What is a Guaranteed Income Plan?

Guaranteed Income Plans (also known as Money-Back Plans) are low-risk investment plans where you invest money during a specific period of time, and then receive the “money back” in periodic instalments in the future usually with a guaranteed return.

Such plans cater to financial commitments that are spread over a period of time in the future. What’s more, in case you pass away before the maturity of the plan, then these policies may also pay a lump sum benefit

Basically, Guaranteed Income plans blend the need for future income to cater to future expenses, with a dash of financial security in the form of a death benefit.

For instance, say your child is 2 years old. You are aware that the fee for higher education from prestigious institutes is prohibitory. You hence want to invest today so that there are enough funds available for their higher education.

Let’s have a detailed look at Guaranteed Income Plans.

 

Guaranteed Income Plans

As we said, Guaranteed Income Plans are essentially a combo of investment and insurance - all rolled into one single plan.

• The investment portion of the plan gives you periodic payouts if you survive the policy duration. The amount you will receive is laid down in the policy schedule.
• The insurance portion of the plan acts as a financial cushion for your dependents and gives them a comfortable life even in your absence.

Now, let’s discuss the three main benefits offered by a Guaranteed Income Plan.

Survival Benefit - Income over a period of time

The survival benefit, or the periodic payouts you receive, is the most crucial aspect of a Guaranteed Income Plan. The period during which it is paid is called the ‘benefit payout period’.

How is it calculated?

The payouts can either be -

• A percentage of the sum assured. This is in cases of Sum Assured Front Guaranteed Income Policies, i.e., where you choose the sum assured.
• A percentage of the annual premium you pay in cases of Premium Front Guaranteed Income Policies, i.e., where you choose the premium. This may be dependent on various factors like your age, premium payment term, benefit payout period, and the premium you are paying.

Example - The survival benefit, or the periodic payouts you receive, is the most crucial aspect of a Guaranteed Income Plan. The period during which it is paid is called the ‘benefit payout period’.

Mahesh

He chooses a plan with a sum assured of Rs 30 Lakhs, duration of 20 years, and premium payment term of 15 years. His annual premium comes out to be Rs 3 Lakhs. The survival benefit will be paid to him annually from the 21st year to the 30th year, let’s assume it is 15% of the sum assured.

Annual Survival Benefit = Percentage of the sum assured

= 15% of 30 Lakhs

= Rs 4.5 Lakhs

Nilesh

He can comfortably pay a premium of Rs 40,000 on an annual basis. The policy duration of the plan he chooses is 20 years, and the premium payment term is 15 years. Since he has chosen the premium, the survival benefit will be a percentage of it. Let’s assume it is 10% of the annual premium which is payable from the 21st policy year to the 30th policy year.

Annual Survival Benefit = Percentage of the premium

= 10% of 40,000

= Rs 4000

When is the Survival Benefit paid to you?

The survival benefit, as the name suggests, is paid to you (the policyholder) if you survive the policy duration. It is paid in accordance with the policy schedule.

Note: The policy schedule is a part of the policy document and lays out the structure, frequency, and timeline of the benefits. Depending on the product you buy, the policy schedule may say that the survival benefit is to be paid out -

• A few years after the policy commences
• After the premium payment term ends
• After the policy duration ends

It may be payable on a monthly, quarterly, half-yearly, or yearly basis. Some plans may let you receive this as a lump sum. Some plans may also return a lump sum of all the premiums you have paid after the benefit payout period.

Example - Harsha purchases a Money-back Plan in 2022 with a cover amount of Rs 30 Lakhs. The premium payment term is 10 years and the policy term is 25 years. The policy document says that she will receive 20% of the cover amount as the survival benefit every year over a period of 5 years.

Scenario 1

The survival benefit payout period will begin 5 years after the policy inception.

Harsha will start receiving the survival benefit in 2027 and this will continue over the succeeding 5 years, i.e., till 2031.

Survival benefit each year from 2027 to 2031 = 20% of Sum Assured

= 20% of 30,00,000

= Rs 6,00,000.

Scenario 2

The survival benefit payout period will begin 3 years after the premium payment term is over.

This 3-year gap is known as the deferred period. In this case, Harsha will start receiving the survival benefit in 2035 and this will continue over the succeeding 5 years, i.e., till 2039.

