Prime Review: The new HDFC Life Sanchay Plus

With the RBI opening up a gateway for retail investors to directly buy government securities for long tenures such as 10, 15, 25, 30 and 40 years, immediate and deferred annuity products from insurers have lost sheen (Refer to our previous article on RBI Retail Direct platform). 

Therefore, at a time when long-term g-secs from the Central government offer you regular income at a yield of 6.5-7%, there’s really no reason to lock up your capital with an insurer’s annuity plan for an effective return (IRR) of 4-5%, which is taxable at your slab rate.  

But one category of plans that remain attractive for meeting your long-term income needs are the guaranteed income plans from insurers. Because they are structured as insurance plans and not annuity products, their annual payouts to you are treated as insurance maturity proceeds and are tax-free under current tax laws. HDFC Life Sanchay Plus, one of the better plans in this category, has seen a revamp recently. We had dissected its pros and cons in our earlier review on the product, way back in June 2020. Here’s an update.

What the HDFC Life Sanchay Plus offers

HDFC Life Sanchay Plus is a non-linked, non-participating plan, which means that your returns from it are not dependent on the market or HDFC Life’s performance. You will be paid the promised return irrespective of both. 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 of entry is 50 years. You can pay premiums annually, half-yearly, quarterly or monthly and choose to receive your income also at these intervals.

In other words, under the HDFC Life Sanchay Plus, if you pay regular premium to HDFC Life for a fixed number of years, the insurer promises to pay either a lumpsum or regular income for a chosen period, at a fixed rate. There is also a life cover in force during your policy term. 

There appear to be three main differences between the current new version of Sanchay Plus and the old one. 

• One, the insurer now offers you more choices in terms of premium payment and policy terms. The wider menu allows you to defer your income payouts for a few years after you stop paying premiums. 
• Two, the maximum investment you can make is now capped at a sum assured of Rs 25 lakh. There were no such limits earlier and HNIs were known to sign up for multi-crore policies. The minimum premium remains at Rs 30,000 a year. 
• Three, the critical illness and accident riders that were part of the old scheme have been done away with. This is not a big loss, as these riders did not offer value-add for investors.  

The scheme as it stands now offers four plans detailed further down. Under all four plans, your life will be covered by the insurer and your nominees will get the death benefit in case you don’t survive the policy.

Death benefit – inadequate

The death benefit (the life insurance cover) you can expect from HDFC Life Sanchay Plus is decided based on a complex formula. Should you fail to survive the policy term, the highest of annualised premiums paid, 105% of premiums paid, guaranteed sum assured on maturity or the Sum Assured, is paid out to your nominee as death benefit. The Sum Assured is calculated as a multiple of your annual premium and falls with age. 

Without getting into such details, it is enough to know that the different plans of HDFC Life Sanchay Plus fetch you a life cover of between 10 to 15 times your annual premium paid. This is not enough to compensate your dependents for the loss of your life and income. 

So, if getting a life insurance cover to protect your dependents is your objective, skip HDFC Life Sanchay Plus. Choose a pure term plan instead from PrimeInvestor’s Term Insurance Rankings. 

But most investors consider HDFC Life Sanchay Plus for its guaranteed lumpsum or income payouts. We analyse them below.

Plans of HDFC Life Sanchay Plus

Plan #1 – Guaranteed lumpsum at maturity

Under this plan, you can opt to pay premiums for any period from 5 to 10 years. In return, the insurer promises to pay you a lumpsum at the end of your chosen policy term, which will typically be longer than the premium paying term. 

For example, if you opt for a premium paying term of 5 years, your policy term can be 10-20 years. If you opt for premium paying terms of 6-10 years, your policy term can be 12-20 years. The difference between your premium paying term and policy term will decide how long you’ll have to wait to get your lumpsum payout. It will also decide the length of your life cover. 

So how is your final lumpsum calculated? Well, it is the sum of the following:

1. Your guaranteed sum is assured at maturity, which is the total of premiums paid. 
2. Accumulated guaranteed additions, which are decided by the insurer at specific rates and presented in the policy brochure. The higher your annual premium and longer the policy term, the higher your guaranteed additions. For example, a 45-year-old choosing a 5-year premium paying term with a 10-year policy term will get guaranteed additions at the rate of just Rs 63.8 per Rs 1000. But if it is the 20-year policy term, this goes up to Rs 115.35.   

The benefits you’ll receive from the plan become clearer when you check out an illustration for an actual investor. Our calculations for a less than 45-year-old show that if he pays Rs 5 lakh in annual premium for 5 years (with additional GST of 4.5% in the first year and 2.25% in the subsequent years), he stands to receive Rs 33.6 lakh as guaranteed lumpsum at the end of the 10^th year. This translates into an effective 3.41% return. But if the investor pays premiums for the same 5 years but chooses a 20-year policy term, his effective returns improve to 5.67% with a maturity payout of Rs 69.62 lakh.  

Conclusion: The above feature does not make the guaranteed lumpsum at maturity attractive. 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 rigid premium commitments and the long lock-in, and won’t match inflation rates. If wealth creation is your objective, PPF or hybrid or equity mutual funds would be a far better bet than HDFC Life Sanchay Plus.

Plan #2 – Guaranteed Income for a Limited Period

Under this option, you can choose to pay premiums for any period from 7 to 12 years. The insurer will pay you a guaranteed income for either 10 or 12 years, after a waiting period of your choosing, which can go up to 5 years. The guaranteed income will be paid to you in arrears, which means that it will come to you at the end of the year and not the beginning. Your life is covered during the policy term. 

