Simply put: Guaranteed life insurance

Two friends discuss retirement plans and the topic shifts to the appropriate asset class.

Sudhir: Once a month or two, I receive a consolidated statement of my investments, and my reaction has ranged from ecstasy to disappointment with recent periods invoking a constant stream of ‘meh’. I cannot bear this roller coaster of emotions, especially in money matters. I have decided that by the time of my retirement my investments should filter down to fixed deposits only. I don’t want any tension in my days of rest.

Inder: I believe I will be able to handle equity risks at that age as well, but I have a portion of retirement funding invested in guaranteed life insurance.

Sudhir: First time I’m hearing of such a product. What is the guaranteed return and how is that different?

Inder: Well, insurers offer guaranteed returns ranging 5-6 per cent mostly. The insurer can guarantee these returns because he is choosing ultra-low risk securities like government bonds, for instance. By buying such securities which are trading at a given price and given maturity amount, the yield is locked in. But only if held to maturity. Also, you get term insurance component which generally pays ₹10-20 lakh on death along with investment returns.

Sudhir: I believe there are some tax breaks as well.

Inder: Yes, the premium payments fall under 80C and the maturity amount for premiums under ₹5 lakh also get tax break.

Sudhir: So there seems to be a trade-off on returns to guarantee the returns.

Inder: Well, returns are a function of the underlying asset class, which here are long-term bond yields. But yes, the insurer has lower bandwidth while allocating funds in order to secure the yields.

Sudhir: What if the restriction in guarantee is lifted?

Inder: Now you are slowly drifting into market-linked products. Here, the returns will be higher as the underlying asset class of equities offer a higher return potential over longer terms. But again, you will be exposed to market volatility in this case.

Sudhir: Yes, eliminating volatility is my ideal benchmark. But I think I can employ a hybrid method with respect to these guaranteed life insurance products. I’ll use risk-based assets to build up a corpus and later when the time comes, ill deploy the corpus in such guaranteed products.

Inder: Congrats on the discovery, however, I believe this is widely followed. But the primary appeal of these products is for individuals who are strongly risk-averse in the older years. Even basic investing tenets support the concept of lower risk at higher age so this can appeal to such individuals. Also, tax breaks and the minimum insurance covers are factors helping the product.

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