I know it has been a long break since I posted previously but I just got a little busier with drafting Financial Plans for several of our readers. Thanks all for your continued patronage.
I am publishing here a product review this time about the new talk of the town LIC Jeevan Vriddhi (http://www.licindia.in/Jeevan_vriddhi_sales_brochure.htm). All LIC policies get this status by default!
Though I recommend shunning LIC’s and other Endowment policies in general and one time premium paying policies especially, when my spouse asked me earlier today to take a look at this plan I agreed. I worked out the numbers for Jeevan Vriddhi and was in for a pleasant surprise (compared to LIC standards) which is when I decided to write about this plan in the justgrowmymoney blog. Do note I evaluated this policy purely from an investment perspective. The policy is in no way an Insurance product. Take a Pure term policy in the first place. Any additional coverage provided by this plan is just that – additional.
- 1 time premium plan
- 10 year term
- Some guaranteed returns provided in LIC website (link provided above)
- Life cover is 5 times of premium. Minimum premium 30,000 no maximum premium.
- Incentives for higher premiums (50k-99k -> 1.25%, 100k+ 3%)
- Loan available after 1 year. Surrender value after 1 year is 90% of amount paid.
- Service tax of 1.545% for Endowment plans is applicable (not mentioned explicitly in the link above!)
- Loyalty additions at the end of the term may be decided by LIC. I am assuming this to be a very insignificant amount because the guaranteed payout is large. [This hidden return in a Debt investment is one of the several reason I shun Endowment policies]. Hence I have made this zero in my calculations. You may make this to be Rs.1 or Rs. 2 per thousand for EACH YEAR for comparison purposes.
What is in it for Investors:
The guaranteed rate of return ranges from 4.53% to 6.93% [This is for the case with NO incentive. If someone pays 1lac the range of returns are 4.84% to 7.25%). The numbers do not appear to be very impressive at the first glance and it is easier to shun this off as another LIC Endowment plan but we need to look a little beyond the obvious.
I have also assumed there are no Tax savings in the year of investment by investing in this policy because I recommend anyone to maximize PPF before looking at this plan in which case the tax savings under 80C are already in place.
Let us look at some numbers for LIC Jeevan Vriddhi. (Detailed Calculations here – Sneak peek at Jeevan Vriddhi)
Assume a 30 year old in the 30% tax bracket pays a premium of 1 lac. The initial outgo will be 1.545% higher due to service tax => 101545. The Sum Assured is 5 lacs. The guaranteed payment is 199985. The rate of return turns out to be 7.01%. There are 2 considerations here:
1) If someone at Age 30 takes a pure term plan for 5 lacs the cost should approximately be Rs. 1000 per year (Just like the premium does not increase proportionally between a sum assured of 50 lacs and 1 crore it would not decrease proportionally when you take a term plan for just 5 lacs). There is a notional income flow of Rs. 1000 every year. Plugging this in a IRR calculator will show that this increases the returns to 7.81%. The notional income flow is higher for people 40+ as their insurance costs are higher as well. Do note the calculation in the spreadsheet link provided above do not take into consideration this cash flow as it may differ for each individual.
2) This is a controversial one related to DTC. According to the current tax laws the maturity proceeds are tax free. However per DTC if the Sum Assured is not 20 times the premium paid then the final corpus is taxable. Now if and when DTC comes in to effect will it affect existing investments? At least as per the current draft it will. However LIC’s primary business (besides bailing out State run companies!) of selling endowment plans would suffer a massive massive blow if such a proposal is made a law. Again in general taxation laws are usually prospective so such proposals may be applicable for future investments and would not tax previous investments. There is a lot of gray area here that is anybody’s guess. So assuming DTC will not tax the proceeds the return of 7.81% is equivalent of a 10 year CAGR of 11.1% taxed at 30% – not bad for a Debt investment. By ignoring the Rs. 1000 cash flow I mentioned earlier the tax adjusted return still comes out to be 10.02%.
I agree you can as well lock in a FD for 10 years today at the 9.5% range. However you will miss out on the Life cover, which, however insignificant (Say even 5 lacs), still makes your money work harder. Do note I have assumed the loyalty additions are zero so in the event there is some addition at the end consider it as a freebie!
Should you buy this?
Is this not why you read this review until now?! There is no one size fits all because the final returns are determined also by the Initial premium paid, tax bracket and age (Financial Planners never commit, do they!). Consider these points and your specific tax situation and age before making a final call.
– The final return on this Debt plan appears to be decent for some Tax brackets and age levels not for all.
– Even where this plan gives decent FD like returns they STILL lag PPF/EPF returns over the same duration. The proceeds from the latter are guaranteed to be tax free. So if someone has not exhausted PPF it makes less sense to invest in LIC Jeevan Vriddhi! Just go and maximize PPF before even thinking about investing in this plan.
– In the Debt scheme of things PPF/EPF obviously rank at the highest level followed by the new (restarted) era of Tax Free bonds. REC is coming up with an issue of Tax free bonds in about 1 week at 8.13%. But note that the annual interest is paid out and not reinvested and you may or may not find reinvestment avenues at such rates in future. The returns are nevertheless very good. After these bonds come in the hierarchy Liquid/Debt funds where you can park your money to grow at a rate marginally better than FDs if you opt for a Dividend option that is taxed at ~ 15%. This again is beneficial only for folks in the 20% and 30% tax bracket. Returns on Jeevan Vriddhi come somewhere between the Tax free bonds and Liquid funds depending on your individual situation.
If someone says they are not willing to consider any LIC plan and can manage their Debt portfolio otherwise I would not disagree. As I said before Jeevan Vriddhi is one plan from LIC that is at least worth considering analyzing to be included in one’s debt portfolio.
Whether it makes the cut to enter your Debt portfolio is a combination of several factors including your current Asset allocation, liquidity situation, the premium chosen, age and tax bracket amongst other things.
Welcoming your views on this.
Update on Apr 1, 2012:
Per the Union Budget that was presented in Mar 2012 maturity proceeds from policies where the Sum Assured is not at least 10 times the premium paid will be taxed at maturity.
LIC Jeevan Vriddhi provides 5 times coverage. Hence any investment made from April 1, 2012 will be taxed at maturity. Hence I recommend a STRICT NO-NO for anyone (except perhaps age group 8-12) to take this policy.