SBI Life has launched a new traditional life insurance plan, SBI Life Smart Future Choices plan.
In this post, let’s find about this plan in detail. We shall also see if you should invest in such a product.
SBI Life Smart Future Choices: Salient Features
- Non-linked, Participating Life Insurance Plan
- It is Not a ULIP. It is a traditional life insurance plan.
- 2 variants: Classic choice and Flexi Choice
- Policy Loan: Not permitted
- I reproduce a table from the policy brochure.
The plan provides three kinds of benefits.
- Survival benefits (Pay-outs to policyholder before policy maturity)
- Maturity benefit (payment at the time of policy maturity)
- Death Benefit (payment in the event of policyholder demise)
Let us look at each of these benefits.
SBI Life: Smart Future Choices: Survival Benefit
There are two types of benefits that the plan provides before maturity.
- Cash Bonuses
- Survival Benefits
Cash Bonuses are applicable in both Classic Choice and Flexi Choice variants.
Cash bonuses shall be announced every year as a percentage of Basic Sum Assured and paid to the investors. The quantum of cash bonuses will depend on investment performance of SBI Life. You can think of this as simple reversionary bonus in other traditional life insurance plans. The only difference is that reversionary bonus merely accrues to the plan and is not paid out. The cash bonus (if declared) in this plan is paid out every year.
The policyholders also have an option of deferring cash bonuses. In such cases, the cash bonus accrues to the policy and even earns a rate of return. (RBI Repo Rate at the beginning of the financial year – 1%). Hence, if the RBI Repo rate is 4% at the beginning of the corresponding financial year, your cash bonus (if you choose to defer it) will earn 3% in the year. Not a high rate of return but you must understand that this return is tax-free.
Moreover, you have the flexibility of taking out the accumulated deferred cash bonuses whenever you want.
Now, to the Survival benefits.
Classic choice variant does not offer any survival benefits.
Survival benefit is applicable only in the Flexi choice variant.
Depending on the premium payment and the policy term, the policyholder will be paid survival benefit twice before maturity.
Each survival benefit installment = 10% of Basic Sum Assured (We shall discuss how Basic Sum Assured is calculated later)
Hence, if you have bought a policy (Flexi choice variant) with premium payment term of 7 years and policy term of 12 years, you will get survival benefit at the end of 8th policy year and 10th policy year. As mentioned above, you will get 10% of Basic Sum Assured each time.
You have an option of deferring the Survival Benefits. The deferred survival benefit earns interest too. Interest rate is RBI Repo rate at the beginning of year – 1%. Same as for deferred cash bonuses.
These deferred survival benefits can be withdrawn anytime before the policy maturity or else will be paid out along with death or maturity benefit.
SBI Life: Smart Future Choices: Maturity Benefit
In case of Classic Choice variant
Maturity Benefit = Guaranteed Sum Assured on Maturity + Accrued Deferred Cash Bonuses, if any + Terminal Bonus, if any
Guaranteed Sum Assured on Maturity is a percentage of Basic Sum Assured. And this percentage depends on the age, premium payment term and policy term.
If you deferred any cash bonuses, you would get those at the time of maturity.
Moreover, there is a terminal bonus. Think of this as final additional bonus in traditional life insurance plans. If SBI Life announces a terminal bonus for the policy in the year of demise or maturity, you will get the terminal bonus along with other maturity benefits.
In case of Flexi Choice variant
Maturity Benefit = Guaranteed Sum Assured on Maturity + Accrued Deferred Cash Bonuses, if any + Terminal Bonus, if any + Accumulated Survival Benefits, if any.
There are two differences compared to Classic choice variant.
Since the Flexi choice variant has the concept of survival benefits (Classic choice variant doesn’t), if you deferred survival benefits, those benefits along with interest shall be paid at the time of maturity.
In addition, Guaranteed Sum Assured on Maturity is fixed at 80% of Basic Sum Assured. Note, in the case of Classic choice variant, we had a complex matrix and the percentage depended on age, premium payment term, and policy term. No such confusion in the case of Flexi Choice variant.
SBI Life Smart Future Choices: What is Basic Sum Assured?
I have used Basic Sum Assured at many places in the document. And it is important too.
Why?
The Guaranteed portion of maturity is expressed as a percentage of Basic Sum Assured.
Even the variable portion of policy benefits (cash bonuses, survival benefits, and terminal bonus) are linked to Basic Sum Assured.
Hence, all the pay-outs from this plan (except death benefit to an extent) are linked to Basic Sum Assured.
However, there is no easy way to calculate the Basic Sum Assured (for a combination of premium, payment term, and policy term) in excel or calculator. In fact, I don’t know how it is calculated. But there is a simple way. You can check the numbers for any combination on SBI Life website.
Hence, you will know the Basic Sum Assured for your plan before you buy the plan. At least, you can work out the guaranteed benefits before you buy the plan.
I copy a few sample rates from the policy brochure.
You can see that, for a given amount of premium, the Basic Sum Assured goes down with age (assuming premium payment term and policy terms are kept constant).
