Guaranteed insurance products (GIPs) are savings products with a tinge of insurance. Because the emphasis is on ‘guarantee’ of a certain return, the ‘return’ aspect tends to take a backseat. But it doesn’t mean that these products don’t suit anyone. Instead, it can be a personalised decision based on an analysis of one’s own risk aversion, preference for assured returns, tax implications and the goals that are served by the product.
Assurance is the key
GIPs offer a return/yield between 4.5 and 6.5 per cent compared to the current 7-7.5 per cent yields for FDs over 4-5 years. Long-dated government bonds (10-30 years) are currently trading at a yield of 7-7.2 per cent. Some of these can be bought at RBI retail direct as well. This comparison is limited to yields as the product timelines, ranging from 30 years to 50 years (including premium payment, deferred period and income period), cannot be replicated through other instruments. After investing periodically over 10 years, and after a deferred period, annual income is paid out to the policyholder for a certain period of time. A death insurance equivalent to 10x the annual premium is also provided. The premium paying terms, deferred period, death insurance and income period can be varied across policies as product variations.
But the IRR that is guaranteed in the form of annual income does not change. Premium paid in the first year secures the same yield as the same premium paid at the end of 10-15 year term. Through the 10-15 year premium payment period, whatever be the interest rate, inflation, reinvestment risk or other macroeconomic factors, the insurer locks in the required yield with premiums received and yet to be received. This is achieved by investing in long-dated treasuries or forward rate agreements with banks. The limited active management involved in securing the locked-in yields in any macroeconomic environment accounts for part of difference between long-term yields and the promised IRR, apart from management fees and others.
According to the industry, assurance of the yield over several years, and through economic cycles, is the key function of the product. The assurance, which no other product in the category can achieve, is the primary draw for the policyholder. Thus, if one is certain of the goals which can be served by the assured yield, one can allocate sums to this product with conviction.
Tax-payers can claim deduction from Gross total income to the extent of life insurance policy premiums, which fall under Section 80(C). The bracket itself is limited to ₹1,50,000 per annum and has been overcrowded with deductible instruments: PF, NPS, ELSS and others, which limits the deduction one can achieve through this. Also, all of this is not applicable under the New Tax regime anyways. The maturity proceeds from policies with more than ₹5 lakh annual premium are taxable as per recent tax changes — even when life insurance premiums paid in aggregate are above ₹5 lakh per annum. Earlier, all maturity proceeds from Life Insurance were not taxed under Section 10 10(D).
Risk aversion and suitability
As a primary component of your retirement portfolio, this product is suitable for those who are completely risk-averse. The insurance component can also be a comfort factor. But this is actually a misguided one, with 10x annual premium on death offered, being neither adequate nor efficient.
However, this product can find a fit with even those who have a risk appetite and have invested in other higher return, market-linked products for a primary income stream. In such cases, a second stream of income that is not conditional on any market factor is secured through these products. Similarly, gifting the policy to aged parents, whose expenses are not growing and can be ascertained with some certainty, is another use case for the product.