Things To Keep In Mind When Purchasing A Guaranteed Income Plan

Whenever you buy a product, whether it’s a pack of bread or an expensive electronic gadget, you have a checklist in mind. If we were to talk about bread, you check the expiration date, whether the quantity is enough, the type of bread, etc. And, when you buy an electronic gadget, you check the specifications, the brand, post-sales customer service, the price, etc.

Why do you keep an eye on all these things? To make sure that the purchase is worth your money and will fit your set of requirements. For instance, if you need a mobile phone with a good camera, you will narrow down your choices accordingly.

Similarly, when it comes to buying an insurance plan, there’s a few things that you should check thoroughly. Why? First, it is a long-term commitment - both in terms of the paying period as well as the payout period. Second, the plan should fit your unique needs. You don’t want it to seem useless later on.

In this article, we’ve put together a list of important things you should check when purchasing a Guaranteed Income Plan (or Money-Back Plans).
 

Things to Keep in Mind Before Purchasing A Guaranteed Income Plan

• Your Financial Goals
  Before you go on to finalise your plan, you need to make sure that your financial goals really call for it. Jot down your goals - like having a secondary income, funding your child’s education, giving your family a financial safety net, etc. - before committing to the plan.

  A Guaranteed Income Plan gives you regular payouts as the survival benefit and a death and maturity benefit.

• Understand The Financial Commitment
  Generally, Guaranteed Income Plans give you payouts after the premium payment term ends. Depending on the product you choose, this term will typically be around 6-8 years or 10-12 years. So, keep in mind that you must pay the premiums regularly over the course of this time period to be able to receive the payouts later.

  Apart from that, the policy schedule may also include a deferred period, i.e., a period between the end of the premium payment term and the beginning of the payout period. To put it simply, it is the period of time when the customer has already made all the premium payments, and the insurer has not started paying out anything. The deferred period may be zero in some cases, so you may receive payouts immediately upon paying all the premiums. In most cases, it will be a specific number of years, like 2 years, 4 years, or 6 years.

  Please note that you cannot withdraw money during this ‘lock-in period’ without suffering substantial losses to the fund you have accumulated.

• Determine The Guaranteed Income Amount And Sum Assured
  To determine how much coverage you need, you must assess your goals and needs. It's important to do thorough research before making the final estimation since this amount should be adequate to cover the key milestones in your life such as child's college fees, EMIs for a car or home, retirement expenses, etc.

  Another important thing to note is that the survival payout depends on the cover amount you choose. In some plans, the survival payout is a percentage of the sum assured, while in others it is a percentage of the annual premium. Ensure you read the policy documents carefully and choose the option that's right for you.

• Know Your Investment Returns
  You should know the returns you will get back on your investment to be sure that they can comfortably accommodate your needs. You can get this information by calculating the Internal Rate of Return (IRR).

  The IRR is a financial metric that compares the returns between cash inflows and cash outflows. Using this metric, you can find how profitable your investment is. The higher the IRR, the better your investment.

  You can get the IRR for your investment from your insurer or financial advisor. Or, you can use online calculators.

  Buy the policy only if you are satisfied with the returns and know they will cover the goals you have set.

• Make Withdrawals With Caution
  When you buy a Guaranteed Income Plan, you're committing to a long-term commitment because most plans give you payouts after the premium payment terms and deferral periods are over. Your money will be locked under your policy for a fixed period of time. Keep in mind that you may incur significant losses if you exit, i.e., surrender the policy.

  Example - Mehak bought a Guaranteed Income Plan that will start giving the survival payout after a premium payment term of 15 years and a deferred period of 2 years. This means that her money will remain locked for a period of 17 years. If she wishes to . surrender the policy during this lock-in period, say in the 12th year, she will get the surrender value which might be much lower than the payouts, resulting in losses.

• Pick The Right Payout Frequency
  Your payout should perfectly align with the financial goals you want to achieve. You may need it to cover the different milestones of your life. Maybe you simply want another source of income, or want the payouts for buying a vehicle, starting a business, as retirement income, etc.

  Some plans offer payouts every year, while others offer payouts every two years. It varies across insurers

  So, you must be well-informed about the frequency of payouts payable under your policy. Ensure you select the payout frequency based on your financial objectives.

  Example - Manoj, a 30-year-old salaried employee, wants to purchase a Guaranteed Income Plan. He intends to buy a car and will require additional income for the same. In order to achieve his financial goals, he chooses a policy that provides a payout every year.

