- This is a guaranteed return insurance-cum-investment product
- The insurance cover is too small to adequately protect dependants and can be ignored
- The guaranteed income options are the most attractive, especially for 10-11 year premium terms
- Guaranteed cash flows at 5.4-5.7% pa tax-free, are attractive in the current context
Advisors love to promote market-linked products, but guaranteed return products remain a big draw for Indian investors. Often the word ‘guarantee’ proves such a big lure that we don’t stop to check if the returns being guaranteed are better than the savings bank interest rate! When seen from a return perspective, there are very few guaranteed products from insurers that are worth considering for long-term investing.
But HDFC Life’s Sanchay Plus is an exception. It is an interesting and very popular product that guarantees tax-free regular income to investors for the long term. We dissect its pros and cons.
HDFC Life Sanchay Plus is a non-linked, non-participating plan. Simply put, this means that your returns from this product are not dependent on markets or a profit share from the insurer. They are fixed and guaranteed by HDFC Life. This is a savings-cum-insurance plan.
- The plan carries a life insurance component along with a return component.
- Anyone between the age of 5 and 60 years can invest in it.
- For the Lifelong Income option alone, the minimum age at which you can sign up is 50 years.
- You can pay premiums annually, half-yearly, quarterly or monthly.
- You can also choose to receive your income benefits at these frequencies.
So how does it work? If you agree to pay regular premium to HDFC Life for a pre-selected term, the insurer offers you guaranteed pay-outs in the form of a lumpsum or regular income. The policy also promises a lumpsum to your beneficiaries in the case of your death within the policy term. The guaranteed returns you can expect from this policy in the form of lumpsum or regular income payouts, do not vary much with the investor’s age. Only the death benefit varies.
Death benefit: Not worth it
The death benefit (the life insurance cover) you can expect from this plan is based on your age. Without getting into confusing details of how it is arrived at, Sanchay Plus fetches you a life cover of between 10 to 15 times the annual premium that you pay. Therefore, a Rs 1 lakh annual premium will fetch you a life cover of just Rs 10-15 lakh which is clearly not enough to compensate your dependants for income loss.
So if getting an adequate life insurance cover in place to protect your dependents is your objective, HDFC Life Sanchay Plus is a bad choice as it offers too little by way of death benefit. A pure term plan chosen from Primenvestor’s Term Insurance Rankings will fetch you far better bang for buck.
The Critical Illness and Accident Benefit riders that come as add-on options in Sanchay Plus are also avoidable for the same reason. When choosing your plans, be sure to opt out of these riders.
Having said this, most investors consider Sanchay Plus not for its death benefits, but for its guaranteed maturity or income payouts. Sanchay Plus offers four guaranteed return options, which we analyse below.
Guaranteed lumpsum at maturity
You can opt for policy terms of 10, 12 and 20 years for which you will have to pay regular premiums for 5 years, 6 years or 10 years. At the end of the 10th year, 12th year or 20th year from buying the policy (depending on the payment term you selected) you’ll receive a lumpsum payout from HDFC Life.
The lumpsum payout is calculated based on guaranteed additions mentioned in the brochure. The lumpsum varies slightly with your age band (below 45, 46-50, 51-55, 56-60 years) and also the premium payment term you choose (5, 6 and 10 years). However, the benefits you’ll receive from the plan become clearer when you check out the illustration for an actual investor.
Please download this Excel spreadsheet that shows the illustrations for an actual investor. Different sheets from this file are referred to in the rest of the article.
HDFC Life’s benefit illustration for a 35-year old woman shows that if she pays Rs 1 lakh in annual premium, with additional GST (4.5% in the first year and 2.25% in the subsequent years), she stands to receive Rs 6.79 lakh as guaranteed lumpsum at the end of the 10th year in the 10-year plan, Rs 9.1 lakh in the 12 year plan and Rs 22.72 lakh in the 20-year plan. The effective return (XIRR) works out to 3.54%, 4.16% and 5.19% respectively for the three plans. Refer to the Excel file (the sheet Guaranteed Maturity Benefit) for details. In the event of the investor’s death before the policy matures, the nominees will receive the death benefit plus guaranteed additions.
The only purpose of opting for a lumpsum payout after many years would be wealth creation. But the above returns, even though they are tax-free, offer poor compensation for the inflexible premium payouts you need to commit to and the long lock-in, making this a sub-optimal choice. If wealth creation is your objective and you can afford to wait this long, investing the same sums in equity or hybrid mutual funds would be a better bet.
Given the paucity of regular income avenues, it is the guaranteed income plans of Sanchay Plus that are the most popular. Here’s our take on them.
Guaranteed Income for a Limited Period
This is suitable for investors looking for predictable income over a 10 or 12-year period after paying premiums for similar terms. You can opt for policy terms of either 11 or 13 years and pay premiums for 10 or 12 years respectively. The insurer will pay you regular income in arrears from the 12th to 21st year or 14th to 25th year, depending on the plan you choose. In the event of your death, your nominees with receive regular income as per your chosen schedule. They can also convert pending payouts into a lumpsum.
Payment of income in arrears means that the money will come to you at the end of each year and not at the beginning. The following table shows the rough thumb rule for calculating the annual income benefit. The income will be higher by 0.75%-3% if you opt for higher premiums of Rs 1.5 lakh and above.
