Should you buy guaranteed monthly income plan from insurers?

It has always been debated whether one should not mix insurance with investments. Let it remain separate to achieve better results. However, many even today hold such investment policies provided by insurance companies. One such policy is guaranteed monthly plans which provide guaranteed monthly income ranging from 8.35 to 13.03 per cent p.a. of total premiums paid. They offer this with various policies and premium paying terms like 5 years, 8 years and 12 years for which your life would be covered and also there is an income term which would start after policy term. The income term is usually 10 years, 16 years and 24 years and upon survival of the policy term, you would receive guaranteed monthly income for the income term opted. However, in case of death, in income terms, all the future guaranteed income would be paid to the claimant.

Let us take an example to understand how it works. Say your current age is 45 years and assuming that you have opted for the highest policy term of 12 years and highest income term of 24 years. With such a setup, the sum assured would be Rs. 11 lakhs and the premium that you would be paying is Rs. 1 lakh per annum for 12 years. So, you would pay in total of Rs. 12 lakhs for the policy term for which you would receive a sum assured of Rs. 11 lakhs. Now post survival of the 12 years policy period, you are entitled to receiving a guaranteed monthly income of Rs. 9,170 for the next 24 years.

Now let us say you take term insurance with sum assured of Rs. 11 lakhs for 12 years then you would be paying a premium of Rs. 2,000 annually for 12 years. So, from the above Rs. 1 lakh premium you are saving Rs. 98,000 annually which we assume that you invest in liquid funds for 12 years which gave average one-year returns of 7 per cent. At the end of 12 years you would have corpus of Rs. 18.76 lakhs. So, assuming that you remain invested in liquid funds for next 24 years and wish to start and monthly SWP (Systematic Withdrawal Plan) then you can withdraw Rs. 13,400 every month for 24 years.

Even if we say that instead of taking a term plan for 12 years you would have stretched it for 36 years then also the annual premium would have been Rs. 3,700. So, even after reducing Rs. 3,700 from Rs. 1 lakh premium of a guaranteed monthly plan, still you would have saved Rs. 96,300 annually and if you had invested the same in liquid fund then at the end of 12 years you would have accumulated Rs. 18.43 lakh and assuming that you would withdraw for the next 24 years then you would be able to withdraw Rs. 13,200 per month. From Rs. 13,200 even if we assume that you pay a premium of Rs. 3,700 then also you would be left with Rs. 9,500 per month. You may feel this is not a substantial difference when compared to a guaranteed monthly plan as it gives you a monthly income of Rs. 9,071. However, if we look at it from a death benefit perspective then in guaranteed monthly plan maximum death benefit is Rs. 26.12 lakh, whereas in the other case you would have a maximum death benefit of Rs. 29.43 lakh, which is 3.3 lakhs more than guaranteed monthly income plan and in case of monthly income it is Rs. 500 more than guaranteed monthly income plan.

So, what’s the call? Should you go for it or should you ignore and invest in mutual funds and take a term plan for insurance needs? Ideally, you should take a term plan for insurance needs and for investments opt for mutual funds. However, if you are a kind of person who doesn’t wish to take even a minor risk then he should go ahead with investing in such plans from insurance companies. But if you can take risk then don’t opt for such plans as effectively you would yield much less than mutual funds over years.