You should buy insurance separately and invest in other products with higher returns, they say

 

The Reserve Bank has cut the benchmark interest rate by 125 bps till now in 2015 and is expected to lower it further. Investors are already feeling the pinch due to the reduction in bank fixed deposit rates and the thought that they will go down further is making them nervous. Insurance companies are using this opportunity to push `guaranteed return' products.

How do these plans work?

Let's explain this by analysing AEGON Religare Guaranteed Growth Insurance Plan. If a 30-year-old male puts `1 lakh for 8 years to get `10 lakh insurance cover, he will get back 150% of the annual premium (excluding taxes) at the end of every year from the 10th year to the 17th year.While the total investment will be `8 lakh (plus taxes) over the first 8 years, he will get back `12 lakh between 10th year and 17th year.

Though the `150% guaranteed return' sounds lucrative, it is not the case because this does not consider the `time value of money'. And if you calculate the annualised returns, it will be only around 4%.

What should you do then?

 

Financial planners suggest you to keep your investments separate from your insurance. You should buy a simple term cover to meet your insurance requirements and look at more remunerative avenues for investment. Since the time frame is very long, investors can consider equity mutual funds if they have the ability to take risk. This way , the final proceeds will also be tax-free in your hands. If you are risk averse, then you should consider Public Provident Fund (PPF).Though the rate may come down in coming years, PPF is offering 8.7% tax-free interest now. Debt MFs are another option worth considering.For example, liquid funds have returned 8.66% in the last five years and 7.57% in the last 10 years. The only glitch is that these returns are taxable as long-term capital gains at 20% after indexation benefit.