Independence Day 2023: Should investors opt for guaranteed income plans for financial security?

In order to achieve financial goals on time, investors can explore the prospect of investing in guaranteed income products offered by insurers.

Although one must allocate a significant portion to equity to achieve financial goals and eventually become financially independent, investing a portion of the portfolio in the guaranteed income products is seen as important, too.

For instance, Max Life Smart Wealth Plan gives guaranteed returns on maturity along with other benefits which include flexibility, guaranteed additions and financial security in case of death.

IndiaFirst Life Insurance Company has recently launched a Guarantee of Life Dreams (GOLD) Plan that offers regular long-term income to policyholders.

Similarly, there are other guaranteed income plans offered by different insurers such as Guaranteed Income for Tomorrow by ICICI Prudential and Smart Platina Plus by SBI Life, among others.

“A number of insurers offer these guaranteed plans but investors should ideally choose only the ones that offer an IRR (internal rate of return) of at least 6.5 percent, or more. Anything less than this return is not useful. These plans generally suit investors in the higher income bracket,” says Sridharan Sundaram, a Sebi-registered investment advisor.

Why should you opt for guaranteed income plans?

Let us explain what these income plans are and why should investors opt for them — if at all. It is often believed that equity is meant for wealth creation and it is not expected to deliver assured returns. So, one might have a number of apprehensions about the feasibility of ‘guaranteed income plans’ in your portfolio?

Which plan should one opt for can be suggested by a personal finance advisor only, but as an insurance expert, we recommend investors to choose any guaranteed income plan because of a number of factors, says Abhishek Misra, CEO and principal officer, Bonanza Insurance.

“First and foremost, these plans offer guaranteed income for a long term. Second, they also accompany life insurance. Third, they are tax free so long as the premium is lower than ₹5 lakh,” says Misra.

Vivek Jain, Head, Investments, Policybazaar says, “Guaranteed Income Plans are apt for investors or customers looking for assured monthly payout. These plans offer tax free income for annualised premiums up to ₹5 lakhs and also allow you to lock-in your interest rates for a very long tenure. These plans can be considered for retirement planning as well given that these offer monthly income for long tenure. Your returns are 100 percent guaranteed and you do not have to worry about market fluctuations.”

Factors to consider

Although there are a number of guaranteed income plans broadly, one can divide them into two types. One is the type wherein premium paid is returned to the policyholder at the time of maturity plus there is a guaranteed income given for a fixed period of time.

Second is the category of plans where a higher fixed income is given instead of an assured sum at maturity. Investors should be conscious about a slew of factors before opting for a guaranteed income plan.

Experts suggest that the investors, prior to investing in a guaranteed income plan, should consider the returns offered by the plans as that will result in higher monthly income payout.

Second, it should be goal based where one can choose to save for a child's education or marriage or offer security post-retirement that helps maintain the same standard of living.

“The guaranteed income plans can help you achieve your future financial needs and different life milestones. The guaranteed income plans help you diversify your portfolio as well as it provides you safety via guaranteed income,” adds Vivek Jain from Policybazaar.

For instance,a 35-year-old investing 20000 monthly for 10 years will get a guaranteed monthly income of 23,875 for 30 years and all premiums paid will also be returned at the time of maturity.