Jeevan Varsha: Money back policy with Assured Returns
After overwhelming response to Jeevan Astha, LIC has introduced this money back policy with assured returns. This has caught the attention of
investors who are tired of the prevailing uncertainty in various asset markets. But one needs to do a cost-benefit analysis to assess the policy before putting money and not get away with the policy features like assured returns along with risk cover.
This policy is nothing but a general money back policy offered for a limited period- 16th February 09 to 31st March 09. Another attractive feature of the policy is assured returns. It is already announced that the policy holder will get Rs 65 per thousand (6.5%) of sum assured (SA) for the policy of 9 years while Rs 70 per thousand (7.0%) of SA for 12 years’ policy. The rate of return offered on this policy is one amongst the maximum benefits offered by LIC so far. As it is known, returns earned on policy are completely tax-free. So, on the face, 6.5% or 7% tax free returns looks attractive.
However, comparing these returns with total cost incurred– total premium paid- raises doubts on economic viability of the policy. For example, a 30-year old person needs to pay Rs 78,497 as annual premium for 12-year policy of Rs 5,00,000 sum assured. As a policy feature premium payment term is just 9 years. So, the total premium outflow is Rs 7,06, 473.
At the time of maturity, the policyholder will get 40% of sum assured (as 10%, 20% and 30% of SA will be paid at the end of years 3,6 and 9 years, respectively) along with accrued guaranteed returns for 12 years. So, the total guaranteed amount received during the policy period was Rs 9,20,000.
Thus, the tax-free assured net gain (difference between total premium paid and guaranteed benefit) on the investment in policy is Rs 2,13, 527. The policy holder is also entitled for variable return called as loyalty addition at the time of maturity, which aligns to profit earned by LIC. So, it is as good as neglecting it.
Does this mean investment in Jeevan Varsha is a better option? To take a decision one needs to compare the policy with other fixed income instruments. To make a fair comparison, let us assume a 30-year old person invest Rs 78497- the amount equivalent to premium paid- is invested into a bank FD for 12 years which will get matured in 2021.
Subsequently, the person may open a new FD of the equivalent amount every year but with the maturity year as 2021. Thus, the person will have 9 FDs maturing in 2021 for the total sum of Rs 706,473. The total interest accrued on these FDs will be Rs 544,205 in 12 years assuming the average deposit rate of 7% per annum compounded quarterly. (The assumed deposit rate is based on the simple average of deposit rates observed in past seven years, which have witnessed swings in deposits rate to higher and lower ends.)
Yes, interest earned on FDs is taxable. Assuming person belonging to higher income tax bracket, needs to pay Rs 168159 as tax on interest earned. Yet, investment in FDs is better off as interest earnings adjusted for tax at Rs 376,046 are much higher than that of assured returns earned on Jeevan Varsha policy.
The argument could be won in favour of the insurance policy as it covers death risk. But, in such case one may go for pure term policy for risk cover. It may cost additional Rs 10145 (single premium) for 25 years policy of Rs 500,000 sum assured. Thus, an investment combination of bank FD and a pure insurance policy stands is preferable than the insurance policy with dual benefits of investment and life insurance.
Going forward, a possibility of insurance policies offering attractive assured returns could not be ruled out in such time of crisis. But, it is necessary to do a real cost benefit analysis of the scheme before blindly investing in such schemes.
Sources: The Economic Times
This policy is nothing but a general money back policy offered for a limited period- 16th February 09 to 31st March 09. Another attractive feature of the policy is assured returns. It is already announced that the policy holder will get Rs 65 per thousand (6.5%) of sum assured (SA) for the policy of 9 years while Rs 70 per thousand (7.0%) of SA for 12 years’ policy. The rate of return offered on this policy is one amongst the maximum benefits offered by LIC so far. As it is known, returns earned on policy are completely tax-free. So, on the face, 6.5% or 7% tax free returns looks attractive.
However, comparing these returns with total cost incurred– total premium paid- raises doubts on economic viability of the policy. For example, a 30-year old person needs to pay Rs 78,497 as annual premium for 12-year policy of Rs 5,00,000 sum assured. As a policy feature premium payment term is just 9 years. So, the total premium outflow is Rs 7,06, 473.
At the time of maturity, the policyholder will get 40% of sum assured (as 10%, 20% and 30% of SA will be paid at the end of years 3,6 and 9 years, respectively) along with accrued guaranteed returns for 12 years. So, the total guaranteed amount received during the policy period was Rs 9,20,000.
Thus, the tax-free assured net gain (difference between total premium paid and guaranteed benefit) on the investment in policy is Rs 2,13, 527. The policy holder is also entitled for variable return called as loyalty addition at the time of maturity, which aligns to profit earned by LIC. So, it is as good as neglecting it.
Does this mean investment in Jeevan Varsha is a better option? To take a decision one needs to compare the policy with other fixed income instruments. To make a fair comparison, let us assume a 30-year old person invest Rs 78497- the amount equivalent to premium paid- is invested into a bank FD for 12 years which will get matured in 2021.
Subsequently, the person may open a new FD of the equivalent amount every year but with the maturity year as 2021. Thus, the person will have 9 FDs maturing in 2021 for the total sum of Rs 706,473. The total interest accrued on these FDs will be Rs 544,205 in 12 years assuming the average deposit rate of 7% per annum compounded quarterly. (The assumed deposit rate is based on the simple average of deposit rates observed in past seven years, which have witnessed swings in deposits rate to higher and lower ends.)
Yes, interest earned on FDs is taxable. Assuming person belonging to higher income tax bracket, needs to pay Rs 168159 as tax on interest earned. Yet, investment in FDs is better off as interest earnings adjusted for tax at Rs 376,046 are much higher than that of assured returns earned on Jeevan Varsha policy.
The argument could be won in favour of the insurance policy as it covers death risk. But, in such case one may go for pure term policy for risk cover. It may cost additional Rs 10145 (single premium) for 25 years policy of Rs 500,000 sum assured. Thus, an investment combination of bank FD and a pure insurance policy stands is preferable than the insurance policy with dual benefits of investment and life insurance.
Going forward, a possibility of insurance policies offering attractive assured returns could not be ruled out in such time of crisis. But, it is necessary to do a real cost benefit analysis of the scheme before blindly investing in such schemes.
Sources: The Economic Times
posted by Nikunj Jani @ 7:29 PM
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