Inflation Cover for Your Life Insurance
Rising prices of essential items are not only impacting household budgets, but also eating into investments. However, there are some life insurance policies that ensure that increasing prices do not diminish the value of your investment at maturity.
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Industry experts say the fluctuation in the rate of inflation is forcing people to go for inflation cover while buying insurance policies. Life Insurance Corporation, ICICI Prudential Life, Tata AIG Life and Bajaj Allianz Life are some of the companies offering such plans.
Akshay Mehrotra, head of marketing at Bajaj Allianz Life, says the value of every Rs 100 invested today will go down next year. Hence, a life insurance policy has to ensure that an investor gets more than the Rs 100 invested in line with the increase in inflation.
Bajaj Allianz has a product whe-re the sum assured and the cover increases with rising inflation. This is a traditional plan where the premium paid is invested in the debt market. “As this is a traditional product, one can take a loan against it,” Mehrotra said.
In developed insurance markets, such as the UK and US, there have been inflation-indexed life insurance policies. Some Indian companies that FC Invest spoke to said they were looking at introducing more products on similar lines.
ICICI Prudential Life, one of the companies that already offers such a product, has seen many investors opting for a policy that factors in inflation. A senior ICICI Prudential official said, “It is an immediate annuity product, where if the investor pays Rs 2 lakh today, he is bound to be paid 5 per cent returns as income on annuity.”
So, an investor gets 5 per cent return in the first year, 3 per cent of the 5 per cent additional returns in the second year, and another 3 per cent on the corpus earned in the third year. “The guaranteed returns earned are cumulative. Hence, on maturity, enough corpus will be built to take care of future needs,” the official said.
We had heard about annuities and were investigating them for our IRAs. We also heard bad things about pushy brokers over the years. So when we went to the ImmediateAnnuities.com site we were skeptical about calling them. But whenever we called their staff was really friendly. They answered all our questions and one of their reps even told us that at our ages there was no advantage to buying the annuity with our IRAs. These guys are really honest!
Premium from such policies is invested in government securities (G-secs) and corporate bonds.
A senior LIC official said, “Since interest rates are determined by or linked to the return on 10-year G-sec bonds, the inflation is taken care of when the premium is invested in such instruments.”
Indian annuity market has not matured enough as yet. Immediate annuities are few and are mostly from the LIC stable. Tata AIG, Kotak Life and Max New York also have products that factor in inflation on returns. While deciding on investment, be it insurance, equity or debt funds, one should take into account the erosion in real value of money over a period of time.