HDFC Life Sanchay Plus is a Non-participating traditional life insurance plan. That means the payouts are guaranteed. There is no market risk or risk associated with varying annual bonuses. You know upfront what you are getting into. Moreover, it is a deferred payout plan i.e. maturity value is paid over a period of time.
Let’s find out more about HDFC Life Sanchay Plus and figure out if this plan should find a place in your insurance and investment portfolio.
HDFC Life Sanchay Plus comes in multiple variants
- Guaranteed Income: Guaranteed income for a few years
- Guaranteed Maturity: Lumpsum at maturity
- Life Long Income: Guaranteed income till the age of 99
- Long Term Income: Guaranteed income for 25 or 30 years
Here are a few snapshots from the product brochure about the important features of each variant.
HDFC Life Sanchay Plus: Death Benefit
Death benefit is the same for all the plans and is payable only if the demise happens during the policy term.
It is the highest of the following:
- 105% of the total premiums paid
- 10 times the annualized premium
- Guaranteed Sum Assured on Maturity (total premiums payable under the policy)
- Sum Assured (Death Multiple times Annualized premium). Death multiple depends in your entry age.
For Guaranteed Income, Long Term Income and Life Long Income, there is an additional parameter. Premium paid with 5% interest, compounded annually.
You can see the life cover depends on your age. Instead of varying returns based on your age, they have varied the life cover based on your entry age. Not bad since they are projecting this plan as an investment plan. Therefore, everyone who purchases the plan will get the same return irrespective of entry age (except in guaranteed maturity benefit). The life cover will vary based on the entry age.
By the way, Death benefit of 10 times annual premium ensures that the maturity amount or any amount paid by the insurance company is exempt from tax.
HDFC Life Sanchay Plus: Maturity Benefit
Variant 1: HDFC Life Sanchay Plus: Guaranteed Maturity Benefit
There are three premium payment term (PPT) options. 5 years, 6 years or 10 years.
Policy terms will be 10 years (5 year PPT), 12 years (6 year PPT) and 20 years (10 year PPT).
Maturity amount shall be paid at the end of policy term.
Maturity Benefit = Guaranteed Sum Assured on Maturity + Guaranteed Additions.
Guaranteed Sum on Maturity is nothing but total annualized premiums paid (net of taxes and underwriting premium).
Guaranteed Additions shall be applicable as follows.
Let’s take an example.
You are 30 years old. You purchase a variant with 10-year payment term and 20-year policy term.
You pay an annual premium of Rs 1 lac. Including GST, you will pay Rs 1,04,500 in the first year and Rs 1,02,250 in the subsequent years. You will get the maturity amount on completion of 20 years.
In this case, Guaranteed Sum Assured on Maturity is Rs 10 lacs.
At maturity (completion of 20 years), you will get Rs 10 lacs + Rs 14 lacs = Rs 24 lacs. (this amount is exempt from tax).
IRR comes out to 5.56% p.a.
Additionally, in this variant, the return will depend on your age. If you are 57 at the time of purchase, your return will only be 5.27% p.a.
Variant 2: HDFC Life Sanchay Plus: Guaranteed Income
Two premium payment term (PPT) options: 10 years and 12 years
Policy Term: 11 years (10-year PPT) and 13 years (12 year PPT)
Under 10-year PPT variant, payout starts from the end of 12th year until the end of 21st year.
Under 12-year PPT variant, payout starts from the end of 14th year until the end of 25st year.
Let’s consider an example.
You are 30 years old. You purchase a variant with 10-year payment term. You pay an annual premium of Rs 1 lac. Including GST, you will pay Rs 1,04,500 in the first year and Rs 1,02,250 in the subsequent years.
From the end of 12th year till the end of 21st year, you will Rs 2 lacs per annum. That makes it 10 instalments of Rs 2 lac each. All these instalments shall be exempt from tax.
In the event of death of the policyholder, the payments will continue to the nominee.
That is an IRR of 5.73% p.a.
Again, not good enough.
Variant 3: HDFC Life Sanchay Plus: Long Term Income
Premium payment term (PPT) options: 5 years or 10 years
Policy term: 6 years (5 year PPT) or 12 years (10 year PPT)
Under 5-year PPT variant, payout starts from the end of 7th year until the end of 36th year.
Under 10-year PPT variant, payout starts from the end of the 14th year until the end of the 36th year.
Let’s consider an example.
You are 30 years old. You purchase a variant with a 5-year payment term. You pay an annual premium of Rs 1 lac. Including GST, you will pay Rs 1,04,500 in the first year and Rs 1,02,250 in the subsequent years.
From the end of 7th year till the end of the 36th year, you will get Rs 36,000 per annum. That makes it 30 installments of Rs 36,000 each. At the end of the 36th year, you will be returned all the premiums paid too. All these installments shall be exempt from tax.
That is an IRR of 5.53% p.a. Not good enough.
In the event of death of the policyholder during pay-out terms, the payments will continue to the nominee. I am not very clear if the nominee will get the premium payments back or not.
Variant 4: HDFC Life Sanchay Plus: Life Long Income Option
You have an option to pay premium for 5 years or 10 years.
Under the 6-year premium payment option, you get life cover for 6 years. The insurance company pays 35% of the annualized premium from the end of 7th year till such time you turn 99. On completion of 99 years, the insurance company will return all the premiums paid.
