Four crucial questions to ask about guaranteed Life Insurance plans

Life Insurance companies develop products that not only provide financial protection but also help one save in the long term. These plans come as either participatory (with bonus) or non-participatory (without bonus).

May 04, 2016 10:42 IST | India Infoline News Service
Life insurance is procured with the primary intention to provide financial protection to one’s dependents in the event of a catastrophe. In response to a market need, Life Insurance company’s developed products not only provide financial protection but also help one save in the long term. These plans come as either participatory (with bonus) or non-participatory (without bonus). Participatory plans carry a bonus that is pegged to the insurance company’s financial performance, whereas non-participatory plans carry a guaranteed return in lieu of bonus. This attracts many who are interested in receiving an assured return on their saving. Below are 4 questions that you should ask before purchasing a guaranteed life insurance plan.
Are guaranteed returns real?
An 8 – 9 percent return on premium catch line or one a guaranteed addition of 7-9 percent of the premium is sure to capture your attention if you are an avid saver; especially so when they are fixed and assured for the long term. However, concealed under the complicated language of insurance plans lies the payout structure. The terms and conditions of the payout structure are complex and often difficult for many to understand. These complexities occasionally result in delays or disqualifications from the release of the guaranteed returns.
What are the actual returns?
You need to be aware that guaranteed returns are not equivalent to guaranteed addition. Furthermore, the benefits only accrue on maturity giving a false perception of the actual return to the customer. On traditional plans, returns depend on one’s age, premium amount, the term and the average internal rate of return (IRR). This is usually in the range of 4-6 percent per annum. However, on the guaranteed return plans, due to the cost of guarantee, the returns are usually lower.
Are the guarantees uniform across insurers?
Different insurers have varying structures for their guarantee plans. While some may guarantee based on the sum assured others may give on the basis of the premium, others differ in terms of the policy and there are those who differentiate in terms of premium payment.
How are the payouts structured?
Since the returns are similar and the payout structure different, the choice plan for a customer is largely dependent on the payout structure and its alignment to one’s needs. There are some plans where there is a regular flow of income, whilst some choose to make lump sum payment on the plan’s maturity. In other cases, payouts are made a few years after maturity of the plan. Death benefits, on the other hand, are more or less similar across different insurers i.e. the sum assured on maturity is 11 times the premium. 
Life insurance plans with guaranteed returns are a relatively costly as compared to traditional plans. Before purchasing a plan, a review of the above questions will provide a better understanding of the product to purchase.

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