Capital guarantee solution plans gain popularity; should you buy?

KEY HIGHLIGHTS

• Capital guarantee solution plans are basically ULIPs, a combination of investment and insurance
• For a 10-year policy, you pay premium for five years
• 50-60% of premium is invested in debt products for capital protection and rest in equities
• On maturity, full premium to be returned along with additional gains made by the product
• Due to capital protection as primary objective the investment approach is quite conservative
• With conservative approach of investment it can only deliver moderate returns
• Calculate opportunity cost before investing as low return is the price you pay for guarantee
• Only those with no risk appetite should go for it
• If you chase returns, pure ULIPs will give you more upside in the current market scenario
• A combination of largecap diversified equity MF and term plan is also a good alternative

Many investors have burned their fingers in unit-linked insurance plans (ULIPs), when after surviving the policy tenure, the amount they received fell short of total premium paid during the policy period. What if there is a stoploss of the sort in ULIPs? To cater to this need, Policybazaar has come out with a solution to link ULIP with a traditional insurance plan. Called capital guarantee solution, these plans ensure that you receive 100 per cent premium back on maturity along with market-linked gains that may have happened during the policy period.

"The recent market crash has made customers apprehensive about buying ULIPs. Since it is a right time to invest in equities, we thought if we can create a solution in which customer's money remains safe and part of the money gets invested in the market to earn some upside. So, these plans give you fixed amount at the end of the policy term. We invest part of money in guaranteed plans and part in markets," explains Vivek Jain, investment, business unit head at Policybazaar.

For example, HDFC Capital Guarantee Protection plan combines HDFC Life Click 2 Wealth and Sanchay Plus. So, if you invest Rs 1 lakh per annum in this plan for five years, at least Rs 50,000-60,000 will go into guaranteed plan, which is HDFC Life Sanchay Plus and rest Rs 40,000 will go into ULIP, that is, HDFC Life Click 2 Wealth. After policy period of ten years, the return of your total premium (Rs 5 lakh) will be guaranteed and whatever market-linked upside happens on Rs 40,000 will be added to it.

 

Apart from it, you also get a life cover of 10 times the annual premium on these plans. So, if something happens to you during the policy period, your family will receive Rs 10 lakh on a Rs 1 lakh premium policy.

Policybazaar has tied up with four insurers - Bajaj Allianz, HDFC Life, Edelweiss Tokio and Max Life - to offer these plans, which you can buy only from their platform. Minimum premium for such policies is Rs 25,000 per annum.

With memories of steep market crash in March still afresh, capital protection has become the top priority for most investors. Jain says these plans are quite popular on Policybazaar's platform with 30-35 per cent investment business coming from it.

Should you invest?

While capital protection plans do offer 100 per cent capital guarantee, before making an investment, you must compute the opportunity cost. You must know that market-linked returns in these plans will be lower than what you would otherwise earn on pure ULIPs for the same amount of money. This is because to ensure capital guarantee, half of the money gets invested in safer debt instruments. "Capital guarantee is an investment strategy where equity participation keeps decreasing with policy term and by fifth year (for a 10-year policy), 80 per cent investment will be in debt funds only. And, unlike pure ULIPs, investors will have no choice of fund. It will be driven by the fund manager," Shailesh Kumar, co-founder, Insurance Samadhan explains.

Mrin Agarwal, founder, Finsafe India concurs. "You are paying huge price for capital guarantee. Opportunity cost is too high. But if you are absolutely risk averse and capital guarantee means a lot to you, you may go for it, although be cognisant of the fact that return could be incredibly low and may not beat inflation," she says.  

 

Another important factor is life cover offered in these policies will not be adequate. For example, for a minimum premium of Rs 25,000 per annum, life cover would only amount to Rs 2.5 lakh. Insurance experts say life insurance should be at least 10-15 per cent of your annual income.

So, invest in these plans only for the capital protection, that is, the money you do not want to lose in any case. If you are chasing returns, these plans will not work for you. "Today net asset values of funds are available at lower rates, hence more units can be accumulated. Instead of capital protection plan, buy regular ULIP with 80 per cent equity exposure. Switch to debt when you are reaching maturity," suggests Kumar.

If you have a long term horizon and are not averse to equity then there is a very cost efficient alternative that you can consider. You  can invest into a combination of term plan and equity mutual fund. Term plan can give you desired protection while equity can help you generate higher returns.

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