• Understand The Premium Payment Commitment
  Guaranteed Income Plans span many years. You are required to pay the premiums for a specific period.

  Another key thing to note is that these premiums are divided into two parts - insurance premiums and investment premiums. As a result, they may be quite expensive than regular term plans.

  Therefore, you need to ensure that you have a steady stream of income to pay the insurance premiums regularly. If you fail to pay your premiums, your policy will lapse and you'll lose out on your benefits. In some cases, the insurer may impose late fees and penalties.

• Pick The Right Premium Payment Frequency And Term
  can also choose how frequently you want to pay the policy premiums based on your convenience - Annually, Semi-annually, Quarterly, Monthly.

  These plans also allow you to pay off your premiums earlier with the ‘Limited Pay Option’. You can finish paying your policy premiums in faster and larger instalments and remain covered for the rest of your policy period.

  Note - Irrespective of the type of payment frequency you choose, make sure you set up auto-debit or standing instructions on your bank account so that your premiums are paid on time and your policy doesn’t lapse.

• Know The Policy Surrender Benefits
  You may want to discontinue or surrender your Guaranteed Income Plan for various reasons - a financial hassle may prevent you from paying premiums, your plan no longer meets your needs, or you want to buy a new plan with better features and benefits.

  In case you wish to discontinue your policy, you must be aware of the repercussions. Make sure you know how much you will receive and how much you will lose when you surrender your policy.

• Check The Riders Available With The Policy
  You can customise the policy you’ve chosen with add-on benefits known as Riders, at an affordable cost. These riders enhance your coverage. For example, a Critical Illness Rider will offer an additional payout if you’re diagnosed with a serious critical illness listed in the policy document.
  Common riders available with Guaranteed Income Plans -
  • Critical Illness Rider
  • Accidental Death Benefit Rider
  • Accidental Disability Rider
  • Hospital Care Rider
  • Surgical Care Rider
  • Waiver of Premium due to Disability Rider
  • Waiver of Premium due to Critical Illness Rider

Note: Guaranteed Income Plans may offer other types of riders besides those listed above. It is therefore critical that you read the policy wordings and brochures before purchase.

• Understand The Free-Look Period
  A free-look period is a time period given by your insurer during which you can evaluate a policy thoroughly after purchasing it.

  During this period, you can review the policy wordings, benefits, terms and conditions, exclusions, etc. of the policy. If you are not satisfied with your policy or it does not meet your and your family's requirements, you can return it. There are no cancellation fees or penalties.

  The lengths and conditions of free-look periods under Guaranteed Income Plans can vary across insurers. It is, therefore, essential that you speak to your insurer before purchasing the policy to have all the information you need.

• Be Aware Of The Grace Period And The Revival Period

  Grace Period
  A time period given by your insurer to pay any missed premiums. If you fail to pay your premiums within the grace period, your policy will lapse and all benefits under the policy will cease.

  Revival Period
  In case you fail to pay premiums and your policy lapses, you are given a time span know as the ‘revival period’ during which you can reinstate your policy.

  Grace periods and revival periods vary across insurers, so make sure you understand the conditions thoroughly before purchasing the policy

• Appoint The Right Nominee
  While purchasing a Guaranteed Income Plan, you need to pick a nominee/s. This person shall receive the death benefit if you pass away during the policy term.

  The nominee can be anyone in your family - your spouse, children, parents, siblings, etc.

• Take Some Time To Research!
  A Guaranteed Income Plan is a long and dedicated investment, making it super important to do your own research before investing in one.
  ​​​​​​​Here are few things you should be aware of about the plan -
  • Benefits and features
  • Limitations
  • Returns (including a history of the returns giving to existing policyholders)
  • Past performance of the insurer
  • History of claim settlement
  • Customer feedback about the insurer’s services

• Consult A Good Financial Advisor
  As we’ve discussed before, buying a Guaranteed Income is an important and life-changing decision, requiring substantial investment on your part. The best way to ensure this long-term investment doesn't go wrong is to seek advice from a reliable financial advisor. A good financial advisor can help you choose the right policy for your needs, answer any questions you may have, and assist you through the entire process - so you can make a well-informed decision.
   

Wrapping Up!

Hence, these are a few things you must keep in mind before purchasing a Guaranted Income Plan - so you make the right choice and don’t have to deal with any hassles in the future.