Guaranteed Income or bonus- why this kind life insurance policies are bad?
Life Insurance companies use different kind of words to attract people so that they will buy plans from them. They use words like life insurance bonus, a terminal bonus in life insurance, life insurance with bonuses. In recent years they started plans which are offering guaranteed bonus policies to the policyholder.
What Kind of Guaranteed return Plans that these companies are offering?…
Companies sometimes offer some kind of plans with bonus till death.
Example of Guaranteed bonus…
A company is asking you to pay Rs.1,000 per year for 10 years, from 11th year to 19th-year company will pay you back Rs.100 as income and in 20th-year company promises to pay Rs.10,000.
What is the exact interest or return company offering in above example?…
If we calculate the Internal rate of return of the above cash flows, we can calculate interest or return from above police example.
| year | Cash Flows |
| 0 | -1000 |
| 1 | -1000 |
| 2 | -1000 |
| 3 | -1000 |
| 4 | -1000 |
| 5 | -1000 |
| 6 | -1000 |
| 7 | -1000 |
| 8 | -1000 |
| 9 | -1000 |
| 10 | 1000 |
| 11 | 1000 |
| 12 | 1000 |
| 13 | 1000 |
| 14 | 1000 |
| 15 | 1000 |
| 16 | 1000 |
| 17 | 1000 |
| 18 | 1000 |
| 19 | 1000 |
| 20 | 10000 |
| IRR | 5.64% |
The return or interest from the example cash flows is only around 5.64% which is almost 3% lower than the public provident fund.
Any Life Insurance Company offering Guaranteed Bonus Policy at present?…
The answer is yes, If you type guaranteed bonus or income plan
Max
You can find the plan features and benefits and payouts offered in this link. Click to read.
It says if a 35 years old person pays Rs.1,00,000 as a premium for 12 years, then this plan will give him back Rs.1,31,370 per year for 5 years, another 5 years it gives double payout for another 5 years. I.e Rs.2,62,740 from age 50 to 55( at 55 along with Rs.262,740 terminal bonus Rs.2,00,000).
If we calculate the IRR for the above numbers, the return from this plan as shown in the below table.
| year | Cash Flows |
| 0 | -100000 |
| 1 | -100000 |
| 2 | -100000 |
| 3 | -100000 |
| 4 | -100000 |
| 5 | -100000 |
| 6 | -100000 |
| 7 | -100000 |
| 8 | -100000 |
| 9 | -100000 |
| 10 | -100000 |
| 11 | -100000 |
| 12 | 131370 |
| 13 | 131370 |
| 14 | 131370 |
| 15 | 131370 |
| 16 | 131370 |
| 17 | 262740 |
| 18 | 262740 |
| 19 | 262740 |
| 20 | 262740 |
| 21 | 462740 |
| IRR | 4.952% |
If you notice the return from Max life guaranteed income plan, it is below 5%.
Why Max life named this policy as guaranteed income Plan…
Insurance companies need their policies to be sold. To attract people in buying policies from them, they will use attractive words like guaranteed income, life long income or get check every year etc.
This plan is endowment type plan, in this kind of policy you will get less return when compared to PPF( present interest rate is 7.6%).
Shoud You take max life guaranteed bonus plan?…
No, Insurance and investment should not be mixed(read this). You should take pure insurance which covers death only. It should not have savings component.
There two methods to take insurance on your life. 1. Click to read. 2. Click to read.
After calculating the insurance required then take term life insurance only.
Never take endowment or money back plans which are thrown at you having tempting words like guaranteed income or bonus.
