Are Guaranteed Return plans good?

What is a Guaranteed Return plan?

A Guaranteed Return Plan (also called, Non linked Non Participating Life insurance plan) in India is a type of Life insurance product that promises a fixed return on the investment made by the policyholder. These plans are typically offered by life insurance companies and are designed to provide financial security and predictable returns over a specified period along with Life cover.

What is a typical rate of return from a guaranteed plan?

In India certain life policies may offer guaranteed returns, often in the range of 4% to 6.5%. and the returns are tax free.

Bank FD returns in India often in a range of 6% to 7%, some small banks might much higher returns. But FDs are taxed at Income tax slab. 

From the above, in terms of the returns if you are risk averse person (not willing take risk with the money and want to take safe bets) FD is a better option than Guaranteed plan.

Guaranteed Plan vs Fixed Deposit:

Comparison	Guaranteed Plan	Fixed Deposit
Returns	4% - 6%	6% - 7%
Life Insurance	Available	Not Available
Regulator	IRDAI	RBI
Tax benefit on Investment (Old tax Regime)	Upto 1.5L  (Section 80C)	Upto 1.5L for 5 years FD  (Section 80C)
Tax  on Returns	Tax free returns	Taxed as per income tax slab

Let's say Mr.X wants to invest Rs. 1,00,000 for 5 years in a risk free investment, plans to withdraw after 10years . If he

• Invests in Guaranteed plan : He would have Rs. 7,81,000 by the end of 10 years (Return : 5.7%. considering one of the top Guaranteed plans in India, Most of the other plans would give less than 5.7%)
• Invests in FD : He would have Rs. 8,08,576 (net return : 6.14%) after paying tax by the end of 10 years (FD rate : 7%. Income tax slab : 15%. some small finance banks give much more than 7% interest rate)

Summary: Mr. X is better off investing that 1,00,000 per year in an FD instead of investing in a Guaranteed Plan purely from returns perspective. But Guaranteed plan would insure Mr.X for Rs. 11,00,000 (in case of unfortunate scenario his dependents would get that amount). If Mr.X has good Term Plan, then he is better off investing the amount in an FD which gives.

In case of an emergency if you have to withdraw the money before the lock-in period, Guaranteed plans attract surrender charges which are much higher compared to the charges of breaking an FD.

If any Bank person pitches you an insurance policy with guaranteed returns you are better off investing in that bank's FD rather than taking that Guaranteed plan.

Please make a choice wisely and don't fall for marketing ads/ sales pitches promising big numbers as guaranteed returns. Do your math or consult an Advisor before considering such plans.

Please find the calculations here, please feel free to change data that suits your FD returns, tax slab etc. : 

Extra Info (please skip to if you don't want to go through) 

Let's take this one level deeper.

Where do these Insurers invest these premiums paid by the customers? 

or 

What do these insurers do with the premiums paid to ensure guaranteed returns to the customers?

Insurers invest in

• Government Securities (G-Secs): Low-risk, high-liquidity investments in government bonds.
• Corporate Bonds: Investment-grade bonds issued by reputable corporations.
• Money Market Instruments: Short-term, low-risk investments in commercial paper, treasury bills, and certificates of deposit.

• Fixed Deposits: Low-risk, fixed-return investments with banks.

Though our comparison example only talks about FDs, the above are some alternative risk free returns you can consider.

#WalkTheTalk: I have personally invested in Market Linked Plan instead of a Guaranteed plan since I am a risk taker. 

Disclaimer : This article is solely for educational purposes. details are as on Dec'24.

Happy Investing,

Honvest Team.