Wednesday, March 28, 2012

Don't rush to invest in single-premium plans :

With just four days remaining in the current financial year, there is no escaping from the sales calls exhorting you to make tax-saving investments just before the deadline. And this year, these voices are likely to get shriller, thanks to certain announcements in the Union Budget. 

The Finance Bill has upped the mandated sum assured-to-premium proportion from five times, till now, to ten times. The new stipulation will become effective from April 1, rendering several policies - unit-linked as well as endowment - unattractive from the tax-saving perspective. Products that will be hit include single-premium, guaranteed maturity plans, which have been the flavour of this season. 
Life Insurance Corporation of India's (LIC) Jeevan Vriddhi, Bajaj Allianz's Guaranteed Maturity Plan, Star Union Dai-ichi's Dhan Suraksha Platinum and IDBI Federal's Bondsurance are some of the heavily-promoted plans in this category. Hence, the agents' rush to sell these policies. While you may see merit in their propositions, make sure you understand the products to ascertain their suitability before signing up for them. 

Fact Check 

Essentially, all these products (except Bajaj Allianz's, which is a unit-linked insurance plan) are endowment plans with a tenure of 5-10 years. The sum assured, or death benefit, is five times the premium, while the maturity benefit is guaranteed at the time of buying the policy. 

The returns vary as per the product, tenure and an individual's age, but younger individuals can expect their investments to nearly double in 10 years. Like all insurance policies, premium paid is entitled for deductions up to 1 lakh under section 80C, while the maturity proceeds are exempt from tax under section 10 (10D). 

The Merit List 

Tax breaks apart, single-premium plans of the guaranteed maturity variety proffer other benefits too, say insurers. "These products were not designed merely to tap into those looking for tax relief. Given that RBI is expected to cut policy rates in April, the high interest rates prevailing now will not be available later," says Aneesh Khanna, head, marketing and products, IDBI Federal Life. 

These products invest mainly in debt as they are bound by the 'guarantee promise'. Put simply, if you are a risk-averse individual looking for assured returns rather than higher returns from the riskier equity investments, you can consider these products. "Unlike fixed-maturity plans or fixed deposits which come with a short-term tenure, guaranteed maturity plans are long-term products. 

So, those looking to invest a lump-sum amount and lock into high interest rates over a longer period of time could find these products attractive," adds Khanna. "Their post-tax returns would be comparable to those yielded by fixed-maturity plans (FMPs) and fixed deposits." 

Gauge their suitability 

If you are in a hurry to exhaust the tax breaks, the sales pitch may seem like the perfect last-minute solution - these products offer protection cover, savings components and tax deductions. Then, of course, single-premium products don't necessitate recurrent premium payments, obliterating long-term commitments. 

If you have a seasonal or uneven income stream and thus not certain of servicing regular premiums, these plans can help boost your protection portfolio at one go. However, remember, if your chief goal is to financially safeguard your family's interests, these plans may not score high on the utility quotient, as the death benefit is just five times the annual premium. 

Thus, if your single premium is 1 lakh, your SA will be 5 lakh. In contrast, a pure protection term policy can provide a life cover as large as 50 lakh for an annual premium of 4,000-14,600, depending on your age, the insurer and distribution channel. Ideally, your life cover should be at least 100 times your monthly income. 

Evaluate all alternatives 

Even if your objective is 'safe' investment, you can still assess other options before zeroing in on guaranteed maturity products. While the benefits will be laid out by the distributors, you will have to figure out the limitations yourself. For instance, irrespective of whether or not you need a life cover, you will have to pay the mortality charges built into the product. 

Also, when it comes to insurance-cum-investment products, financial planners' pet peeve has always been the charge structure. They believe that it is high when compared to other investment avenues like mutual funds; lack of transparency in endowment products is another aspect. In addition, you need to take into account their return-generating capability too. 

"These single premium plans are essentially investment products and should be treated like that. While tax-free income from such bonds (the assured return ones) might have been attractive earlier, in today's scenario, there are many investment options that can offer better returns," says Raghvendra Nath, managing director,Ladderup Wealth Management. Since guaranteed maturity plans are long-term products, they should be compared with long-term bonds rather than FDs or FMPs, which carry a shorter tenure. 

"A better alternative to these instruments are the tax-free bonds from NHAI, REC, PFC and HUDCO, which were floated recently. All of them come with a 15-year duration and are offering a tax-free yield of over 8% now. They are freely traded in the market. Therefore, in case interest rates come down in future, there is a possibility of capital appreciation as well. Moreover, they are also very safe," he adds. 

However, these bonds do not qualify for deduction under section 80C, though. Only the interest earned will not be liable to tax. 

As is the case with all financial decisions, you should take a call on the basis of your needs and risk appetite. Whether you choose a guaranteed maturity plan or a long-term bond, let your goals and not the tax-saving feature alone, be the guide. 
Source : ET

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