A guaranteed income plan in life insurance comes with a predefined schedule and a specified amount that is paid to the policyholder. Income under this plan can be provided to the insured on a monthly, quarterly, half-yearly or annual basis.
Unlike term insurance, which provided cover only till the expiry of the term, or the years, for which the policy has been purchased, the guaranteed income plan provides a fixed amount for a specified period after maturity of the policy.
The amount of income that is provided under the guaranteed income plan is fixed and calculated either as a percentage of the sum assured or the annualised premium.
Premium paid under term plan is less. However, as the savings component is involved, you need to pay a very high premium in a guaranteed income plan. Before buying a guaranteed income plan, one should first ascertain his/her purpose for buying the insurance policy.
According to Aatur Thakkar, Co-founder and Director of Alliance Insurance Brokers, one should buy guaranteed plans if fixed and assured returns are preferred over low returns.
“These plans offer capital protection and stable returns. Life insurance cover provides financial security to the family and a guaranteed insurance plan also helps the customers to eliminate the uncertainty of the future income streams to a large extent,” Thakkar told FE Online.
What Rs 1 crore cover costs
There are many factors on which actual returns are dependent under a guaranteed income plan. These could be one’s age, term and premium amount, and the internal rate of return (IRR) in most traditional plans including money back and endowment, said Thakkar.
Each insurer has its structure of guaranteed plans and guaranteed returns are based either on premiums or the sum insured.
While choosing the right plan, one should thoroughly understand the pay-out structure as well.
“Guaranteed plans with or without fixed returns are very heavily priced. E.g., if a Normal Term Plan costs you for 15000 per annum for a cover of Rs 1 Crore on the other hand Guaranteed returns plans will cost you around approx. Rs 3.5 lakhs to Rs 4 Lakh premium annually,” said Thakkar.
“The returns from a Guaranteed plan will not yield more than 6% to 8%,” he added.
If the purpose of buying insurance is financial protection of family in case of unexpected death of the policyholder then one should buy a term plan. As the premium is low. Also, one can invest in better financial products for high returns.
“As an advisor, we would always suggest buying a Pure Term Insurance which will always help you serve the purpose of getting a cover for your loved ones in your absence and then at the same time investing the remaining premium amount somewhere which will yield you better returns,” Thakkar said.