FISCALLY FIT
Investing wisely
SHYAM P.
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‘Guaranteed Return’ insurance plans, contrary to popular perception, neither offer better investment returns nor cheap insurance cover.
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The most lucrative use of your capital is to directly invest in a well-established ELSS mutual fund.
Despite the proliferation of Guaranteed Return Schemes that offer tax waiver, term life insurance and investment benefit, the fact is that they come with many hidden clauses and hefty charges. This tax season, with the stock market at rock bottom lev
els, investors will be better off investing directly in ELSS mutual funds (Equity Linked Savings Scheme). Those seeking life insurance security must enrol into a separate pure risk term cover life- insurance plan in addition to their ELSS investment.
‘Guaranteed Return’ schemes are either single premium or annual premium insurance plans. It seems the rise in popularity of ‘Guaranteed Return’ schemes is four-fold: they offer tax benefit, they offer insurance cover, they provide investment returns (with either fixed return guarantee or minimum maturity guarantee over a 5-yr or 10-year lock-in period), they levy hefty charges (for the insurance company/ agents to pocket). Let’s evaluate by taking the features apart:
Tax Benefit (the only good thing about the schemes)
Not only is the premium that you contribute (either upfront or on an annual basis) eligible for exemption under section 80c, the maturity value is also exempt from tax.
Death benefit
The single-premium ‘Guaranteed Return’ plans (including the superhit Jeevan Aastha) typically offer little cover in terms of life insurance compared to the premium amount. Beware of tricks that claim high first year insurance cover that drops to a fraction by the end of the term (that’s crazy! Ain’t it?). I guess after enrolling in the scheme, one needs to kick the bucket ASAP in order to avail of maximum benefit. Some single-premium ‘Guaranteed Return’ ULIPs (Unit Linked Insurance Plans) that do offer higher insurance cover deduct the corresponding ‘mortality charges’ upfront. That means the insurance cover is not ‘free’ as your agent would make you believe.
The other variety: annual-premium ‘Guaranteed Return’ ULIPs, offer a ‘death benefit’, which is usually either the fund value only (as on date) or the sum of fund value and ‘sum assured’ (insurance claim). The first option is not insurance really and the latter option comes with a high ‘mortality fee’ (monthly or annual charge in return for the insurance cover).
The question is: if you are anyway going to be charged for your insurance, why don’t you just pay the relevant fee (or probably even a lesser amount) and take a separate pure risk term insurance plan? What’s the point in jointly taking insurance along with the investment scheme?
Lacklustre Investment Returns (after netting off charges)
Some single premium ‘Guaranteed Return’ plans (such as your Jeevan Aastha or Aegon Religare Guaranteed Return Plan) offer fixed post tax investment return of around seven per cent p.a. over a period of five to 10 years. For those in the highest tax bracket, this translates about one per cent higher annual post tax returns compared to five-year Bank FD or NABARD bond, which are also eligible for 80c tax deduction. This is because investors in Bank FD or NABARD Bond have to pay a tax on interest earned at the time of maturity (computed based on tax slab). For lower tax brackets, the one per cent return differential pretty much disappears. Either ways, I don’t think there is anything to salivate over, at least not to the extent the schemes are promoted. You could invest in a PPF (upto Rs. 70,000 p.a. with 80c deduction) and get eight per cent p.a. tax-free returns.
Other single premium ‘Guaranteed Return’ plans are ULIPs e.g. Bajaj Allianz Capital Shield, which offers a guaranteed maturity value after a five-year term that is equal to your first premium amount! Can you believe that! This means they don’t even guarantee fixed-deposit returns on your premium. Their argument is that this is only a minimum guarantee i.e. you will reap higher returns from this scheme if the stock market goes up, as they would invest your premium amount in mutual fund(s). It doesn’t take a genius to figure out that the stock market will definitely go up over the next five years as long as the world doesn’t come to an end! Then why do you need this scheme? You could directly invest in a mutual fund at a much lower cost! Speaking of cost, the charges for the scheme are as follows: two per cent one-time premium allocation charges, 2.75 per cent p.a. recurring fund management charge, two per cent withdrawal charge at maturity. This is in addition to the separate mortality charge that you have to pay for the life insurance cover.
The annual premium ‘Guaranteed Return’ ULIPs typically require you to pay premiums for a minimum of three years and allow withdrawal of funds after five years lock-in. Just like the single-premium ULIPs (discussed above), these plans also invest your premiums in mutual fund(s) and offer a minimum return guarantee — but only on your first premium! Even this guarantee becomes meaningless if you account for the charges. So here again investing directly in a mutual fund seems to be a better and cheaper option.
The recently launched ICICI Prudential Return Guaranteed Fund or ‘RGF’ is a good example of how charges diminish ‘guaranteed returns’. One unit of the RGF is available for Rs. 10 NAV with a guaranteed return of Rs. 15 NAV (50 per cent) after five years. This wonderful scheme (I am kidding) can be availed if you enrol in their annual premium ULIPs: Life Stage Pension or Life Stage Gold. All right you may say! At least I am getting 50 per cent minimum guaranteed returns for my first premium. The answer is ‘no’, because only a portion of your first premium is used towards purchase of units. About 20 per cent of the premium is deducted towards premium allocation charge! That means although you expect a total return of 50 per cent (Rs. 10 NAV to Rs. 15 NAV after five years), your effective guaranteed return after charges would be much lesser — close to 20 per cent after five years. That’s a pathetic guarantee! You would earn more in a Bank FD.
Furthermore, some of the other charges such as policy administration charges (6 per cent p.a.) and mortality cover are deducted by cancellation of units. That means you won’t even realise it: while you keep your focus on the rising NAV, the number of units will gradually keep reducing over the years! It is almost as if you can call the product ‘Charge Guarantee Scheme’ instead of ‘Return Guarantee Scheme’.
Summary
‘Guaranteed Return’ insurance plans neither offer investment returns that are significantly better than other fixed return instruments (such as Bank FDs, PPF etc) nor cheap insurance cover. In fact the ULIPs that offer these schemes just invest in mutual funds. So, why pay extra charges and succumb to hidden clauses?
The best and the most lucrative use of your capital for this tax-planning season is to directly invest in a well-established ELSS mutual fund. These carry very low charges when compared to the ULIPs or other ‘Guaranteed Return’ Insurance cum Investment plans. Just because you made the wrong decision of investing in the market at the peak it doesn’t mean you should shy away from making the right decision of buying when it is cheap!
If you are concerned about ‘death benefit’, buy a dedicated life insurance policy — a pure risk cover without the bells and whistles of endowment, investment, money back, ‘guaranteed return’ etc. That way you can pay a low premium and you know exactly what you are getting. eg. LIC’s Jeevan Anmol offers a pure risk term cover. If you are a 30 year old, for a single premium of Rs. 8,300 or annual premium of Rs. 1, 200 you can get a 10-year term life cover of Rs. 5 Lakhs (i.e. 400 times your annual premium or 60 times your single premium).
This is your fortnightly column on money matters. You can reach the author at: shyamscolumn@gmail.com or www.shyamscolumn.com
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