IDBI Federal Life announced the launch of ’Dream Builder Plan‘, a non-participating, non-linked plan on 13 June 2018.
To understand the working of the plan better, let us consider what we give (or pay) and what we get (receive) from the plan.
What Do You Give?
Annual premiums (no other payment modes allowed) for eight years (this is also fixed).
What Do You Get?
1. If you are alive, the maturity sum assured (called guaranteed annual payouts) is paid to you in three parts:
a. 20% of the maturity sum assured is paid two years prior to the maturity date;
b. 20% is paid one year prior to the maturity date; and
c. the balance 60% is paid on maturity.
2. If you are alive, but suffer total and permanent disability during the premium paying term, future premiums due are waived, and the policy with all its attendant benefits remains in force. That means future guaranteed annual payouts would be paid on their due dates.
3. In case of death while the policy is in force:
a. death benefit (maturity sum assured) is paid out on death;
b. Guaranteed annual payouts (as described in point 1) are also paid to the nominee on their due dates;
c. Premiums are waived in case of death during the premium paying term.
For a 30-year male, the brochure mentions annual premium for Dream Builder at Rs70,950. On this cash flow, we have arrived at an IRR (internal rate of return) of approximately 3.6% (considering the product cash flow in point 1).
So, one can consider this plan, if one does not want any market or interest rate risk for a 20-year timeframe and is happy with a return of sub-4% per annum. This could turn negative if we were to look at the real (after adjusting for inflation) return. However, we have only looked at living benefits in this scenario.
If one were to take a prudent financial call, one could construct a similar cash flow with a limited pay term plan with a total and permanent disability rider and invest the rest in a balanced mutual fund scheme. The returns are likely to be manifold.
Other regular features of a life insurance plan apply to Dream Builder as well.
1. Surrender Value: The policy acquires a non-negative guaranteed surrender value after payment of two full years of premium. The surrender value increases each year and becomes 100% on maturity. Of course, payouts, if any, are deducted, to arrive at the final number.
2. Grace Period: A 30-day window is offered to the policyholder to pay his premiums, during which period the policy remains in full force. Policy will lapse only if premiums are not paid even after the 30-day grace period.
3. Paid-up Value: In case the policyholder fails to pay the premium even after the grace period, the policy is converted to a paid-up policy. The policyholder now gets reduced benefits –in proportion to the number of premiums paid to the total number of premiums payable.
4. Revival: A lapsed policy can be revived, that is, its full benefits restored by paying the unpaid premiums along with interest and by fulfilling the revival norms (as mentioned in the brochure).
5. Free Look Period: In case a policyholder does not wish to continue with the policy for whatever reason, he can communicate in writing with the insurance company his decision to discontinue the policy. He has a 15-day window to do this. Premium paid, less proportionate risk premium for coverage period plus medical examination costs plus stamp duty charges, is refunded to the policyholder and the policy stands cancelled.
6. Loans: Can be availed once the policy acquires a surrender value.
7. Suicide Exclusion: 80% of the premium paid will be paid as death benefit in case of death due to suicide in the first 12 months from the date of commencement of the policy.
8. Exclusion in respect of future premiums being ceased on disability: Benefit of future premium waiver in case of total and permanent disability is not applicable: (1) in case such an injury is self inflicted, (2) caused by medical condition or procedure caused due to AIDS or HIV and other regular exclusions.
IDBI Federal Life ranked 15th and 14th in terms of first year premium collection and total premium collection, respectively, for FY16-17 (as reported in Insurance Regulatory and Development Board of India - IRDAI’s—2016-17 annual report). Also, the claims rejected by IDBI Federal Life were 9.01% (number of policies) and 11.69% (benefit amount) in FY16-17. Corresponding figures for private life insurers was 4.85% and 11.78%, respectively (all figures are taken from IRDAI’s 2016-17 annual report).
To summarise, IDBI Federal Life’s Dream Builder can be considered as a savings-cum-protection plan for those who do not want any market or interest rate risk over a long timeframe and are willing to tolerate a rate of return that will not beat inflation.