The table below 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. The table shows the annual income as a proportion of the premium paid, that younger investors can expect from this plan, based on their premium payment. The rates of payout are slightly lower for 51-60 year olds.

As is clear from the data above, the longer you choose to defer your income by stretching your policy term, the higher your absolute income from the plan. Longer premium payment terms also fetch you higher incomes. 

But this data isn’t helpful to gauge the effective IRR you would earn from this plan. We did our own calculation, after factoring in GST outgo to find out the effective returns (IRR) that investors can expect from premium paying and policy term different options. The table below gives you the broad range of returns to be expected.

You can download this Excel sheet for return calculation details here.

Conclusion: Given that alternative options such as the GOI Floating Rate Savings Bonds (pre-tax returns 7.15%), Senior Citizens Savings Scheme (pre-tax returns 7.4%) and PM Vaya Vandana Yojana (pre-tax returns 7.4%) are available to set up income streams for limited periods from 7-10 years, the 7-year option of this plan isn’t attractive. The 12-year option offers reasonable returns for folks in the highest tax bracket.

Plan #3 - Guaranteed Income for Long Term

In this plan, you can choose to pay premiums for any period from 5 to 12 years. The insurer will pay you a regular income for 25 or 30 years starting from one year after the end of the policy term that you choose. The policy terms you choose can range between 5 and 13 years, after which your income stream will start. This plan offers the same rates of return for anyone between the age of 5 and 60. 

The following table captures the annual income you can expect if you choose the minimum and maximum policy terms for each premium term. The data shows that choosing between a 25-year or 30-year income payment period does not make much of a difference to your returns. But your choice of policy term does materially affect returns. The longer your policy term, the more income you can hope to make.

You can download this Excel sheet for return calculation details here. Effective IRRs for the investor range from 5.1% to 6.2% pa (see excel linked above), with longer premium terms improving your returns. 

Conclusion: Given that the returns are tax-free and allow you to lock into guaranteed payouts for really long periods such as 25-30 years, investors in higher tax brackets can consider the longer premium and policy terms as a supplement to incomes from other avenues either pre or post retirement.

Plan #4 - Guaranteed Life-Long Income

This option is available only to individuals who are 50 and above. You pay premiums for 5, 6, 10 or 12 years, depending on your choice. The insurer pays guaranteed income in arrears after skipping one year, once your premium payment term ends. 

Therefore, if you pay premiums from 2021 to 2030, your income payments will start from the end of 2032. The income payouts are continued till you turn 99 years of age. If you live beyond 99, the plan will also refund the total premium paid over the entire policy.  

The unique feature of this plan, different from the others above, is that it offers you an option to ‘commute’ your future income by seeking lumpsum payments at any time during the payout period. This lumpsum will be calculated based on future incomes due to you, discounted at prevailing interest rates. This policy also allows your nominee to receive income payouts at the rates promised to you, in case of your death during the payout period. 

The following table illustrates the amount of income to expect as a proportion of annual premiums paid.

You can download this Excel sheet for return calculation details here. Our calculations show that this plan provides an effective IRR of 5.02% in the 5-year premium term, going up to 5.94% for 10 years and 6.08% for 12 years. 

Conclusion: The rates are fairly attractive for 10 and 12 years given that they represent tax-free returns. The facility to allow your spouse or dependent to earn incomes in case you don’t live to age 99, is a big plus too. Those on the verge of retirement can definitely consider the Lifelong Income option to supplement their income needs.

Our take

The above calculations serve up the following pros:

• HDFC Life Sanchay Plus offers a tax-free return going up to 6% pa in its Lifelong Income option, which is a reasonable return given the ability to lock into these rates for the long term and the fact that the income guarantee comes from an insurer with a good pedigree and reputation. 
• Apart from giving you an exact idea of the income you can expect, the long term and lifelong income plans also mitigate the reinvestment risk that you would face with other investments such as FDs or post office schemes. The plan does allow early exit through surrender, offering you a way out if you need a lumpsum for emergencies. 

However, the cons of HDFC Life Sanchay Plus, even in plans where return is reasonable are as follow:

• The income is not going to adjust for inflation over the years. What looks to be a large income today may seem quite paltry 10 or even 5 years down the line. 
• Tax laws can change. Though maturity proceeds from such insurance plans remain tax-free under the current tax regime, there’s no guarantee that they will remain so in perpetuity. The Centre is clearly keen to transition individual taxpayers to a regime where they pay low rates of tax in return for giving up all exemptions. Should the tax breaks on insurance maturity proceeds be withdrawn, the rates of return on this scheme would be quite unattractive relative to others in the market. 

Therefore, our recommendations with the various plans of HDFC Life Sanchay Plus are as follows:

The Lifelong or Long Term Income options are good options for investors seeking to secure a minimum level of income either pre or post retirement, without having to worry about interest rate swings or actively managing their money. 

The HDFC brand lends comfort to the credibility of the guarantee and the insurer’s longevity. The product however will not meet your post-retirement income needs fully, because the payouts are not inflation adjusted. To complete your regular income portfolio for retirement, you will need to own equity or hybrid funds, post office products and other higher return options along with this HDFC Life Sanchay Plus plan.

With inputs from Bipin Ramachandran