An employer may take a group gratuity plan with an insurance provider. The gratuity paid by the company is based on the terms of the group insurance scheme. The different types of group gratuity insurance plans are mentioned below:
Unit Linked Plan: The Unit Linked Plan is a group policy with an indefinite policy term. Being a group gratuity insurance plan, the sum assured depends on the salary of the individuals and annuity rates. It also depends on the annual contributions made. The plan offers a life cover throughout the policy term, it has an annual automatic renewal cycle and the tax benefits are applicable as per the tax laws. The benefits of the policy are attached to the performance of the market.
Non Participating Endownment Plan: Endownment plans offer two options-participating and non participating plans. In case of Non Participating Endownment Plan, the benefits of the policy are defined at the time of buying the policy. Here, the costs and returns are mentioned upfront to the buyer of the policy.
Case on Group Gratuity Insurance Plan
Unit Linked Plan: Say A invests an amount in a unit linked plan. This plan will give him a cover of Rs. 3 lakh. This means the premium will amount to Rs. 30,000 in a year for 20 years. An amount of Rs. 25,000 is invested in a fund with an NAV of Rs.10/-. This means A gets 2500 units of the fund at Rs. 10. Now, if after a year, the NAV of the fund increases to 12, A will receive a higher amount as compared to the investment made. A will then receive (2500 units X 12) which is Rs. 30,000. Similarly, if after a year, the NAV falls to Rs. 9, A will receive (2500 X 9) which is Rs. 22,500. Thus, in case of a unit linked plan, the return is based on the performance of the market and the fund.
Non-Participating Endownment Plan: Say A invests an amount of Rs.10 lakh in a non-participating endownment plan. The terms mention that after the deduction of the expenses, A will get a return of 7.25% after 10 years. The expenses amount to Rs. 55,000. This means that A will get a return of 7.25% on Rs. 945,000 after a period of 10 years. There are no changes in the return with the performance of the market.
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