Publication: DNA, Mumbai; Date: July 3, 2007; Section: Personal Finance; Page: 6
LICs Jeevan Anand certainly cant help you buy all that
The other day I got a call from my uncle who wanted me to invest in what he thought was a fantastic product from the Life Insurance Corporation of India (LIC). I politely declined, but he was in my house the next morning with the forms filled and just waiting for my signature. The product in question was Jeevan Anand, a plan that offers the combined benefit of endowment and whole life policies.
A typical endowment policy combines savings and protection. A portion of the premium goes towards covering your life and the balance after policy expenses goes towards investments. This kind of policy combines savings (because money is given to you on maturity) with some protection (your nominee gets the sum assured if you die during the premium paying term). Your risk cover ceases on maturity of the policy.
On the other hand, a whole life policy pays the sum assured not on maturity but on the death of the insured, whenever that happens. Typically, most of the whole life insurance plans give you coverage till either 80 or 100 as opposed to an endowment plan where the cover is till the policy matures.
Since Jeevan Anand provides a lump sum amount at the end of the selected term in case of survival (like an endowment plan) and provides financial protection against death throughout the lifetime of an individual (like a whole life plan), this is a combo endowment and whole life plan.
Benefits:
In case of death during the selected term: The sum assured along with the vested bonuses is payable on death in a lump sum. There are no guaranteed bonuses in this policy.
Benefits in case of survival to the end of the selected term: The sum assured along with the vested bonuses is payable in a lump sum on survival at the end of the term. An additional sum assured is payable on death thereafter, since the risk cover is on till the death of the life insured.
Accident benefit: An additional sum assured subject to a limit of Rs 5 lakh is payable in a lump sum on death due to accident, up to age 70. In case of permanent disability of the life assured due to accident, this additional sum assured is payable in installments.
Supplementary/extra benefits: For an additional premium, these are optional riders that can be added to your basic plan for extra protection.
Bonuses:
Individuals taking this policy get a bonus. This bonus is a share of the profits that LIC is able to make in a given year. There are no guaranteed bonuses in this policy. The bonus declared under this plan for the year 2005-2006 was Rs 40-44 per thousand of sum assured. This means a return of 4-4.4% (see table). For a premium paying term of 16-20 years, the bonus was Rs 40 per thousand and for premium paying terms of 20+ years, the bonus was Rs 44 per thousand. So, if an individual taking the policy has a sum assured of Rs 10 lakh for a 25-year policy, then the bonus during the year would have stood at Rs 44,000. However, these bonuses do not compound and get added on every year. Hence, the bonus of Rs 44,000 stays at Rs 44,000 till the end of the policy. Since bonuses do not compound, the returns any endowment policy can generate tends to be fairly limited and just about able to match the rate of inflation. If the individual survives the policy, he gets the accumulated bonus along with the sum assured. If he dies in between, the nominee gets the sum assured plus the bonus that has accumulated till then.
Lets take an example of a 35-year individual taking a 20-year policy for a sum assured of Rs 10 lakh. The annual premium for this is Rs 53,207 (see table). The returns as per the table work out to around 5.66% (inclusive of the final bonus).
Is it worthwhile to buy this?
Returns are low and if you were to go by the bonuses declared for 2005-2006, the returns might be in the range of 5-6% considering yearly and final bonuses.
Premiums are high as compared to other plans because it offers not only an amount on maturity but also a sum assured on death. However, this attractive feature should be of little relevance to most of the people now as the objective with which you buy insurance is to provide financial protection to your family should something happen to you now.
Liquidity is an issue if one was to exit this policy early and high surrender charges take away most of the accumulated benefits.
You should instead opt for a sizeable cover for yourself through a plain term plan and invest the difference in other products in the debt space, namely PPF, EPF, fixed maturity plans , post office and Senior Citizens Savings Scheme (through your parents) for better returns.
What if you already have this policy?
The policy may be surrendered after it has been in force for 3 years or more. The guaranteed surrender value is 30% of the basic premiums paid, excluding the first years premium. Any extra premium(s) paid and premium(s) towards accident benefit are also excluded. So, in our example, if you surrender the plan above after 3 premiums have been paid, you will receive 30% of the premiums paid in the second and the third year and the accumulated bonus. In other words, you will get Rs 31,924 (30% of the second and third year premiums of Rs 53.207 each) and the bonus accumulated.
If you have bought this policy in the last couple of years, you should first do a thorough need analysis and calculate your insurance needs. After this, you should buy a term plan and once this term plan is active, evaluate the need for surrendering Jeevan Anand. Remember, insurance is not about what you would get on maturity, but what your family would get in case something happens to you. Hence, make sure your insurance needs are sufficiently addressed through a term plan.
The author runs the financial advisory firm, My Financial Advisor and can be reached at amar.pandit@myfindad.com
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