LIC of India has launched Jeevan Aastha on December 8th, 2008. The scheme is open for subscription for 45 days.
You can get the details about this scheme here.
When reading through its features, please make note of the two terms used in this:
Basic Sum Assured - This is insured amount during the first year of the policy.
Maturity Sum Assured - This is equal to ( Basic Sum Assured / 6 )
Thus, if you purchase a policy with basic sum assured of Rs. 3,00,000/- , the maturity sum assured is only Rs. 50,000/-
In a way, this insurance policy is quite stupid and absurd ( truly speaking this does not look like an insurance policy at all ):
1. Decreasing Insurance benefit: This is the first insurance policy I have come across in which the death benefit decreases with the increase in the term of the policy. If you purchase a policy for Rs. 3,00,000/-, then only during the first year the death benefit is Rs. 3 lakhs. Second year onwards the death benefit is in the range of Rs 1 lakh - Rs. 2 lakhs. You can see the benefits illustration here.
2. Guaranteed additions are not on the Basic sum assured but on the Maturity Sum assured ( which is one-sixth of the Basic Sum assured ). So when you read the policy features, keep this thing in mind.
Infact, this looks like another of LIC's tricks to fool the common public. The purpose of this scheme is not to provide insurance, but to mop up huge sums of money from the public so that LIC can shore up the sinking stock market.
Update: This post was previously titled "LIC Jeevan Aastha - Do not buy". To know why I have renamed it, please read this.
Thursday, December 11, 2008
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Dear sir, It is not like ur thinking according to rules income tax exemption can only be taken if risk coverage is availed 5 times of the premium paid.So for the favour lic did so & also no banks are giving guarantee on F.D.s more than 3 yrs whereas lic of india is granting 10 yrs guarantee.
ReplyDeleteBabu ur right.
ReplyDeleteThe author obviously appears to be prejudiced against LIC in writing this blog. or looking for cheap attention by taking a negative approach. I am happy there are people like Babu who see things in a proper light and defend a great institution like LIC which deserves the appreciation for bringing out innovative products to suit the varied needs of customers
ReplyDeleteI have posted an update here. Request all readers to please read the update as well.
ReplyDeleteHi,
ReplyDeleteI looked at the Benefits Illustration on the LIC page and I have to say there is some fiddling with the numbers going on here. If you see the survival table, your guaranteed return after 10 years is Rs. 1 lakh when you have invested Rs. 48975. Doesn't that amount to a return of just about 7% compound interest? Simple maths. They however claim a guaranteed Rs. 100 per Rs. 1000 as the return which makes it look like 10% return. Can you please comment? Why should I invest for investment sake in this product, let alone insurance sake?
Hi anon,
ReplyDeleteThis is the point I am trying to make in my post above. The usage of two terms "Basic Sum Assured" and "Maturity Sum Assured" will confuse any layman, since everyone is not a lawyer/accountant.
The Guaranteed addition (Rs. 100 for every Rs. 1000) advertised by them is on Maturity Sum Assured ( which is 1/6th of the Basic Sum assured ). If you now try to calculate with this explanation in mind, you will arrive at the numbers shown in the Benefit Illustration.
I agree with the CA comments..
ReplyDeleteIt is not the intension of blaming LIC.
I too just gone through the LIC site and read the offer details... One should have to spend considerable time to get understand the Basic Sum Assured and Maturity Sum Assured.. Frankly, this is confusing.. Definately agents(LIC) would fool the common people hiding the 'Maturity Sum Assured'..
I do not know why all these LIC agents are writing nonsense. In my town there r boards at most places as "Beggers and LIC agents noy allowed ". Actullay LIC till now not insured any one. It only sold below grade investments in the name of insurance. Enough is enough.
ReplyDeleteits bakwaas ,if dont know anything pleaese do not misguide people.there is policy of lic or any other private insurer which give this much of assured returns.contact me for details 09896983699
ReplyDeleteCan some one please simply tell me If I invest 1Lakh in this policy ( investment) How much I will get after 5 year or 10 years ..
ReplyDelete5 year - or - 10 years
Minimum amount: ? ?
Expected amount: ? ?
Maximum amount: ? ?
For a sample age 35
Hi Vikas,
ReplyDeleteMy concern in this post is not the Returns generated, but rather the insurance benefit being offered. Jeevan Aastha should not be bought as Insurance product.
Since it is an offering from an Insurance company, people assume it provides sufficient Insurance cover. But that's not true with respect to Jeevan Aastha. My update post here will provide more clarity.
It seems that the author has passed comments on LIC product keeping in its mind biased views (may be he is an agent or broker of any other private insurer) like our political parties do to ruin the image of the opponent irrespective of the fact that he / she is doing nothing wrong.
ReplyDeleteiam a NRI and would like to invest Rs. 5 lakhs in LIC Jeevan Astha for 5 yrs. How much i will get after maturity and what are insurance benefits?Different people are giving different opinions.Iam not able to decide whether to invest or not?
