ICICI Prudential Life Insurance recently launched a long-term savings product with three variants. The annuities, which can extend till the age of 99, can be paid immediately, immediately with a booster or as deferred annuities. The participating product allows policyholders to partake in insurer’s profits, beyond the guaranteed portion of annuities. Death benefit, terminal sum assured and terminal bonus at the end of the term are also included.
Are the overall yields from the savings product attractive enough? Here we analyse and compare with other fixed income products.
Variation in annuity payments
Policyholders can choose a premium payment term ranging from five years to twelve and annuities can be received till the age of 99. The maximum age to start is 50 years with no minimum age and a minimum annual premium of ₹50,000. The plan also allows flexibility with payments as income generated from payments can be used to adjust future premiums.
The variants differ in how annuities are distributed. Apart from immediate and deferred, the plan also allows for immediate with regular boosters in annuity payments.
In the regular immediate paying annuities, policyholders pay premiums regularly for five to twelve years. From the end of first year itself, a regular guaranteed income can be expected till 99 years, and a cash bonus will also be announced, which will be linked to the insurer’s performance in the market. Thereby risk is eliminated in the guaranteed portion and risk exposure gained through the bonus portion. At the end of the term, sum assured on maturity (guaranteed and equal to premiums paid) and terminal bonus declared are paid.
For instance, a 35-year-old paying ₹10 lakh through ten years of premiums will receive ₹12,750 per year in guaranteed income and cash bonus ranging from ₹8,750 to ₹24,500 depending on insurer investments generating 4 per cent to 8 per cent returns. Similarly, at the end of term at 99 years, the sum assured on maturity (₹10 lakh) and terminal bonus ranging from ₹26 lakh to ₹1.25 crore can be expected based on insurer’s investment return performance.
The yield (IRR) based on the above illustration ranges from 3.8 per cent to 6.7 per cent. This is below the market performance assumptions of the insurer, as death benefit must be provided for. Death benefit will correspond to the death benefit multiple that ranges 10-15 times annualised premiums.
Deferred annuity option allows for premiums accumulated in the premium payment period to compound and then start periodic incomes, which implies a higher payout. In the above illustration but with a deferred annuity, guaranteed income increases to ₹34,500 after a lag of two years from last premium paid date. The cash bonus can range from ₹9,500 to ₹67,500 per year (4-8 per cent investment returns). The yield improves from 3.8 per cent to 4 per cent in this option.
With immediate annuity with a booster option, every five years a guaranteed booster amounting to 12.5 per cent of the annual premium can be expected as well by rearranging the other components and the IRR essentially remains the same in this variant.
Fixed income environment
HDFC Sanchay, a competing savings product, offers yields in the similar range of 6 per cent. The policyholder can look for protection, disciplined savings and partially risk-neutralised returns from such savings products. But if one is willing to pitch in the effort needed to coordinate savings and has arranged other avenues for comprehensive life protection (term insurance, for instance), fixed deposits from banks are in their prime glory currently and offer a better avenue to generate such savings.
With continuous rate hikes by RBI in the last one year, the current fixed deposits range from 7 to 7.5 per cent. Similarly, small savings scheme or even highest rated NBFCs are offering better yields, but again, protection offered in insurance policies will be missing. But reinvestment risk when the deposits mature is the main risk that is offset with defined savings products, apart from the death benefits.
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