Cash payouts before the end of the policy’s term are attractive, but overall returns are low.
ICICI Prudential Cash Advantage is an endowment plan that comes with a guaranteed benefit on maturity. It offers a premium payment term of 5/7/10 years and a policy period of 15/17/20 years. The plan is a bit different from other endowment products currently in the market, as it offers a regular cash payout after the premium payment period.
The payout starts as the premium payment term ends and continues till the last year of the policy. The policyholder can choose to receive this sum monthly or annually. This cash payout will be equal to 11.5 per cent of the guaranteed maturity benefit.
At the end of policy term, the surviving policyholder gets the guaranteed maturity value plus reversionary bonuses and terminal bonus if any. The sum assured on the policy is 10 times the annual premium for those below 45 years and 7-10 times for individuals in the age group of 45-54. To qualify for tax deduction, the sum assured on the policy should be at least 10 times the annual premium.
The plan acquires a surrender value only after three years of premium payment. In case of an unfortunate event, the policy holder’s nominee will be paid higher of the sum assured plus bonus, or the guaranteed maturity benefit, or 105 per cent of the premiums paid till then.
The plan is made to look attractive with cash payments even before the policy term ends. However, the costs outweigh benefits and there are alternate avenues where you can potentially generate better returns.
COSTS AND RETURNS
Assuming you pay an annual premium of Rs 1 lakh and sign in for a 20-year policy and a premium payment term of 10 years, the plan will offer a guaranteed maturity benefit of Rs 5.31 lakh and a life cover for Rs 10 lakh.
If we take bonus rate of 4 per cent (this is company’s average pay out rate in the last three years), your returns on this product would be around five per cent. Now, even if we take the long term inflation rate to be one-two percentage points below the current 10 per cent, this plan will give you a negative real return.
OPTIONS
For those of you eyeing superior returns, an endowment plan is not a good investment tool. Though there is a guaranteed benefit plus some bonus at maturity, the returns are measly. Instead, you can invest in the public provident fund where there is an advantage of tax benefit, capital safety and higher returns. For life cover needs, a term policy is always cheaper. A term insurance cover for sum assured Rs 10 lakh will cost a 35-year-old only Rs 3,000-3,500 a year.
The PPF scheme has a 5-year tenure. The principal contributed towards the scheme, the interest and the lump sum that will be received at the end of the term are all tax exempt.
If you invest Rs 1 lakh in a PPF scheme for 10 years, at the end of the 15th year itself you will have generated around Rs 23 lakh. Individuals who don’t mind a little risk may even start an SIP in some balanced equity scheme of a mutual funds. Equity exposure has the potential to generate inflation-beating returns over the long run.
