Personal Finance

Should you invest in IDBI Federal Life’s Guaranteed Wealth Plan?

Rajalakshmi Nirmal BL Research Bureau | Updated on May 11, 2020

We evaluate the plan based on the internal rate of return

IDBI Federal Life has launched a new endowment plan.

An endowment policy is one where the policyholder pays the premium for a certain number of years and, at the end of the policy term, gets a lump-sum. In case of death during the policy term, the sum assured is paid.

Endowment plans are of two types — non-par (non-participating) and par (participating). Non-par plans do not get a share in the profits of the insurance company (declared as bonus by the company) but par plans do. In non-par plans, returns for the policyholders are guaranteed upfront by the insurer.

IDBI Life’s new policy, the Guaranteed Wealth Plan, is a non-par endowment plan. Amid uncertain times in the equity and debt market, it is prudent to have one portion of your investment in a product that promises returns upfront.

We take you through the new plan from IDBI Life, and look at whether investors should go for it.

What’s on offer?

Individuals aged up to 55 years are eligible to buy IDBI Life’s Guaranteed Wealth Plan. The minimum annual premium one can opt for is ₹35,000; there is no option for paying premium in instalments every month/quarter. The premium payment term and policy term are fixed at seven years and 14 years, respectively. Through the entire policy term of 14 years, the insured is covered for death. The amount paid on death is the higher of these — sum assured under the plan (which is 10 times the annual premium) or 105 per cent of the total premiums paid or the maturity benefit.

Once you decide on the amount of premium you want to pay, you will have to select between two options under the plan — lump-sum benefit and regular income benefit.

In option 1, where the benefit amount is paid in one lump-sum at maturity, the payment is a percentage of the total annualised premiums payable and depends on the age at entry of the policyholder and the premium amount. For instance, for a 40-year-old individual who pays an annual premium of ₹1 lakh, the maturity proceed will be 162.32 per cent of ₹1 lakh x 7, which comes to ₹11.36 lakh. The maturity factor (here, 162.32 per cent) keeps changing based on the age and premium paid by the individual.

In option 2, there is no lump-sum payment. The maturity benefit is paid as equal instalments over seven years: it starts from the end of the 8th year and goes on till the end of the policy term. The guaranteed annual payout is a percentage of the annualised premium and depends on the age at entry of the insured and the premium amount. Continuing with the example earlier of a 40-year-old individual paying ₹1 lakh premium, the annual payout will be ₹1 lakh x 133.33 per cent, which is ₹1.33 lakh.

Our take

Any endowment plan should be evaluated only on returns based on IRR — the internal rate of return, which calculates the net present value of all benefits received at different points in time or received in one lump-sum at the end of the policy term, and compares it with the initial investment. The IRR in the case of IDBI Life’s Guaranteed Wealth Plan for a 40-year-old paying ₹1 lakh annual premium is 4.47 per cent in option 1 and 3.64 per cent in option 2. This is the actual annual return from the plan.

There are non-par endowment plans in the market that offer higher returns. For HDFC Life’s Sanchay Plus and ICICI Prudential’s Assured Savings Insurance Plan, the IRR is around 5 per cent (for a 40-year-old, for the longest term the respective insurer offers).

Further, the policy term offered is the shortest in the case of IDBI Life. Against 14 years offered by IDBI Life, ICICI Prudential’s plan offers a 15-year term and HDFC Life offers a 20-year term. With HDFC Life’s Sanchay Plus, there is an option that offers guaranteed payouts till one turns 99 years of age. So, for those of you who are in your mid/late 30s and looking for a longer duration product to match with the time you retire, IDBI Life’s Guaranteed Wealth Plan may not be the right option.

While the non-par plan from IDBI Life is easy to understand and offers an option to take maturity benefit in equal instalments, it loses out to some similar plans in the market on returns.

Note that like regular term life insurance policies, in endowment plans, too, one gets to enjoy tax benefits. Premium contributed towards the plan is eligible for deductions under Section 80 C of the Income Tax Act and the maturity proceeds are also tax exempt per provisions of Section 10 (10D). So, returns from guaranteed endowment insurance products are comparable to FDs. While the plan from IDBI Life doesn’t offer an attractive return, other products mentioned in this article are worthy of investment.

Published on May 11, 2020

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