash bonuses depend on the profits of the insurance company. Hence, it is difficult to assess the real return from the product.

Our take

Traditional policies in general are not an ideal option for those looking for life cover. These products offer inadequate cover. While the HDFC Sanchay Par Advantage offers whole-life cover, the amount of cover at best is 10 times the premium. A pure term cover offers a much wider life cover for a relatively cheaper premium.

However, if you are looking for some form of tax-free income for your whole life and have exhausted other options, you can consider the HDFC Sanchay Par Advantage.

If offers other advantages, too.

One, the policy offers flexibility on payouts. The policyholder has an option to defer the survival benefits, including cash bonuses and guaranteed income, and accrue them if there is a need. This can be opted for any time during the policy term, any number of times. The accrued payouts can be accumulated monthly at the reverse repo rate (currently at 4.9 per cent) and can be withdrawn by the policyholder any time during the policy period. While this gives you the flexibility to plan for specific goals, remember that you can get a higher interest on the payouts if invested elsewhere.

Also, unlike the regular traditional policies where a substantial portion of investments is in debt securities, which limit the returns to policyholders, in the case of this HDFC Life plan, the could can be higher as it proposes to invest a relatively higher portion of investments in equities. However, this also pegs up the risk, and there could be more volatility for an investor in payouts.

The other highlight of the plan is the additional guaranteed income for higher premiums. For instance, for premiums of ₹5 lakh and above, an additional 1.2 per cent income is paid out.

Note that the younger you are, the higher the returns from this product. If you are nearing retirement, the returns may be modest and not worth the while. Investors who opt for HDFC Sanchay Par Advantage can opt for a 12-year premium-payment term — the longer the premium-paying term, the higher the possible returns.

Published on December 23, 2019
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