What are Guaranteed Income Plans and how do they work? (2023)

Most of the time, people look for good long-term investment opportunities to escape short-term market volatility. Investors also keep an eye on their non-negotiable goals in life, such as retirement, raising children or getting married or buying a home. In addition, the reduction in interest rates on fixed-term deposits in recent years has certainly changed the course of financial planning for many.

A better option that combines a fixed interest rate but offers the investor a higher return on their money is a guaranteed income plan. When you invest in these plans, they offer a 6% to 6.5% return, which is higher than the options described above. Interest earned is not taxable, so your profits keep growing. Your funds are protected against market risks for about 40-45 years, so you don't have to worry about constant fluctuations, at least for the foreseeable future.

This is how guaranteed income plans work.

What Makes Guaranteed Income Plans Work?

Higher, tax-free returns

When comparing options, we generally assume the stated rate of return, but ignore the hidden factors that have a significant impact on real value for money. Factors such as inflation and taxes, which are often not considered when parking money, are what will determine your real rate of return.

If we are talking about the last decade, fixed-term deposits have suffered a constant drop in interest rates and only recently have they risen again. As India remains a developing country, yields on fixed deposits have fallen from around 9% to just under 5%. With rising retail inflation, if you choose to sit idle in your bank account, you'll end up losing more returns than you gain. This also affects your long-term financial goals, as every industry has been hit hard by inflation.

Add control and yields will continue to decline. For example, when we talk about the interest rate on the savings account, it oscillates between almost 3% and 4%, which is not strong enough to support the increase in the inflation rate. Next, if we talk about the standard fixed deposit option for many, it brings around 5% interest rate.

Since this is a long-term option, rising inflation is sure to take a toll on your hard-earned savings over the years. And, of course, the return you get here is taxed year after year. Depending on your tax bracket, the actual return will continue to decline here.

This is where guaranteed plans come in.


When it comes to guaranteed return plans, investors are advised to take the long-term route. This essentially means that when investing in the plan, you should aim for at least 20-25 years if you want to get the most value out of your investment. However, the market also has new age plans that offer greater flexibility to investors.

While guaranteed return plans are best known for offering the investor the ability to lock in the interest rate for up to 45 years, there are plans that cater to the investor's desire for early withdrawals. Still, it's important to understand how they work. For example, some plans allow you to earn income at a rate of return of 5.74% for 45 years from year 6, which is tax free due to the life insurance element. You get a higher return than the nearly 5% taxable on a lump sum deposit.

However, if you wish to return your policy, you can do so and within the first five years you will receive back the amount originally invested. There are no redemption fees and you get your invested amount back immediately.

If you wish to return your policy during the income period, you will receive your money at a reduced rate of 7.5%. However, since you also receive the earnings during this time, it's still a bargain that's worth it for you. This plan offers great flexibility and value for the investor.

Safe in these uncertain times

Past waves of Covid-19 have taught us abundant life lessons to prepare in time. As the pandemic continues to result in greater uncertainty and loss of life, it is imperative to think outside the box at times like this.

What makes these plans the best choice for policyholders is the fact that they come with a life insurance component. This combination of investment and insurance ensures that you are financially secure during your lifetime and that there is also a stable safety net for your loved ones after your lifetime.

With new variants posing yet another new threat, it's best to be financially prepared for unforeseen circumstances. The insurance element in guaranteed return plans helps to secure your future. These plans include life insurance of 10 times the annual premium, which is paid to the surviving dependent in the event of the unfortunate death of the policyholder.

To further increase your safety net, you can even add supplemental insurance such as critical illness insurance or personal accident insurance to your policy. Therefore, these plans not only guarantee your present, but also your future and the future of your loved ones even in your absence.

Hedging against market volatility

It is quite evident that markets have been impacted by several developments over the last few months, which have resulted in significant volatility. Rising inflation, fuel prices, unrest in Russia and Ukraine, and Fed rate hikes were the main factors causing instability in markets across the world. Investing, while a great option, might not be for everyone in a situation like this. Guaranteed payback plans come to your rescue here. This works best for investors who cannot afford to have their funds exposed to market risk.

As the name suggests, these plans offer a guaranteed return on your investment and come with zero risk element. In addition to offering a higher return and preserving the original investment, they are also a great reinvestment gateway as they offer a long-term return guarantee.

Even if the tariffs are readjusted here, this does not occur within the same contract, unlike the severance pay orpublic provident fund. While banks allow you to invest in term deposits for 10 years, you can invest your money in these plans for 45 years. While no other instruments, including term deposits, can guarantee a fixed rate of return beyond 10 years, these plans can offer a fixed interest rate for around 40 years. This ensures a longer, safer and more productive period of time for your invested money.

You can invest as early as possible to get the most benefit and comfortably navigate various milestones in your life. You also have the option of investing in an income plan and receiving recurring income, or you can opt for a lump sum benefit plan.

final result

Guaranteed return plans exemplify the popular investment principle - keep it simple. Fixed returns, the ability to lock in for longer periods, a tax-free interest rate and little to no risk to your invested funds - these plans meet most of the criteria the average investor is looking for and are a great alternative to traditional options as fixed deposit plans.

If you don't have a risk appetite but are looking for investment opportunities to grow your money, these guaranteed return plans are the best and safest choice. Alternatively, if you are looking for even greater returns, you can diversify your investment portfolio by investing a certain amount of money in these guaranteed return plans. Don't forget to carefully review the policy details and other important terms and conditions.

With the advent of online marketplaces, buying a policy has become much easier. You can save even more when you shop online. With so many options available to you, you can compare online and choose the best deal.

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