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Personal finance experts suggest that one should see insurance as a protection tool and not as an investment option. However, several policies promise guaranteed income over a period of time and create a whole lot of confusion in the minds of buyers – whether to see life insurance as an investment or just as the name suggests, i.e. insurance.

Another question that troubles buyers is: Whether they should buy a policy that is offering guaranteed income?

According to Dhirendra Mahyavanshi, Co-Founder, Turtlemint, the very purpose of a Life Insurance Plan in anyone’s life is to provide protection. However, some have savings-oriented goals coupled with guaranteed payouts complimenting their protection goals. This is where Guaranteed Income Plans from Life Insurance companies play a role.

Guaranteed Income Plans have a predefined schedule and a specified amount that is paid to the policyholder if he survives the mentioned tenure. These incomes can be paid annually, quarterly, half-yearly, or monthly.

The amount of income under such plans is fixed and is expressed either as a percentage of the sum assured or the annualised premium.

Mahyavanshi told FE Online in an email interaction that the income pay-out under guaranteed income plans starts at either of the following instances:

• After the premium payment term if the policy is a limited premium policy
• After maturity, for a fixed number of years
• After death, either for a fixed number of years or up to the end of the policy tenure.

What role Guaranteed Income Plan can play in one’s overall financial plan

“If an individual needs a guaranteed and regular source of income, guaranteed income plans can prove beneficial. As far as financial planning is concerned, guaranteed income plans can prove worthwhile for people nearing retirement who would like to receive a guaranteed and secure source of income post-retirement,” Mahyavanshi said.

“Moreover, for individuals looking to supplement their incomes, guaranteed income plans can be helpful,” he added.

It is believed that one should not see insurance as an instrument of income. Rather one should see insurance as insurance only.

So, is it right to mix insurance and income through such guaranteed income plans? Explaining this, Mahyavanshi said Guaranteed income plans are available in the market and people must know their features and aspects before they buy the plan. “If an individual’s requirement aligns with guaranteed income plans then they can invest in such plans and create a secured corpus for their needs.”

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There are various types of insurance products to meet the different needs of consumers. There were traditional insurance plans with an element of savings offered in the market for ages.

However, now with more private players in the market, the consumers have a larger bouquet of products with higher returns to choose from.

“If an individual’s requirement aligns with guaranteed income plans then he/she can surely invest in such plans to create a secured corpus for the future,” Mahyavanshi said.

Who should buy a guaranteed income plan?

Mahyavanshi said this is more of a subjective and relative question. “The suitability of guaranteed income plans depends on an individual’s needs, risk appetite, financial goals, and investment horizon.”

Such plans may prove suitable for individuals who –

• Have a medium to long-term investment horizon
• Are completely averse to market risks
• Want to create a guaranteed corpus
• Want to avail of insurance coverage on their investments
• Want a stream of guaranteed incomes for their needs

Options other than guaranteed income plans

If your primary aim is to generate a fixed wealth or income, then there are several other options that you can look into. Some of these are: Public Provident Fund, fixed deposits, post-office deposit schemes, recurring deposits, National Saving Certificates, etc. These savings schemes do not promise insurance coverage, which is available under guaranteed income plans.

Pros and cons of guaranteed income plan

Pros

Some of the benefits offered by Guaranteed Income Plans are:

First, the benefits that you earn from the plan are guaranteed. There is no exposure to market volatility ensuring that you get a fixed rate of income even when the markets are volatile or bearish. This may be helpful for risk-averse investors who look to avoid market risks and want a secured avenue for their investments.

Guaranteed income plans secure a source of additional income. This is helpful if you need supplemental income in meeting your expenses or if you want a regular stream of income after a specified age.

The incomes can be used to pay the premium of the policy, partially or fully, making premium payments easy and affordable.

If the income is paid after death, the plan ensures that your family is financially secured even in your absence.

Lastly, the tax angle cannot be ignored. The premiums paid as well as the incomes that you receive are tax-free subject to certain terms and conditions. As such, you can plan your taxes effectively and even create a tax-free corpus with the plan.

Cons

According to Mahyavanshi, the only con of guaranteed income plans is the overall return of the product is usually lower than its counterparts but that is mainly because of the insurance portion in-built into the plan. Thus, an individual would have to factor the insurance portion in, while comparing returns.