With uncertainty in the markets, investors are looking for avenues that can give them an as- surance of certainty. And the insurance industry seems to be catering to this sentiment.
With their focus already on traditional-cum-investment plans, life insurance compa- nies are increasingly getting innovative. A recent innova- tion in the stable of traditional products is monthly income insurance policies.
These are basically money- back policies that ride high on the element of guarantee, which is appealing in the present mar- ket environment. Says V. Viswa- nand, director and head (prod- ucts and persistency manage- ment), Max New York Life In- surance Co. Ltd: “We conducted a research in which a majority of customers preferred tradi- tional endowment and money- back plans because what they give and get are clearly spelt out. Customers don't under- stand the complicated features of a plan but can clearly under- stand the returns they get.
Hence, they prefer products with guaranteed returns.“
These monthly income plans (MIPs) offer a guaranteed monthly income for a fixed number of years along with a non-guaranteed topping of bo- nuses. All this packaged with an insurance cover looks an at- tractive proposition. But look beneath the layer of a guaran- tee and you will find poor re- turns and high costs. Read on to know why these MIPs may not work for you.
How do they work?
You go through two stages in these plans: the accumulation and the payout stages. During the accumulation stage, also known as the premium pay- ment term, you are required to pay an annual premium, which depends on the monthly in- come you choose. When the premium payment stage comes to an end, you start getting a monthly income, which is guar- anteed for a specified tenor.
Over and above these guaran- teed payouts, some insurers of- fer an additional income on maturity by way of bonuses.
For instance, MetLife India Insurance Co. Ltd's Met Monthly Income Plan, the policyholder gets a reversionary (accumulated) bonus on death or on maturity. Depending on the performance of the funds, every year the insurer declares a bonus, which gets credited to the account of the policyhold- er. A terminal bonus (declared when the tenor ends) is also paid on maturity or on death of the policyholder.
Max New York Life Insurance Co. Ltd's Max New York Life Guaranteed Monthly Income Plan has tailored its additional benefit differently. Instead of bunching up the bonuses at the end, this plan has spread the additional benefits over and above the monthly income. In- terestingly, the additional in- come is pegged to five-year government securities' (G- secs) yields. This is how it works: The policy has two pre- mium payment terms--six and 11 years. The premium that a policyholder pays gets pegged to G-sec rates to define the monthly top-up income during the payout stage. For instance, in case of an 11-year premium payment term, if in year two, the five-year G-sec yield is say 8%, then the policy will return an additional 53% of the monthly income in the first year of the payout term. Says Viswanand: “We have pegged the top-up benefit to G-sec rates to ensure transparency.
Bonuses are at the discretion of the insurers and since the his- f torical bonus rates or the per- formance of the funds are not readily available, it causes t some uncertainty. By pegging the top-up monthly income to G-sec rates, a policyholder will know what his monthly income will be 10 years from now.“
Star Union Dai-ichi Life In- surance Co. Ltd's Defined Ben- efit Endowment Plan, howev- er, has done away with bonus- t es. The plan returns a percent- age of the sum assured at the end of the policy term as addi- tional survival benefits. i t The insurance element Since these policies are pri- marily structured to provide a monthly income, the insurance component is not a lump sum benefit as is usually the case with insurance plans. These plans typically offer the guaran- tee of monthly income in the name of insurance.
For instance, Bharti AXA Life Insurance Co. Ltd's Bharti AXA Life Monthly Income Plan pays all the accrued bonuses as lump sum and starts the monthly pay- out immediately for the benefi- ciary if the policyholder dies during the premium payment stage. Star Union Dai-ichi's De- ined Endowment Plan, howev- er, offers a sum assured which is 180 times the monthly income hat you choose. But on death only 25% of the sum assured is paid and the monthly income starts immediately.
So if you are looking to pro- vide for a lump sum for your nominee, these plans won't work for you. Says Viswanand, “The insurance element in hese plans ensures that the monthly income is not inter- rupted in any way. MIPs are particularly good for customers n their late 40s because by the ime they retire they will ensure a guaranteed monthly income.“ The investment element The guaranteed monthly in- come that MIPs provide are nothing to write home about.
Sample this: A 30-year-old wanting a monthly income of `10,000 for a period of 15 years needs to pay a premium of about `90,432 for 15 years in Bharti AXA's Monthly Income Plan. At the end of the premium payment term, the policy- holder gets a monthly income of `10,000 for 15 years. This is a return of around 1.82%. How- ever, if you build in the non- guaranteed benefits or the re- versionary bonus, then assum- ing a gross return of 6%, your net return comes to 3.62%; on a 10% gross return, the net re- turn comes to 6.45%. The two gross rates of return have been permitted by the regulator for illustrative purposes only. Here the cost works out to around 2.38-3.55 percentage points.
And it is not the cost alone that hurts; the non-guaranteed bo- nuses are subject to the discre- tion of the insurer.
Max New York's MIP works differently, but even here the cost hurts. In this plan, the non-guaranteed benefit which is a monthly income over and above the guaranteed income is pegged to G-sec rates as ex- plained earlier in the story.
Sample this: A 35-year-old buying this plan for an 11-year premium paying period for a monthly income of `5,000 for 10 years needs to pay `52,560 per year for 11 years. The re- turn here works out to 1.71%.
Assuming the average rate of the G-sec yields is 6%, the policy would return 4.15% and 7.22% if the assumed G-sec yield is 10%.
But the death benefit in this plan is much better than other plans. Upon the death of the policyholder during the premi- um payment term, the policy will pay back all the premiums paid till then as lump sum. The monthly income will start im- mediately and continues to pay the guaranteed monthly income till the end of the premium pay- ing term. From the beginning of the payout period, the guaran- teed monthly income for the specified term along with the additional payout commences.
In the last year, it pays a termi- nal benefit equal to twice the annual premium.
What should you do?
For a young investor whose retirement is at least 20-30 years away, taking an MIP would make little sense. These plans come with a limited premium payment tenor and such inves- tors may not need periodic in- come so soon. Their financial goals would be staggered over the years and their focus should be on wealth accumulation rather than periodic income in the not-so-far future. However, these plans pro- vide a solution to customers looking for products struc- tured to save for retirement and to provide a guaranteed monthly income thereafter.
But the trade off for this guar- antee income is high costs and poor returns.
A better strategy would be to buy a pure term plan, the simpl- est and cheapest form of insur- ance, to provide a cover to your family during your working life.
Simultaneously, you can save regularly to build a retirement nest egg. At the time of retire- ment, you could look at fixed- income products such as Senior Citizens' Savings Scheme and fixed deposits to ensure a peri- odic flow of income. Says Pan- kaj Mathpal, a Mumbai-based financial planner: “Keep the two goals of accumulation and dis- tribution separate. Look at equi- ty products or long-term debt products such as the Public Provident Fund for the accumu- lation stage and structure your periodic income through fixed- income products.“
MIPs are revamped money- back plans that offer customi- zation at the cost of returns.
Invest only if customization appeals to you.
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