How Does a Guaranteed Savings Plan Work?

In India, all families teach the importance of savings to children from a young age. Parents buy their children fancy-looking piggy banks and encourage them to save so that they can build a corpus over a period. Almost all Indians are aware of this fundamental savings technique. 

As you grow, you may discover other forms of savings, and one such option is a guaranteed savings plan. It is essentially a life insurance-cum-savings scheme that allows you to secure your family’s future against the uncertainties of life and get guaranteed returns in the long run. 

Many financial advisors and insurance experts recommend having a guaranteed savings plan in your portfolio. It assures you that your family will never face any financial trouble if something happens to you. They can continue to live the lifestyle they are used to even when you are not around. Additionally, savings plans allow you to build a corpus for your future goals like buying a retirement home, a child’s higher education, etc. 

How does a guaranteed savings plan work?

When you buy a guaranteed savings plan, like a standard insurance policy, you must pay the premium periodically as per your financial situation or in a lump sum. When the policy matures, the insurer pays back the accrued interest to the policy in a lump sum as per the terms and conditions. 

There are three types of guaranteed savings plans:

  • Limited Premium
  • Guaranteed additions
  • Guaranteed loyalty additions

In limited premium, you pay the premium for only a limited period specified in the policy documents. However, you continue to enjoy the policy benefits and coverage for the entire duration. 

After the premium payment term is over in guaranteed additions plans, the plan will accrue guaranteed addition every year, which will be added to the sum assured until the policy matures. 

In a guaranteed loyalty additions plan, you get a guaranteed lump sum amount at the end of the policy term. 

Why should you invest in a guaranteed savings plan?

  • Helps you create a safety financial net for your family

If something happens to you during the policy period, the insurer will pay the death benefit to the nominee. They are eligible to receive the sum assured plus the accrued interest and the yearly additions. Your family can use the money for several purposes, like repaying the debt (if any) and meeting their everyday expenses. 

  • Leave a legacy behind

It is the innate desire of everyone to leave behind a good legacy and a corpus for the future generation. With a guaranteed investment plan, you can accomplish both goals. As you continue to pay the premium over a period, your investment grows significantly with a compounding effect.

Thus, the wealth you create can help you take care of your post-retirement expenses and be financially independent after you hang your boots. You can also use the corpus to meet other goals like buying a home, which you can behind for your children to inherit. 

  • Enjoy tax benefits

Apart from creating a safety net for your family and building a corpus for the future, investment in a guaranteed savings plan helps you enjoy tax benefits throughout the premium payment period. You can enjoy tax benefits up to ₹1.5 lakhs in a financial year under Section 80C of the Indian Income Tax Act. 

Final Word

Guaranteed savings plans are a great investment choice that gives you financial independence. However, to get the most out of it, compare the different plans in the market and choose the one that best suits your needs and goals. 

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