ReplyDeleteSIR IN FDR YOU GET 8-9% RETURN BUT IN THIS POLICY YOU GET 9-10% RETURN WITH INSURANCE COVER
ReplyDeleteFor 5 yrs, a simple interest of 9% pa is guaranteed. It means that you will get 5L + (5L*0.09*5) = 7.25L + Loyalty Bonus after 5 yrs.
ReplyDeleteLoyalty bonus is a variable component about which, not much info is given by LIC. But in my opinion it'd amount to something like 25K. So u can expect a return bw 7.25L (guaranteed) and 7.5L and that too as non-taxable income.
LIC Jeevan Aastha - Do not buy as an Insurance product ........... is very well written article.
ReplyDeletePlz stop blaming each others.
the author has already mentioned tht its not so tht this policy is not worth buying but not as an insurance.
All i can say tht this article is informative and can be rated 8/10.
Thanks.
An article on LIC's Jeevan Aastha by Sandeep Shanbhag in DNA.
ReplyDeleteLink via Deepak.
I've bought this policy with following details (Age 33). Please let me, if I'm wrong as I'll get 12% pa return (simple interest so that I can exit within cooling off period -
ReplyDelete1. Basic Sum Assured for 10 yrs =1,440,000
2. Single Premium =232,992
3. Maturity Sum Assured (1/6) of (#1) 240,000
4. Guaranteed Addition (Rs 100 per 1000 of #3)for 10 yrs = 240,000
5. Guaranteed after 10 yrs i.e. (#3+#4) = 480,000
6. Variable Loyality @ 7% of (#5)= 33,600
7. Total after 10 Yrs (#5 + #6) = 513,600
8. Return after 10 Yrs (#7 - #2) = 280,608
9. % Return per year = 12.04
Hi anon,
ReplyDeleteAs an investor you should never consider the simple rate of interest ( i.e. 12% ). You should always look for the compound interest which is around 7.32% for Jeevan Aastha.
Compare this compunded interest rate with what is being offered by Banks/NABARD BN bonds/IIFCL tax-free bonds, you would be able to decide yourself which is the better option.
Also I would like to tell you few more points about the variable loyalty additions.
1. It is not guaranteed
2. Go to the LIC glossary page and search for loyalty additions. It states that loyalty additions are given as a percentage of Maturity Sum assured. Thus the step #6 ( and the subsequent steps also ) in your calculation is wrong. Variable loyalty should be calculated as a % of #3 and not as a percentage of #5.
Also, it is a bigger mistake if you have bought this as an insurance product. If you have bought Jeevan Aastha purely for investment purpose, then it is still ok.
Thanks, CA. I rectified the Variable Loyality @ 5 % of #3 and following are the figures-
ReplyDelete6. Variable Loyality @ 5% of (#5)= 11,650
7. Total after 10 Yrs (#5 + #6) = 491,650
8. Return after 10 Yrs (#7 - #2) = 258,658
9. % Return per year = 11.10 (simple int.)
I'll bought two policies - Age 33 (wife) and myself (age 36) and If money is divided in two policies, in total - I'll get 7.51% as compound interest from the today onwards upto 10 yrs. LIC has clearly specified that on maturity, all returns are Tax Free. So I will not be paying a single penny as tax after 10 yrs.
I've seen your suggested Two Options -
Option 1.
NABARD but there are no tax savings available under 80C for investments under this bond. Rs. 8500 will get you Rs 20,000 after 10 yrs. i.e. 8.65% compound interest p.a. but minus Tax.
In my example Rs. 2,32,992 will get me RS. 5,48,279 and with today's rate, I need to pay 16,586 as Tax. So in hand will be 5,31,693.00. Yield % will be 8.33 p.a. compound int.
Diff. between Jeevan Astha and NABARD after 10 Yrs will be = 5,31,693 - 491,650 = 39,715.00
With Rs. 39715, I'll get insurance cover for 10 yrs. which is Rs. 3,971.5 per year.
Option 2.
Tax-free bonds - Coupon rate is 7.5 % but will have a lock-in period of atleast 10 years
#1 This return is same Jeevan Astha policy
#2 Lock-in period of atleast 10 years
#3 No insurance coverage
Conclusion-
So, Jeevan Astha is not a bad policy. Moreover, I've bought this policy as investment product who wants to die early! which will fetch 7.51% as compound interest and no lock in period ( you can exit early with 90% in hand.
Your feedback will be appreciated. Take care,
Regards,
Sunil Kumar Sharma
Hi Sunil,
ReplyDeleteI am happy to hear that you didn't purchase Jeevan Aastha for insurance purpose.
LIC Returns are tax-free as per current tax laws. Laws relating to this can be changed by the budget presented in any year by the Finance Minister. Of course, lets presume the laws will remain the same way as present.
