While guaranteed return plans are nothing new, historically, these plans received bad press as the investment returns were low (4.5%-5.5%). The launch of an insurance policy called HDFC Life Sanchay Plus changed all that with its higher returns and has become a best seller for HDFC Life.
So what is it all about and is it worth looking into?
What is HDFC Sanchay Plus?
This plan is a “non-participating” “non linked” “traditional savings” life insurance product offering deferred payouts to you (i.e. maturity value is paid over a period of time). In simple English it means that the payouts, made at a later stage of your life, are guaranteed and unlike a plan which offers “bonuses””, there is risk associated of the insurer not paying you if it doesn’t make profits. You are committed upfront what you are getting into and what you will get during the payout / distribution period. In that sense, it can be compared to an annuity plan
HDFC Sanchay Plus offers 4 variants :
- Guaranteed Income: Guaranteed income for a few years
- Guaranteed Maturity: Lump sum at maturity
- Life Long Income: Guaranteed income till the age of 99
- Long Term Income: Guaranteed income for 25 or 30 years
According to the brochure, a healthy 30 year old male paying annual premium of Rs. 1 lakh may enjoy the following maturity benefits:
|Plan Option||Sum Assured||Death Benefit at Inception*||Policy Term (years)||Premium Paying Term (years)||Maturity Benefit (INR)|
|Guaranteed Maturity||1,250,000||1,250,000||20||10||2,206,300 paid as a lump sum at Maturity|
|Guaranteed Income||1,250,000||1,496,586||13||12||Guaranteed Income^ of Rs. 2,09,000 p.a. from 14th year to 25th year (payout period of 12 years)|
|Long Term Income||1,250,000||1,250,000||11||10||Guaranteed Income^ of Rs. 93,500 p.a. from 12th year to 36th year (payout period of 25 years) + Rs. 10,00,000 at the end of payout period(36th year)|
|Life Long Income||1,050,000||1,050,000||11||10||Guaranteed Income^ of Rs. 89,000 p.a. from 12th year till age 99 years (38 years) + Rs. 10,00,000 at the end of p
Focus Variant : Life Long Income Option
You need to be minimum 50 years of age for this option.
In this plan, you will pay the premium for 10 years. From 12th year to 99 years of your age, you will receive the Guaranteed Benefit.
Under the 6-year premium payment option, you get life cover for 6 years. On completion of 99 years, the insurance company will return all the premiums paid.
Under the 10-year premium payment option, you get life cover for 11 years. The insurance company pays 100% of the annualized premium from the end of 12th year till such time you turn 99. On completion of 99 years, the insurance company will return all the premiums paid.
So what are the returns like?
Illustration: Returns for a 60 Year Old
You will pay Rs 1.045 lakh as the first-year premium. This includes 4.5 percent GST. From the second until the 10th year, you will pay Rs 1.0225 lakh every year (includes GST of 2.25 percent).
You will get Rs 0.9 lakh each from the end of 12th year till the end of 49th year (you turn 99). That is 38 installments of Rs 1 lakh each. Additionally, when you complete 99 years, you will get an additional Rs 10 lakh back.
The IRR is close to 6.2 percent per annum. In the highest tax bracket that works out above 9% pre tax.
If the demise happens during the payout term (after policy term), the payouts will continue to the nominee till the end of the payout period (till such time the policyholder would have turned 99).
In case of death of Life Assured during the policy term, the death benefit equal to Sum Assured on Death shall be payable to the nominee.
Sum Assured on Death is the highest of:
- 10 times the Annualized Premium, or
- 105% of Total Premiums paid, or
- Premiums paid accumulated at an interest of 5% p.a. compounded annually, or
- Guaranteed Sum Assured on Maturity, or
- an absolute amount assured to be paid on death, which is equal to the sum assured.
Sum Assured shall be equal to the applicable Death Benefit Multiple times the Annualized Premium. The applicable Death Benefit Multiples are between 10x to 15x depending on age. Upon the payment of the death benefit, the policy terminates and no further benefits are payable.
HDFC Life Sanchay Plus – Pros
Tax Status :
The USP of these plans is that the payout from these plans will be exempt from tax. Remember these pay-outs are guaranteed. Contrast this with an annuity plan which also provide guaranteed pay-outs but the payment from an annuity plan is taxable at your marginal tax rate. This makes HDFC Sanchay Plus very attractive to soon-to-be retirees.
Fixed Rate :
The committed rate for a very long tenure is a very attractive feature of the plan. Of course, you may be able to lock-in the rate of interest for a very long-term using Government bonds but then , the interest on these bonds is taxed at your marginal rate. No other income strategy can lock-in the interest income for such long tenures.
Annuity Plus :
These plans also provide insurance during the policy term. Annuity plans don’t provide any insurance.
Sanchay Plus , from what we gather, offers higher returns compared to other guaranteed return products in the life insurance space. This makes it an excellent choice for investors seeking a guaranteed return insurance plan.
On risk-return perspective, the product is comparable to 10-year g-sec. Currently, 10 year g-sec yields are hovering in the 6.80%-6.90% range. In addition, as it is a guaranteed return product, the risk of non-payment is extremely minuscule.
At the same time, you also need to contrast against other retirement income options such as PPF, SCSS, Fixed deposits, PMVVY, Government Bonds, annuities and even Systematic withdrawals from mutual funds.
With SCSS and PMVVY, you will get a higher rate but you bear reinvestment risk since the interest rate is locked in for only 5 and 10 years respectively. Moreover, interest from SCSS and PMVVY is taxable too.
Loan: Once your policy has acquired the surrender value, you may avail of a policy loan upto 80% of the surrender value of your policy subject to applicable terms and conditions
Finally, on death of the Life Assured during the Payout Period, the nominee shall continue receiving Guaranteed Income as per Income Payout Frequency & benefit option chosen till the end of Payout Period.
The nominee shall have an option to receive the future income as a lump sum, which shall be the present value of future payouts, discounted at a rate which is computed using the prevailing interest rates.
And the Cons
For a long term investment, 6-7 percent per annum may not be something you may settle for. A PPF will give you higher tax free returns for now though interest rates keep changing. You may expect much higher returns in equity funds too.
Currently, inflation is low but if it shoots up permanently, investors will not earn any real returns on investments.
Returns are only guaranteed if investor stays the course: The policy benefits are reduced if the investor decides to surrender his policy or misses insurance premium payment. So, they are only suitable for investors who can make a long term commitment.
Who is the plan for?
The tilting fact favoring HDFC Sanchay Plus is that apart from Government Bonds and annuities, you cannot lock-in the rate of interest for the long term. HDFC Life Sanchay Plus lets you do that.
Deferred payout plans are good for people who want guaranteed income over the long-term and are in the highest tax bracket even after retirement.So if you were anyways looking for one, this one suits the bill perfectly.
This plan, for such people, offers a very good diversification option in the investment cum insurance portfolio.
Therefore, If you are looking for income during retirement, likely to remain in the higher tax bracket post retirement, looking for peace of mind on returns and already have invested into equities and term insurance, this product may be a good additional investment.
Do write into us at firstname.lastname@example.org for more information on this product or alternatives for retirement income! Or talk to any of our officers across the country to know more!
DISCLAIMER: Insurance is a subject matter of solicitation. Prabhudas Lilladher Distribution is a Corporate Agent COR Number : CA0375 and will be distributing HDFC Life Insurance Products.