Are Guaranteed Income Schemes Worth It?

On February 16, 2025 By newsroom Topic: India Money Advice

Guaranteed Income Schemes like Tata AIG’s Fortune Guarantee Plus are often marketed as safe, predictable financial products. However, these schemes often fail to deliver when evaluated against alternatives. Here’s a breakdown:

Key Features of These Schemes

Fixed Contributions: Invest a specific amount annually for a defined term (e.g.,2.5L/year for 10 years).

Fixed Returns: Receive annual payouts for a subsequent period (e.g.,2.5L/year for 15 years) with a final lump sum at maturity.

Implied Returns: These typically range between 3%-5% annually, pre-tax.

Pros of Guaranteed Income Schemes

Predictable Returns: You know the exact amount you’ll receive over the term.

Low Risk: Backed by large insurers, minimizing default risk.

Tax Efficiency: Some plans may offer EEE (Exempt-Exempt-Exempt) status under Indian tax laws.

Cons to Watch Out For

Low Returns:
- After factoring in inflation, your real return is often negative or close to 0.
- Comparable to Fixed Deposits but with less flexibility.

Locked-In Investment:
- Long-term commitment with penalties for early withdrawal or stopping premiums.
- Illiquid investment—breaking the policy mid-term often results in heavy losses.

High Fees:
- Administrative costs and agent commissions significantly erode returns.

Misaligned Marketing:
- Aggressive selling by bank relationship managers (RMs) prioritizing their incentives.

Mixing Insurance with Investment:
- These plans combine life insurance with savings, leading to mediocre outcomes in both.

Better Alternatives

1. Fixed Deposits (FDs):

Current rates: ~6%-7% per annum.
More flexible and liquid.
Breaking an FD is far easier than exiting a guaranteed income plan.

2. Index Funds & Mutual Funds:

Long-term equity investments deliver ~10%-12% annual returns.
SIPs (Systematic Investment Plans) in diversified equity funds can outperform these schemes.

3. Public Provident Fund (PPF):

Guaranteed returns (~7.1% currently).
Tax benefits and complete safety for long-term wealth creation.

4. Term Insurance for Protection:

Separate life insurance with a term plan to secure your family’s financial future.

Golden Rule of Investing

Never Combine Insurance with Investment. Opt for pure investment products and separate insurance plans for better returns and flexibility.

What Others Say

Low Returns: Investors report effective returns of 3%-5%, which fail to even match inflation.
No Flexibility: Breaking the plan or modifying contributions mid-term results in penalties or subpar payouts.
Aggressive Selling: These plans are often pushed by RMs prioritizing commissions rather than customer needs.

Bottom Line

Guaranteed Income Schemes are rarely worth it unless:

You prioritize absolute safety over returns.
You’re in a high-tax bracket and need EEE tax benefits.

For most individuals, index funds, FDs, or PPF offer better returns, flexibility, and long-term growth potential.