Addressing Your Retirement Goal – HDFC Sanchay plus Vs Balanced Advantage Category in Mutual Funds

This insurance plan from HDFC Life stable has caught people’s fancy of late.

I am making an attempt to decode this plan for the benefit of all my investors & compare it with Balanced Advantage Category plans of Mutual Funds, to address their retirement needs

What is HDFC Sanchay Plus?

This plan is a “non-participating” “non linked” “traditional savings” life insurance product offering deferred payouts to you (i.e. maturity value is paid over a period of time). In simple English it means that the payouts, made at a later stage of your life, are guaranteed and unlike a plan which offers “bonuses””, there is risk associated of the insurer not paying you if it doesn’t make profits. You are committed upfront what you are getting into and what you will get during the payout / distribution period. In that sense, it can be compared to an annuity plan

Death Benefit

In case of death of Life Assured during the policy term, the death benefit equal to Sum Assured on Death shall be payable to the nominee.

Sum Assured on Death is the highest of:

10 times the Annualized Premium, or

105% of Total Premiums paid, or

Premiums paid accumulated at an interest of 5% p.a. compounded annually, or

Guaranteed Sum Assured on Maturity, or

An absolute amount assured to be paid on death, which is equal to the sum assured.

Sum Assured shall be equal to the applicable Death Benefit Multiple times the Annualized Premium. The applicable Death Benefit Multiples are between 10x to 15x depending on age. Upon the payment of the death benefit, the policy terminates and no further benefits are payable.

Guaranteed Maturity Option – This option offers guaranteed benefit payable as a lump sum on maturity.

Maturity Benefit – The maturity benefit is equal to Guaranteed Sum Assured on Maturity plus accrued Guaranteed Additions. Where, Guaranteed Sum Assured on Maturity is the total Annualized Premium payable under the policy during the premium payment term.

Life-Long Income Option – This option offers maturity benefit in the form of Guaranteed Regular Income up to the age of 99 years and the return of total premiums paid at the end of the pay-out period.

Please note – If the policyholder dies during the Pay-out Period, then the nominee shall continue receiving Guaranteed Income as per Income Payout Frequency & benefit option chosen till the end of Pay-out Period. Guaranteed Sum Assured on Maturity shall be the present value of future pay-outs, discounted at a rate of 8% p.a.

Total premiums paid are returned at the end of the Pay-out period, irrespective of survival of the policyholder during the Pay-out Period.

Rider Options

Rider option is also available in the policy, so as to enhance the protection of the policyholder.

Review

Death benefit: Grossly Inadequate

The death benefit (the life insurance cover) you can expect from this plan is based on your age. Without getting into confusing details of how it is arrived at, Sanchay Plus fetches you a life cover of between 10 to 15 times the annual premiums that you pay. Therefore, a ₹ 1 lakh annual premium will fetch you a life cover of just ₹ 10-15 lakh which is clearly not enough to compensate your dependents for income loss.

So if getting an adequate life insurance cover in place to protect your dependents is your objective, HDFC Life Sanchay Plus is a bad choice as it offers too little by way of death benefit. A pure term plan chosen will fetch you far better bang for buck.

The Critical Illness and Accident Benefit riders that come as add-on options in Sanchay Plus are also avoidable for the same reason. When choosing your plans, be sure to opt out of these riders.

Having said this, most investors consider Sanchay Plus not for its death benefits, but for its guaranteed maturity or income payouts.

 Advantages and Disadvantages of HDFC Life Sanchay Plus with Product Suitability Analysis

Overall, this is a good product for investors seeking to secure a minimum level of income without having to worry about interest rate direction, or actively managing their money. The HDFC brand lends comfort & credibility.

The product however will not meet your post-retirement income needs fully, because of fixed non-inflation adjusting payouts which will lose value over time. To complete your regular income portfolio for retirement, you will need to invest in Equity or Hybrid funds, certain government backed Post Office products and other higher return options along with this plan.

On the negative side, the income it generates won’t adjust for inflation over the years. What looks to be a large income today may seem quite inadequate 10 or 12 years down the line, factoring in inflation.

