Is it worth considering Life Insurance Guaranteed Income Plans?

The primary purpose of life insurance policies is to minimize the financial risks associated with premature death. Term insurance plans effectively cover the risk of premature death and provide pure protection against the accompanying financial risks. However, many policyholders desire their life insurance policies to serve as both a protective measure and a savings tool. This is where guaranteed income plans come into play.

Let's delve into the topic:

What exactly are guaranteed income plans?

Guaranteed income plans are life insurance solutions that offer insurance coverage and savings within a single policy. These plans come in the form of endowment plans or money back plans, providing a death cover during the policy tenure. In the event of the insured individual's death during the term, a guaranteed death benefit is paid out. On the other hand, if the policyholder survives the policy tenure, a maturity benefit is received from the guaranteed income plans.

Typically, the benefits provided by these plans are fixed or guaranteed, hence their name, "guaranteed income plans."

Is it advisable to invest in guaranteed income plans?

Guaranteed income plans are suitable for investors seeking insurance protection and guaranteed savings through a single financial instrument. Before investing in such plans, it is essential to consider the following pros and cons:

Advantages of guaranteed income plans

Guaranteed income plans offer various advantages. Take a look:

1.      Assured returns: As the name suggests, guaranteed income plans provide assured returns, either upon premature death or at maturity. Moreover, many plans offer additional returns in the form of bonus additions, guaranteed additions, boosters, loyalty additions, and more. These additional returns enhance the benefits and ensure higher guaranteed returns.

2.      Long-term savings: Usually, guaranteed income plans are long-term life insurance policies that promote disciplined saving habits. By opting for these plans, individuals can establish a long-term savings corpus to meet their financial needs.

3.      Facilitate financial goal attainment: Guaranteed income plans assist in achieving financial goals, even in the policyholder's absence. The death benefit provided by these plans ensures that the policyholder's family receives a financial corpus to fulfill their needs. Additionally, the maturity benefit yields an accumulated corpus that can be utilized for various financial goals, such as a child's education, retirement planning, home purchase, and more.

4.      Specialized plans for specific goals: There are specialized child and pension plans available as guaranteed income plans. These plans are designed to cater to specific financial goals, making it easier to achieve them.

5.      No investment risks: Guaranteed return plans do not expose investments to the volatility risks associated with the equity market. Instead, they provide guaranteed returns and safeguard investments against market risks.

6.      Insurance protection: Since guaranteed income plans are life insurance policies, they offer vital insurance protection. This insurance cover provides financial security to individuals and their families, ensuring a benefit in the event of premature death.

7.      Tax benefits: Finally, guaranteed income plans offer tax-saving benefits. The premiums paid for these plans can be deducted from taxable income. Premiums up to 10% of the sum assured, subject to a maximum limit of INR 1.5 lakhs, qualify for a deduction under Section 80C. Additionally, the returns earned from the policy and the maturity benefit received are completely tax-free under Section 10(10D) if the premium was up to 10% of the sum assured. In the case of death, the death benefit is also entirely tax-free, allowing the family to utilize the full benefit.

Disadvantages of guaranteed income plans

When it comes to disadvantages, there is only one aspect that works against guaranteed income plans: the potential insufficiency of returns. There is a risk that the returns generated by these plans may not keep pace with inflation after long-term saving. In such cases, individuals may be unable to create a sufficient corpus to achieve their financial goals.

What should you do?

Aside from the single drawback mentioned above, guaranteed income plans do not have any other significant downsides. If you have a low tolerance for risk and aim to build a risk-free corpus for your financial goals, opting for guaranteed income plans is a viable option. The tax benefits further enhance the appeal, enabling the creation of a tax-efficient corpus. Therefore, it is crucial to understand the nature of guaranteed income plans and choose one that aligns with your specific needs.