Survival benefit each year from 2035 to 2039 = 20% of Sum Assured

= 20% of 30,00,000

= Rs 6,00,000.

Scenario 3

The survival benefit payout period will begin right after the policy term is over.

In this case, Reema will start receiving the survival benefit in 2047 and this will continue over the succeeding 5 years, i.e., till 2051.

Survival benefit each year from 2047 to 2051 = 20% of Sum Assured

= 20% of 30,00,000

= Rs 6,00,000.

She may also be given the option to receive this amount as a lump sum.

Does the Survival Benefit change as time passes?

Depending on the product you buy, the survival benefit may be -

Fixed over the entire benefit payout period

Increasing by a certain percentage, say, 5% per annum.

Example - Milind and Nilima decide to buy Money-Back Plans with a sum assured of Rs 25 Lakhs with a policy term of 30 years. The annual premium is Rs 2 Lakhs and the premium payment term is 20 years.

he annual survival benefit payouts start in the 21st policy year and continue up to the 30th year. They are equal to 10% of the cover amount.

The only difference is that Milind’s payouts are fixed over the entire benefit payout period, whereas Nilima’s increase by 5% each year.

Mahesh

Annual Survival Benefit Payout = 10% of 25 lakhs = Rs 2.5 lakhs.

He will receive Rs 2.5 lakhs on an annual basis from the 21st policy year to the 30th policy year.

Nilesh

Survival Benefit Payout for the 21st year = 10% of 25 lakhs

= Rs 2.5 lakhs

Payout for the 22nd year = 2.5 lakhs + 5% of 2.5 lakhs

= 2,50,000 + 12,500

= Rs 2,62,500

Payout for the 23rd year = 2,62,500 + 12,500

= Rs 2,75,000

And so on…

 

Maturity Benefit

In a Guaranteed Income Plan, like any other investment plan, you will receive a lump sum benefit when the policy matures, or the policy term ends. This benefit is called the Maturity Benefit.

Example - Monisha buys a Money-back Policy in 2022 with a sum assured of Rs 40 lakhs. The policy term is 25 years and she is required to pay an annual premium of Rs 4 Lakhs for 18 years.

Note: The survival benefit is 10% of the sum assured

Scenario 1

The maturity amount is the sum assured.

Maturity Amount = Sum Assured

= Rs 40 Lakhs

Scenario 2

The maturity amount is paid in the form of survival benefit payouts.

Let’s assume that the survival benefit payouts will be paid over a span of 10 years.

Survival Benefit = 10% of Sum Assured

= 10% of 40,00,000

= 4,00,000
 

Death Benefit

If you (the policyholder) unfortunately pass away during the policy duration, the death benefit is paid to the nominee.

Death Benefit = Total Sum Assured
The death benefit is exclusive of any paid survival benefits. So -

1. If you pass away before the survival benefit is paid
   Your nominee will receive the sum assured and the policy will terminate.
    
2. If you have received survival benefit payouts before you pass away
   Those survival benefits shall remain intact, and your nominee will receive the sum assured and the policy will terminate.

Scenario 1

Rahul passes away in 2032
No survival benefits are paid to Karan since he passes away before they accrue under the policy. His nominee is paid the death benefit of Rs 20 Lakhs. The policy terminates once the death benefit is paid.

Scenario 2

Rahul passes away in 2037
In this case, Rahul will have been paid the survival benefit in 2035 and 2036, on an annual basis. No further survival benefits will be paid because he passes away in 2037.

Survival Benefit = 10% of cover amount

= 10% of 20 lakhs

= 2 lakhs

Hence, he will have received Rs 2 Lakhs as the survival benefit in both 2035 and 2036.

If he passes away in 2037, his nominee will be paid a death benefit of Rs 20 Lakhs. This death benefit will be completely unaffected by the already paid survival benefits. The policy will terminate once the death benefit is paid.

Note: Some products may allow remaining survival benefits to be given to your nominee, even after you pass away. This can usually be seen where the survival benefit payouts start after the policy term is over.

Depending on the product, your nominee can receive the death benefit as -

• A lump sum.
• Staggered payments. The percentage, tenure, and frequency depend on the product. For instance, 25% of the sum assured can be paid annually over a span of 4 years.

Note: This choice may not be available with each product.