Contrary to the idea that investments in stock and crypto markets are more popular than fixed income instruments, exposure to non-participating policies with guaranteed return continues to grow for life insurers, accounting for the lion’s share of the full range of products.
âThere is a clear change in the products that people are opting for. For example, people are moving more towards non-participating plans. At IndiaFirst Life, the non-nominal contribution has increased from 15% in fiscal years 19-20 to 35% in fiscal years 20-21 to over 45% in the current fiscal year â, said Rushabh Gandhi, Director Deputy General, IndiaFirst Life Insurance Company.
Guaranteed plans provide principal protection where policyholders can choose to receive payment in the form of a lump sum or regular income for a number of years. The yield on these policies is approximately 5 to 6 percent, which is set at the time of purchase of the policy and remains the same for the life of the policy. Sanchay Plus from HDFC Life is part of one of the most popular plans on the market, which offers guaranteed payments for different mandates. For example: The Long Term Income Option offers guaranteed income for a fixed term of 35 years with a premium payment term of 5 years.
Vibha Padalkar, CEO and Managing Director of HDFC Life, said their guaranteed product is properly hedged against interest rate risk and the company has a cap for such exposures. âWe have said that our non-participating portfolio will be around 30 percent. Even some variants have their own natural hedge. These may be shorter occupancy guarantees and not long-term occupancy guarantees. Thus, long-term guarantees will represent less than 50 percent of the overall 30 percent portfolio. We have a fully hedged portfolio, which means we have virtually no fluctuations in certain interest rate sensitivities. “
Guaranteed plans have also become popular as pension plans given the fixed amount they pay out over the long term just like pension plans. However, what sets them apart from annuity plans is their tax treatment. Since guaranteed plans are treated as an insurance policy under the Income Tax Act (because they provide insurance coverage), the payment becomes tax-free. However, deferred annuity plans have a disadvantage in this regard, as retirement income is taxable. Experts say the 5-6% tax-free return is a deciding factor for fixed income investors, especially those in the high tax bracket of 20-30%.
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