And this is expected too.
Greater your age, the higher the cost of providing you the life cover. However, the minimum death benefit is 11 times the annual premium, irrespective of your age. Hence, internally, a higher absolute amount (for the same amount of life cover) must be adjusted towards providing life cover to older policyholders. And this must reflect in lower returns for investors (with higher entry age).
And how do you ensure lower returns for older investors (with higher entry age)?
Reduce the Basic Sum Assured. Since all the benefits are tied to Basic Sum Assured, those benefits will go down too.
As I understand, the Basic Sum Assured does not depend on the variant chosen (Classic or Flexi). I tried a few combinations. Everything else being the same, the Basic Sum Assured did not change due to change in policy variant.
SBI Life Smart Future Choices: Death Benefit
In case of Classic choice
Death Benefit= Sum Assured on Death + Accrued deferred cash bonuses (if any) + Terminal Bonus (if any)
In case of Flexi Choice
Death Benefit= Sum Assured on Death + Accrued deferred cash bonuses (if any) + Terminal Bonus (if any) + Accumulated Survival Benefit
The Sum Assured on Death is 11 times annualized premium. With this, the death benefit in either variant will be more than 10 times annualized premium. This ensures that any pay-out from this plan (death benefit, survival benefit or maturity benefit) will be exempt from tax.
Note that Sum Assured on Death is different from Basic Sum Assured, which is used to calculate the survival and maturity benefits.
You can choose to receive death benefit in installments.
SBI Life Smart Future Choices: What will be the returns like?
The plan is a participating plan. Hence, what you get will depend on the quantum of bonuses (cash or terminal) announced for your policy.
There are guaranteed pay-outs from the plan i.e., Guaranteed Sum Assured on maturity (both variants) and Survival benefits (only for Flexi choice variant). About these pay-outs, you know upfront.
Then, there are variable pay-outs i.e., cash bonus and terminal bonus.
We don’t know what these variable pay-outs will be. Hence, it is not possible to calculate cashflows and returns accurately.
However, there is a way to assess the impact of costs on this plan. IRDA mandates the life insurers provide tentative benefits for gross returns of 4% and 8% p.a.
We can run a few sample tests on the website and look at the difference between the gross returns and net returns. Higher the difference, the worse it is.
Example 1
Classic choice, 35-year-old, Premium Payment Term: 10 years, Policy Tenure: 20 years, Cash Bonuses: Deferred, Annual Premium= Rs 2 lacs
On this premium, you pay GST of 4.5% in the first year and 2.25% in the subsequent years.
Basic Sum Assured= Rs. 21.61 lacs (as per the calculator on SBI Life website).
As per the website, for gross yield of 8% p.a. you will end up with 41.43 lacs at the end of 20th year.
That is a net yield of 4.59% p.a.
Hence, the costs have eaten up 3.4% p.a. from gross returns. Or over 40% of the gross returns (3.25/8).
Note net yields will be higher for younger investors (at the time of entry) and lower for older investors at the time of entry.
For instance, in the same example, if the entry age was 45 instead of 35, the expected maturity amount (as per SBI Life website) is Rs 40.35 lacs, giving net returns of 4.41% p.a. over the policy term. Basic Sum Assured will Rs 20.83 lacs.
If the entry age was 25 (instead of 35), the investor ends up with Rs 41.67 lacs, with net returns of 4.62% p.a.
Hence, the policy charges are eating up a significant portion of returns.
Example 2
Flexi choice, 35-year-old, Premium Payment Term: 10 years, Policy Tenure: 20 years, Cash Bonuses: Deferred, Annual Premium= Rs 2 lacs, Survival Benefit taken out when announced.
For payment term of 10 years and policy tenure of 20 years, survival benefit will be paid at the end of 11th and 16th policy year.
Basic Sum Assured = Rs 21.61 lacs
Survival Benefit = 10% of Basic Sum Assured = Rs 2.16 lacs paid at the end of 11th and 16th policy year.
Moreover, as per the SBI Life calculator, for a gross yield of 8% p.a., you will get Rs 34.39 lacs at the time of policy maturity.
That is a net return of 4.56% p.a.
The policy costs have eaten up 3.44% p.a. from the gross returns. To put it in a different way, the costs have shaved off over 40% of the gross returns (3.44/8).
I understand you could have taken out cash bonuses (and no defer them) in the examples. That would have probably increased overall returns slightly.
Note that, actual gross returns (in both examples) can be higher or lower than 8% p.a. That will also affect your net returns.
SBI Life Smart Future Choices: Should you invest?
The findings are along expected lines. Hence, the recommendations will be along expected lines too.
SBI Life Smart Future Choices is a low return product. To make matters worse, it is an extremely complicated plan too.
Don’t invest in this plan. I see no merit in this product.
You are advised to keep your investments and insurance needs separate. Buy a term life insurance plan for your life insurance needs and put your money in a pure investment product for your investment needs.
Do you plan to invest in SBI Life Smart Future Choices plan?
Additional Links/Source
Product page on SBI Life website