Are Guaranteed Income Plans of Life Insurance Worth it?

Life Insurance

 


Life insurance policies are designed for one thing – to help mitigate the financial risk associated with premature death. To this extent, term insurance plans cover the risk of premature death and provide pure protection against the associated financial risks. However, many policyholders want their life insurance policies to double-up as a savings tool too. This is where guaranteed income plans come into the picture. 

Let’s explore –

What are guaranteed income plans?

Guaranteed income plans are life insurance solutions that provide insurance cover and savings under the same policy. These plans come as endowment plans or money back plans with a death cover during the policy tenure. If the insured dies during the term, a guaranteed death benefit is paid. On the other hand, if the life insured survives the policy tenure, guaranteed income plans pay a maturity benefit.

Usually, the benefits payable under these plans are fixed or guaranteed. That is why they are called ‘guaranteed income plans’.

Should you invest in guaranteed income plans?

Guaranteed income plans are suitable for investors looking for insurance protection and guaranteed savings from a single instrument. Here are some pros and cons of these plans which you should consider before investing in them –

Advantages of guaranteed income plans

Guaranteed income plans score on various fronts. Have a look –

  1. Guaranteed returns

    Firstly, as the name suggests, guaranteed income plans give you guaranteed returns either on premature death or on maturity. Moreover, many plans offer additional returns in the form of bonus additions, guaranteed additions, boosters, loyalty additions, etc. These additional returns enhance the benefits and give you better returns, that too, guaranteed.

  2. Long-term savings

    Guaranteed income plans are, usually, long-term life insurance plans which help you save in a disciplined manner. Thus, if you opt for these plans, you can create a long-term savings corpus for your financial needs.

  3. Help in fulfilling financial goals

    Guaranteed income plans help you fulfil your financial goals, even when you are not around. The death benefit paid under these plans provides your family with a financial corpus to meet their needs. On the other hand, the maturity benefit gives you an accumulated corpus which you can use for the different financial goals that you have, like child’s education, retirement planning, buying a home, etc.

    There are specialised child and pension plans too that are offered as guaranteed income plans. These plans are so designed that they cater to specific financial goals and help you fulfil them easily.

  4. No investment risks

    Guaranteed return plans do not invest in the equity market which is highly prone to volatility risks. Instead, they guarantee the returns and protect your investment from any type of market risk.

  5. Insurance protection

    These being life insurance plans, guaranteed income plans offer much-needed insurance protection. This insurance cover provides financial security to you and your family as it promises a benefit in the case of premature death.

  6. Tax benefits

    Lastly, guaranteed income plans help in saving tax. The premiums paid for these plans are allowed as a deduction from your taxable income. Premiums up to 10% of the sum assured, subject to a limit of INR 1.5 lakhs, are allowed as a deduction under Section 80C. Moreover, the returns that you earn 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 too, the death benefit is completely tax-free allowing your family the facility to use the full benefit paid on death. 

Disadvantages of guaranteed income plans

When it comes to the disadvantages, there is only one aspect that works against guaranteed income plans. This aspect is the sufficiency of returns. There is a risk of inflation-beating the returns generated from these plans. After the long-term saving, if the returns do not keep pace with inflation, you might not be able to create a sufficient corpus for your financial goals.

What should you do?

Other than the one disadvantage that guaranteed income plans have, there is no other drawback. So, if you are risk-averse and want to create a risk-free corpus for your financial goals, you can opt for guaranteed income plans. The tax angle gives additional benefits and helps you create a tax-efficient corpus too. So, understand what guaranteed income plans are all about and then choose one if it matches your needs.