As an advisor, I may not like certain products and would never ask anyone to invest in such products. If you are a regular reader, you know that traditional life insurance plans would fit the bill of such a product.
However, whenever a client requests my opinion about a specific product, I can’t just launch into rhetoric. My feedback must be backed by concrete data. Recently, an investor asked about ICICI Prudential Guaranteed Income For Tomorrow or ICICI Prudential GIFT plan. Yes, that’s right. There is an abbreviation. I think ICICI Prudential chose the keyword “GIFT” first and then figured out keywords to match the abbreviation. What do you say?
Decided to dig in. In this post, let us find out more about the plan.
ICICI Prudential Guaranteed Income for Tomorrow (GIFT) plan: Salient Features
- Traditional life insurance plan
- Non-linked, non-participating plan (you know upfront what you will get)
- 4 variants (we will discuss later)
- Minimum premium: Varies depending on the variant
- Maximum premium: No cap
ICICI Prudential Guaranteed Income for Tomorrow (Gift) plan comes in 4 variants
- Early Income
- Single Pay Income
I will look at each of the variant with the help of an illustration.
The concept is simple. You pay the premium for a few years. At the time of maturity, you get a lumpsum amount.
Let us consider an example. We will also try to get a sense of returns from this product variant. Note that, with non-participating plans such as ICICI Prudential Gift, we can calculate the returns (IRR) upfront.
I copy an illustration from the product brochure.
35-year-old male. 10-year premium payment term. 20-year policy term.
Annual premium: Rs 1 lac per annum (this is before GST). Including GST, the premium will be Rs 1.045 lacs in the first year and 1.0225 lacs in the subsequent years.
He pays the premium for 10 years. At the time of maturity in 20 years, he gets Rs 22,87,200.
Is this good or bad?
You paid Rs 10 lacs and are getting more than double the amount back. And this amount is also tax-free. The caveat is that you get this amount on completion of 20 years. 11 years after you paid your last premium.
The IRR is 5.24% p.a.
Note: In life insurance products, your entry age affects the returns. Everything else being the same, higher the entry age, lower the returns. If investor age is 45 at the time of product purchase, he will get less than 22.87 lacs (and thus lower IRR than 5.24% p.a.). If the investor entry age is 25, he will get more than Rs 22.87 lacs at the time of product maturity.
Let us consider another example (again from the product brochure)
35-year-old male. 5-year premium payment term. 10-year policy term. Annual premium: Rs 1 lac per annum
At the end of 10 years, he gets 7.24 lacs.
IRR of 3.87% p.a.
You pay the premium for a fixed number of years. At a designated time in future (which is a year after the premium payment term ends), the insurance company pays you annual income for a fixed number of years.
35-year-old female. Annual premium: Rs 1 lac. Premium Payment Term: 10 years.
Income pay-out will start from the end of 11th year. From the end of 11th year, the insurer pays 1.93 lacs for 10 years.
IRR of 5.92% p.a.
I reproduce other combinations for the same investor and annual premium.
Premium payment term (PPT): 10 years. From the end of 11th year, income of Rs 2.51 lacs for 7 years. IRR of 5.79% p.a.
PPT: 5 years. From the end of 6th year, annual income of 1.05 lacs for 7 years. IRR of 5.37% p.a.
PPT: 5 years. From the end of 6th year, annual income of Rs 81,236 for 10 years. IRR of 5.66% p.a.
#3 Early Income
You pay the premium for a few years.
You get X income during the premium payment term. And get Y income for a fixed number of years after the premium payment term ends.
This is exactly the mindless variant that I detest. I cannot imagine a scenario why anyone would invest in this variant unless of course he is deliberately confused by the sales agent.
35-year-old male. Premium payment term: 10 years. Premium payment term: 10 years. Annual Premium: Rs 1 lac
You get Rs 25,000 per annum (25% of annual premium) from the end of 1st under until the end of 10th year.
From the end of 11th year, you get 1,32,321 for 10 years.
IRR of 4.83% p.a.
The stupidity behind the product design is astounding. Rather than getting Rs 25,000 back every year, shouldn’t the investor buy the Income variant (instead of Early income variant) with an annual premium of 75,000 (instead of Rs 1 lac). He would also likely receive higher income than Rs 1.32 lacs.
#4 Single Pay Income
You pay premium just once. Thereafter, the insurer pays a fixed income for 9 years from the end of 2nd year until the end of 10th years. Total 9 income installments.
35-year-old female. Single premium of Rs 1 lacs. Annual Income of Rs 13,946 from the end of 2nd year until the end of 10th year.
IRR of 3.62% p.a.
What I like about ICICI Prudential Guaranteed Income for Tomorrow (GIFT) Plan?
Do you like products that provide certainty of income and returns?
Think about bank fixed deposits. If yes, ICICI Prudential Gift plan might appeal to you.
This is a non-linked and non-participating plan. This means once you have finalized the variant, annual premium etc. you know what you will get and when you will get it. No confusion.
Your capital is safe (unless you think ICICI Prudential will fail).
The returns are tax-free in most cases.
What I do NOT like about ICICI Prudential GIFT Plan?
Safety of capital and certainty comes at the cost of returns. You earn low return in such products (as we saw above).
Limited liquidity and heavy exit penalty.
The plan is not easy to understand. That’s always the case with traditional plans. There are multiple variants with multiple premium payment and policy terms. Different pay-out and timing options. I find this quite frustrating. If you do not want to spend any time in reading the product brochure and policy wordings, you are at the mercy of intermediaries. You will buy the variant that they recommend.
Should you invest in ICICI Prudential GIFT plan?
I am never keen on such products for the following reasons.
- Guaranteed LOW returns for a long-term product.
- Exit penalty is high. If you figure out later that the plan is not good, you cannot just stop paying the premiums. You may not get anything or just a small portion of your money back.
You might say that the returns are comparable to those from bank fixed deposits and are tax-free too. Fair enough. That’s an individual choice. I won’t be keen.
Do understand that the returns will depend on your entry and product variant chosen. I reproduced the illustrations for a 35-year-old. And these returns are for a 35-year-old investor at the time of entry. If your entry age is higher, your returns will be lower or vice-versa. In other words, if you are 45 years old and buy any variant ICICI Prudential Gift plan, you will end up with a lower amount at maturity or earn lower income than the 35-year-old.
The tax-free nature of maturity proceeds or income is also subject to the life coverage amount. For the single premium variant, if you choose Sum Assured as 1.25 times the single premium, the pay-outs from the policy will be taxable. On the other hand, if you choose Sum Assured as 10 times the single premium, your returns will be low since a good portion of the premium/wealth will go towards providing life cover. Choose between the devil and the deep blue sea.