Under the 10-year premium payment option, you get life cover for 11 years. The insurance company pays 100% of the annualized premium from the end of 12th year till such time you turn 99. On completion of 99 years, the insurance company will return all the premiums paid.
What are the returns like?
You are 50 years old.
You will pay Rs 1.045 lacs as the first-year premium. This includes 4.5% GST. From the second until the 10th year, you will pay Rs 1.0225 lacs every year (includes GST of 2.25%).
You will get Rs 1 lac each from the end of 12th year till the end of the 49th year (you turn 99). That is 38 installments of Rs 1 lac each. Additionally, when you complete 99 years, you will get an additional Rs 10 lacs back.
If you work out the IRR using excel, the return is 6.92% p.a.
You are 60 years old.
10-year policy term. First-year premium: Rs 1.045 lacs, Subsequent premiums: Rs 1.0225 Lacs
You will get Rs 1 lac each from the end of 72nd year till the end of the 99th year. That is 28 installments of Rs 1 lac each. Additionally, when you complete 99 years, you will get an additional Rs 10 lacs back.
IRR will be 6.72% p.a.
There is a caveat though
If the demise happens during the payout term (after policy term), the payouts will continue to the nominee till the end of the payout period (till such time the policyholder would have turned 99). However, as I understand, the nominee will not be returned the premiums paid. I could not find anything in the policy wordings that ensured that premiums will be returned to the nominee too. Had the policyholder survived till the age of 99, he would have got the premiums back.
Now, 99 is a fairly high age. Unless there are some major advances in medical science, not many policyholders will survive till the age of 99. If the policyholder were to pass away before the age of 99, there won’t be any return of premium.
What will be the net return to the family in that case?
6.6% if you bought as a 50-year-old.
6.04% if you bought as a 60-year-old
Again, these are post-tax returns. But clearly less attractive than before.
Where HDFC Life Sanchay Plus scores well?
This plan is easy to understand. You know what you are getting into. I am sure many investors will appreciate that. Whether the returns are good or bad is a different matter altogether.
The USP of these plans is that the payout from these plans will be exempt from tax. All the pay-outs from the insurance company will be exempt from tax. Remember these pay-outs are guaranteed. Contrast this with an annuity plan such as LIC Jeevan Shanti. Annuities also provide guaranteed pay-outs. However, the payment from an annuity plan is taxable at your marginal tax rate. Now, this may make HDFC Sanchay Plus (or any similar life insurance product) very attractive to retirees.
You may be able to lock-in the rate of interest for a very long-term using Government bonds. However, with Government bonds too, interest is taxed at your marginal rate. No other income strategy can lock-in the interest income for such long tenure.
These plans also provide insurance during the policy term. Annuity plans don’t provide any insurance.
Your annual premium may be hiked if your health condition is not good at the time of purchasing the plan for the first time. Remember, if your premium is hiked due to an illness, it does not add to your pay-outs from HDFC Life Sanchay Plus. This is a problem with any investment and insurance combo product.
Should you invest in HDFC Life Sanchay Plus?
Firstly, you need to see why you are even contemplating investing in this plan.
If you are looking at wealth creation, this is clearly not the right product. For a long term investment, 5-7% p.a. is clearly not something you must settle for. PPF or EPF will give you much higher returns. You may argue that the PPF interest rate keeps changing. However, 5.56% p.a. is still very low. You can expect much higher returns in equity funds too.
If you are looking to add to your life cover, HDFC Life Sanchay Plus is again not a good choice. A life cover of 10 to 15 times annual cover will not do much for your insurance portfolio.
If you are looking for income during retirement, Life long income can be an interesting choice for those investors who are looking for guaranteed returns and are also expected to fall in the higher tax bracket. The insurance component, though unnecessary for such investors, is required to make the proceeds tax-free under the extant tax laws. At the same time, you also need to contrast against other retirement income options such as PPF, SCSS, Fixed deposits, PMVVY, Government Bonds, annuities and even Systematic withdrawals from mutual funds.
Apart from Government Bonds and annuities, you cannot lock-in the rate of interest for the long term. HDFC Life Sanchay Plus lets you do that. However, you also need to see if the guaranteed rate is high enough. Between 6% and 7% p.a., it is clearly not shooting through the roof (at least for now).
With SCSS and PMVVY, you will get a higher rate but you bear reinvestment risk since the interest rate is locked in for only 5 and 10 years respectively. Moreover, interest from SCSS and PMVVY is taxable too.
With PPF too, there is some interest rate risk involved. However, for the moment, PPF offers a much higher return than what HDFC Life Sanchay has to offer. Therefore, there is a clear margin that you have. PPF interest is exempt from tax. And PPF is way more flexible than this HDFC life product.
There is no one-size-fits-all solution when it comes to a retirement income strategy. So, you need to look at your requirements and your portfolio to make a choice. If you still can’t make up your mind, seek professional assistance from your financial planner or SEBI registered investment adviser (SEBI RIA).
For my portfolio or the portfolio of my clients, I would stay away from such products. I would rather invest in a diversified portfolio depending upon the clients’ risk profile. Systematic withdrawal from an MF portfolio is a good option. For somebody who wants guaranteed income during retirement, I would prefer to stagger annuity purchases during the course of retirement. With this, you retain greater flexibility with your retirement corpus and potentially higher income by purchasing annuities without return of purchase price.
All the images have been taken from HDFC Life Sanchay Plus brochure.