Explained: How Guaranteed Life Insurance Savings Plans Work

A Guaranteed Life Insurance Savings Plan is a specialized financial product designed to provide a predetermined rate of return on your investment over a set period. This plan merges the dual advantages of life insurance coverage with guaranteed returns, offering a secure way to grow your wealth over time while protecting your family.

The policyholder makes fixed premium payments based on the financial coverage one is seeking and specific needs for a set duration. Upon the plan's maturity, the accumulated benefits can be received as a single lumpsum amount, a regular stream of income, or even a combination of both. Some plans even allow for the income to be received during the policy term itself, providing flexibility in how one can access their funds.

“One of the most distinct features of these plans is the level of control or flexibility they offer regarding payout timelines and durations. You can decide the length of the income period at the very beginning of the policy, with some options extending until the age of 100. To combat the rising cost of living, many plans also include an increasing income option,” says Sabyasachi Sarkar, MD & CEO of Go Digit Life Insurance.

Beyond the investment growth, the life insurance component acts as a vital safety net, ensuring your family is financially protected in the event of an untimely demise. These plans are particularly notable because the returns are completely insulated from market volatility. A specific rate of return at the time of buying the policy is locked in for the policy duration.

“These long-term guarantees are ideal for individuals with a low-risk appetite who are focused on major milestones, such as buying a house, planning for their family’s future like children’s education and marriage or retirement. While the specific rate of returns may vary between different insurance providers, these plans are generally designed to be competitive with other savings instruments. It is often wise to compare different insurers to find the one that aligns the best with your specific goals,” says Sarkar.

Savings plans also provide tax exemptions on the returns. Unlike many other investment vehicles where returns are taxable, the payouts from these plans can be tax-free, provided they meet certain criteria such as a minimum life coverage of 10 times the annual premium. However, keep in mind that as this is a long-term commitment, it is important to identify your specific financial objectives before buying the product. Whether you are building a corpus for a child’s education or planning for your own retirement, the plan should be chosen based on its ability to meet those specific milestones.

“The flexibility of these plans extends to how you pay for them. You can opt for a single premium payment, a limited payment term of 5 to 10 years, or regular payments throughout the policy term. For instance, a parent with a cyclical income can choose a single or limited-pay option to fund a 15-year goal for their child's education, opting for a lump sum payout at the end. Conversely, someone planning for retirement might choose regular premium payments to secure a steady stream of income later in life,” informs Sarkar.

Before finalizing a plan, it is also important to explore additional add-ons or riders offered by insurers to ensure your coverage is as comprehensive as possible.