Lets take NABARD BNB first:
I agree there are no 80C benefits.
You can read this article in DNA, in which NABARD BNB is also mentioned towards the end of the article. Sandeep Shanbhag has written that NABARD BNB gives you an after-tax return of 8.29% ( I haven't verified this). This is irrespective of the tax slab you are in because NABARD BNB is a capital gains zero-coupon bond. But tax-laws may change, same risk as LIC Jeevan Aastha.
Secondly, Rs. 4000/- per annum is too much to pay for an insurance of just Rs. 4,80,000/- from the second year onwards in Jeevan Aastha. To give you an example for Rs. 4000/- per annum you can get insurance of around Rs. 15,00,000/- considering your age i.e. 36 years. You can go to SBI Life insurance and try to calculate the premium yourself. Choose the plan as "Level cover", Policy term as 10, enter your date of birth, sum assured as Rs. 15,00,000/- and press on calculate premium. The premium is less than Rs. 4000/-
You can exit NABARD BNB pre-maturely because they are traded on the BSE. NABARD BNB can be traded even in physical format.
In LIC Jeevan Aastha, you will always get 90% of the single premium on early exit. In Jeevan Aastha if you exit after 5 years you get 90% of the premium paid and if after 8 years you exit you still get 90% of the premium paid.
But this is not the case with NABARD BNB. The price at which the bond is sold and bought in the market will depend on the days to maturity for the bond. Say you sold BNB after 5 years the price you get will definitely be higher than initial investment ( i.e. Rs. 8500/- ) Compare this with Jeevan Aastha where on pre-mature exit you get an amount lesser than your initial investment. If you sell BNB after 8 years, the price would definitely be higher than the price you will get for a 5-year old bond. Of course there are risks related to liquidity and spread.
IIFCL:
IIFCL come with sovereign guarantee of the Govt of India and has got special approval from the Central Bureau of Direct Taxes ( CBDT ) for tax-free returns to investors. So changes in tax laws cannot affect taxation of IIFCL bond returns ( which is tax-free ).
Secondly, IIFCL comes with a guaranteed returns of 7.5%. But in your calculation of Jeevan Aastha you have assumed 5% loyalty addition and then only it could equal the returns of IIFCL. It may so happen that the loyalty addition is nil or lesser than 5%. Then LIC Jeevan Aastha returns will fall short of IIFCL. On the other hand it may also be the case that Jeevan Aastha declares a bigger loyalty addition and it beats the IIFCL returns. The pendulum can swing either way, because of this variable loyalty addition when you compare IIFCL with Jeevan Aastha.
One more point regarding IIFCL bonds. They may be listed on one of the stock exchanges ( maybe BSE ) to provide early exit option to investors. But remember this is pure speculation, and may not turn out to be true.
ReplyDeleteThanks, CA for your detailed analysis.
ReplyDeleteHere is the summary -
#1. NABARD BNB gives an after-tax return of 8.29% but no Insurance.
#2.IIFCL comes with a guaranteed returns of 7.5% (no tax) but lock-in period of atleast 10 years and no insurance.
#3. As I've mentioned earlier, Jeevan Astha will give me 7.51% compound interest per year for 10 years. In order to fill the gap with NABARD, I've received 1% of LIC's agent's commission :) So, my in hand return is 8.51% + Insurance cover for 10 years. This return seems to unbeatable in the current prevailing options.
Hence, I'll continue with Jeevan Astha as an good Investment Product plus minor added benefit of insurance.
Appreciated your efforts!
Take care,
Regards,
Sunil Kumar Sharma
Hi CA/Anon,
ReplyDeleteFound the analysis and the pro-con discussion between the two of you quite informative.
@Anon - How did you get the 1% LIC agent's commision?
Just ask for it - 1% is not a problem for an agent who is getting 2-3% on single premium from LIC, he can easily pay 1% to the customer.
ReplyDeleteTake care,
The person seems to be agent of Aviva life insurance who is trying to discourage people of buying product of LIC.
ReplyDeleteLIC has a stand that no insurance company has !
Can this person provide any document of guarantee of getting just the capital invested in Aviva.
LIC can ! YES
There is another good news for people who invested in Jeevan Astha Policy.
ReplyDeleteAs per Income tax laws -
"
Income tax exemption on Maturity/Death Claims proceeds under Section 10(10D)
All the benefits payable under a Life Insurance policy are tax free. However in cases the premium paid in excess of 20% of the capital sum assured within a year, benefits paid excess of premiums will be taxable. The benefits from a key man Insurance policy and any sum received under Sec 80DD, Sub-section (3) are also taxable."
In my case mentioned above, 20% of the Basic Sum Assured for 10 yrs (i.e. 20% of 14,40,000 =Rs. 2,88,000) is always less than the Single Premium Paid (i.e. Rs. 2,32,992).
So not even Rs. 1 deducted as TDS -:)
Take care,
Sunil Kumar Sharma