Should you invest in capital guarantee plans? | Economic Times

Investors today are worried about safety of capital but also don’t want to miss out on the market uptick. Insurers are trying to solve this conundrum by combining Ulips with guaranteed income plans—leading to the birth of capital guarantee plans. But are these the right fit for you?Both Ulips and guaranteed income plans have their uses and limitations. Ulips are pure market-linked vehicles but do not offer any protection of invested capital. Guaranteed income plans offer safety of capital but lower returns. Insurers want to address the limitations by offering a combination of the two. So some portion of the amount invested goes towards a guaranteed income plan and the rest flows into a Ulip. This is not a separate product sold by insurers but a mix of two existing plans with matching policy terms. The mix varies depending on the policy tenure and age of policyholder. “At the end of the policy term, you get back all the premiums paid along with a maturity value, based on the market-linked return from the Ulip portion,” says Vivek Jain, Head of Investments, Policybazaar.com. Typically, these come with a pay term of 10 years and policy tenure of 20 years.Currently HDFC Life, Bajaj Allianz, ICICI Prudential Life, Edelweiss Tokio, Aditya Birla Capital and Max Life offer this solution. Bajaj Allianz Life Smart Capital Assure Goal is a combination of Bajaj Allianz Life Smart Wealth Goal and Bajaj Allianz Life Guaranteed Income Goal. The premium you pay is split between the two plans. Any payouts related to maturity benefit or death benefit flows separately from the two plans. There are also income variants of these plans where you start earning a guaranteed income from the year after the end of premium paying term. Here, instead of lumpsum payout at the end, the policyholder gets the maturity benefit as a guaranteed regular income for a fixed period of 10-25 years. In both variants, investors also get a life cover that is at least 10 times the annualised premium.Combining utility of Ulips and traditional plansThe capital protection comes with low returns, while the high costs tend to eat into what you earn from Ulips. 83456251The dual benefit of safety of capital with upside participation is a big draw. Policybazaar claims 50% of its incremental sales are coming from this basket. Jain says this combo gives investors the best of both worlds. “No matter how badly the market performs, your invested amount is safe. At the same time, you will be able to enjoy the market upside through investments in equity funds,” he says.However, there are a few shortcomings. Even though the capital is 100% protected, this guarantee should be seen in the context of opportunity cost. While the guaranteed plan portion allows you to lock-in at a fixed rate of return over many years, this is a benefit only if rates remain low over this time frame. Current rates on offer range between 5%-6%. Taking the bold call to lock-in at this rate for next 20 to 35 years may prove counterproductive if rates rise in the interim. “We don’t know if sub-6% annualised return will be good enough for the next 25 years,” says Suresh Sadagopan, Founder, Ladder 7 Financial Advisories. Since a chunk of the premium will go towards the guaranteed plan, the return you get will be much less than that if you had invested in a 100% equity product. “Pure equity funds or even hybrid funds will yield much better returns than what the combined plan fetches over long time frames,” insists Nisreen Mamaji, Founder, Moneyworks Financial Services.Apart from the low returns, the usual charges on the Ulip are a further dampener. Even as the combo leaves much of the heavy-lifting to the Ulip, the latter is weighed down by high costs. These include a premium allocation charge (for first five years), policy administration charge (from sixth year onwards) and fund management charge every year. Mortality charges are a separate levy, deducted through cancellation of units. Put together, this shaves off 3%-plus return from the fund every year. “The high charges put investors on the back-foot straight away,” says Amol Joshi, Founder, PlanRupee Investment Services.Besides, the life cover offered is hardly enough in isolation. For an annual premium of Rs 1 lakh, you will get cover of Rs 10 lakh. This is abysmal considering experts advise taking cover of at least 10-12 times your annual income. A pure term plan will provide cover of Rs 1 crore for as little as Rs 12,000 a year. For these reasons, Joshi insists insurance and investment should be separate. “It is better to opt for a term plan and equity fund combo that will come at much lower cost and better liquidity,” he says.