Tax laws can change. If they do, the returns from this product will turn quite unattractive. A sharp rise in market interest rates can also render this plan’s returns unattractive. Also, like most guaranteed insurance products, it is inflexible as it requires you to commit to large premium payments for several years and wait for an extended period of time, for getting returns.

While offering predictable cash flows similar to immediate annuity plans, Sanchay Plus offers tax-free income (immediate annuity plans offer taxable income), because it qualifies as an insurance scheme under the Income Tax Act owing to its life component. For investors in the 20% and 30% tax brackets a 5.4-5.7% tax free return is quite a good deal in the current context.

The long term and lifelong income plans in HDFC Sanchay Plus materially reduce the reinvestment risk that you would face with other regular income investments such as FDs or post office schemes. You lock into a single rate and a certain income for a long period and don’t have to worry about rate swings.

Minimum premium to be paid is for 2 years. The plan does allow early exit through surrender, offering you a way out if you are stuck but not at all a viable option. Looks like the trick is to make customer commit a large premium, so that it always looks a losing proposition, if one exits after the first year.

If your policy lapses & it has not acquired Guaranteed Surrender Value (GSV) all your premiums paid will become zero & no life cover would exist. No benefits are paid under “Lapsed Policy”. For your policy to attain GSV, You should have paid at least 2 years premium. This is a huge disadvantage, if years premium is 5L per year and U suddenly realise would want to exit after year 1.

If any due premium is unpaid upon the expiry of the grace period & your policy has acquired a Guaranteed Surrender Value (GSV), your policy status is altered to “Reduced Paid Up”

The maturity, death benefits & surrender value, in case of a reduced paid up policy is computed by a standard formula, as per the standard agreed insurance norms.

You can revive the policy. You get a 5 years window to revive, after the last un-paid premium date.

Lets us do the Math by doing a case study with actual numbers

Deepali ,a 45 years young head honcho of a multinational firm, wants to know which is a more viable option. HDFC Sanchay Plus or Investing in a Dynamic Asset Allocation MF product & buying a pure term plan, to address her retirement needs.

Let us evaluate for 5 L annual premium for 10 years, factoring her current age at 45 .

Participating in HDFC Sanchay Plus 5 Lakh annual premium

 

Age of the Person	45 years
Date of commencement of policy	Sep 16th  2020
Yearly Premium Amount	₹ 5 Lakhs
Premium Paying Term	10 years
Sum Assured/Life Cover	₹ 55 Lakhs
Guaranteed Sum Assured	₹ 51.84 Lakhs
Maturity Date ( 11 years)	Sep 16th 1931
Annual Guaranteed Income On Maturity	4,68,750
Guaranteed Income Payout Period	25 years
Total Guaranteed Amount Paid (16/9/32-16/9/56)-25 years	₹ 1.17 Cr
Total Return Of Premium paid after completion of policy term	₹ 50 Lakhs
Total Funds Received by the customer on the maturity of policy	₹ 1.67 Cr
( In 2056, when the investor is 82 years young )

 

Investing 5L Annually For 10 Years In Balanced Advantage Category

5 L invested every year for 10 years @ 8%	₹ 72.43 L
72.43 L @ 8%* for 25 years	₹ 4.40 Cr
( In 2056 , when the investor is 82 years young )
Buying a Life Cover by way of a Pure Term Plan
At 45 a pure life term plan of  ₹1Cr would cost her an annual premium of	₹ 35,754
Total Premium paid for 37 years, till 2056 ( would be age 82 )	₹ 13.22 L
*10yr CAGR return in a Balanced Advantage Plan is between 10-13%

 

So in 2056, when she is 82 years young, with HDFC Sanchay Plus she will have a corpus of 1.67 Cr. In the event of her untimely death, her nominees would receive a maximum of 50 lakhs, as a death benefit.

And in the case of the Mutual Fund scheme, her corpus at the end of 2056 would be 4.4 Cr & she would have been insured for a cover of 1 Cr. More so, she can dip into this corpus, whenever she may want to, in case of any emergencies.

This liquidity is NOT available in HDFC Sanchay plus & the maximum cover payable is 50L.

Summarizing , Both the products have their inherent features, You as an investor will have to apply yourself and get to the nitty gritties, before finalizing a product. As you are addressing your retirement needs, please ensure you get adequate growth in the product you choose & ample liquidity.