Insurers bet on assured returns

Friday 02, January, 2009 CHENNAI: With stock market -related unit linked insurance plans (Ulips) hardly finding any takers now, life insurers have launched old favourites: guaranteed return products. Hoping to cash in on the ‘no-guarantee-in-life' sentiment, the idea is to combine a normal life insurance policy and the promise of entitlement to a fixed sum of money at the end of the maturity period (5/7/10 years). Risk-averse investors who want the comfort of a guaranteed return of around 6% to 9% on maturity are sure giving them a look-in and initial responses have been positive, industry sources say. Most insurers will park the premium into bank deposits, money market instruments, gilts, bonds, debentures, and corporate debt papers. LIC's Jeevan Aastha, Aegon Religare's Guaranteed Return Plan, IDBI Fortis' Bondsurance and Reliance Life's Guaranteed Return Plan (Series I) are some examples. Many agents/advisers are promising returns of up to 12% to 13%, after factoring in 'discretionary' loyalty additions. All these products are single premium products which mean that the customer - aged between 90 days and 45 years (60 years in some cases) - pays a single one-off payment which could be as low as Rs 20,000. "The return guaranteed by the insurers is based on the prevailing interest rates. Hence, insurers need to lock in the entire amount at a particular rate of interest. If the premium is collected annually and the rate of interest falls in the future, the insurers would be hard pressed to meet the guaranteed return." said Rahul Aggarwal, chief executive of Optima Insurance Brokers. The products are also positioned as tax-savers. Sales of insurance policies in the fourth quarter accounts for 40% of their annual sales, as individuals invest to avail of tax benefits. Both the amount invested and the amount returned by the insurer at the time of maturity are tax exempt. "Customers usually lock their returns at high interest rates especially when they have a perception that the current interest rates may not sustain. Also, offering tax-free returns under Sec 10(10D), with this combination of guaranteed returns with life cover allows offering a much better net yield (post-tax) to the customer," said G V Nageswara Rao, CEO and Managing Director, IDBI Fortis Life. An investor can unbundle a guaranteed return product by taking a term insurance policy, and tax free & long term bonds issued by government. While this would be financially a better option if the return from the bonds is more than what is being promised by the insurance company, Aggarwal of Optima feels most investors are not sophisticated enough to do such

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