Guaranteed Limited Income
|Policy term||Entry age 5-50||Entry age – 51-60|
The benefit illustration provided by HDFC Life shows that a 35-year old woman who pays Rs 1 lakh in annual premium under the 11-year plan, after adding GST, would get Rs 1.93 lakh in annual income from the 12th to 21st year. In the 13-year plan, she would pay premiums for 12 years and get Rs 2.15 lakh a year from the 14th to 25th year. The effective return (XIRR) works out to 5.44% in both cases. (Refer to the sheet Guaranteed Limited Income in the Excel file)
Given that these returns are tax-free, HDFC is a reputed name which you can safely bet on for the long term and that you get to lock into certain income payouts for an extended period, the above returns are reasonably attractive, for income seeking investors.
Guaranteed Income for Long Term
This option allows you to receive a fixed income for 25 or 30 years, with your premiums being returned (if you survive) at the end. You can opt for policy terms of 6 or 11 years and will need to pay premiums for 5 and 10 years respectively. In the first plan, the insurer will pay you regular income in arrears from the 7th to 35th year with a lumpsum (return of all premiums) in the 36th year. In the second one, the insurer will pay you regular income in arrears from the 13th to 35th year with a lumpsum in the 36th year.
In the event of your death during the policy term, your nominees will receive regular income as per your schedule or can choose to convert their payouts into a lumpsum. The return of premium is available only on your surviving the policy term.
The following table provides a rough thumb rule on the income you can expect:
Guaranteed long-term income
|Policy term||Entry age 5-60|
HDFC Life’s benefit illustration shows that in the 6-year plan, a 35-year old woman who paid Rs 1 lakh in annual premium (with GST) for 5 years, would get Rs 32,703 lakh in annual income from the 7th to 35st year, with a lumpsum of Rs 5.47 lakh in the 36th year. In the 11-year plan, she would pay premiums for 10 years and get Rs 93,988 a year from the 12th to 35th year with a lumpsum of Rs 11.23 lakh in the 36th year.
In case of your surviving the policy term, the effective return works out to 4.96% in the first case and 5.72% in the second case. (Refer to the sheet Guaranteed Long Term Income in the Excel file) It is clearly advantageous to choose the longer term of 10 years. Given the tax-free and predictable income payouts, this is an attractive option for those who seek to ensure a minimum level of income either on retirement, or before it for an extended period of their life.
Guaranteed Life-Long Income
This option is available only to individuals who are at the age of 50 and above. You pay premiums for 5 or 10 years, depending on your choice. The insurer pays guaranteed income from the 7th year onwards until you turn age 99, or from the 12th year until you turn 99. The plan also offers to return premiums paid to the investor in the 99th year in a lumpsum, if he survives until then. In case of death during the policy term, your nominees receive the income until the end of the payout term as per the original plan, but without the lumpsum payout.
The following table provides a rough thumb rule on the amount of income to expect:
Guaranteed Life-long income
|Policy term||Entry age 50-60|
The benefit illustration shows that for a 50-year old woman who pays Rs 1 lakh in annual premium for 5 years, the plan will pay Rs 31415 a year as income from the 7th year until she turns 99. If she chooses the 11-year option, she would receive Rs 89610 in annual income from the 12th year until she turned 99. The effective returns work out to 4.91% and 5.76% respectively after including the return of premiums at 99. (Refer to the sheet Guaranteed Lifelong Income in the Excel file).
It is clearly advantageous to choose the longer term of 11 years. The return, being tax-free is quite attractive for folks seeking a predictable income stream post-50.
The above calculations tell us that HDFC Sanchay Plus offer a return of 5.4% to 5.7% pa if you choose its income options and stick to the 10/11 year plans. While this is not a great return, the product has many pluses.
- One, while offering predictable cash flows similar to immediate annuity plans, Sanchay Plus offers tax-free income (immediate annuity plans offer taxable income), because it qualifies as an insurance scheme under the Income Tax Act owing to its life component. For investors in the 20% and 30% tax brackets a 5.4-5.7% tax free return is quite a good deal in the current context.
- Two, the long term and lifelong income plans in HDFC Sanchay Plus materially reduce the reinvestment risk that you would face with other regular income investments such as FDs or post office schemes. You lock into a single rate and a certain income for a long period and don’t have to worry about rate swings.
- Three, the plan does allow early exit through surrender, offering you a way out if you are stuck.
On the minus side, the income it generates won’t adjust for inflation over the years. What looks to be a large income today may seem quite inadequate 10 or 12 years down the line.
Two, tax laws can change. If they do, the returns from this product will turn quite unattractive. A sharp rise in market interest rates can also render this plan’s returns unattractive. Three, like most guaranteed insurance products, it is inflexible as it requires you to commit to large premium payments for several years and wait an extended for returns.
Overall, this is a good product for investors seeking to secure a minimum level of income without having to worry about interest rate direction, or actively managing their money. The HDFC brand lends comfort on the credibility of the guarantee and the insurer’s longevity.
The product however will not meet your post-retirement income needs fully, because of fixed non-inflation adjusting payouts which will lose value over time. To complete your regular income portfolio for retirement, you will need to layer on equity or hybrid funds, post office products and other higher return options along with this plan.
Disclaimer: PrimeInvestor does not earn any revenue in any form from the insurer mentioned. While all efforts are made to present updated data, customers are advised to check with the respective insurer before buying the policy. The above recommendations are not advisory in nature. They are a product review done on the merits of the product. Decisions on buying the same has to be made based on your own individual circumstances.