Aviva India Bond - worth Investing?

Aviva India Life Insurance have launched Aviva India Bond, which is open for sale only upto October 6th. Let's analyse if it is worth investing in.

First a little background about the company itself. The company is a joint venture between Aviva plc and the Dabur group with the Dabur group holding 74% in the venture. The Aviva group ( as per some news reports ) have negligible exposure to the subprime mess!

Lets check out its features:

• It is a single premium policy ( minimum premium Rs. 50,000/- )
• For a 10 or 5 year term.
• On maturity you will get your premium back along with interest at the rate of 7% per annum compounded annually. Check the calculation for a 5 year and 10 year term.
• Death benefit: The policy has a reducing death benefit. It also has a surrender value. You can check them here.
  
• Tax benefit: Premium paid is tax-free under section 80C. And the maturity amount is also tax-free under section 10 as per current tax laws ( but beware, laws may change! )

Ok now here's the quiz:
You get 8% p.a. on PPF investment which enjoys the same benefits under section 80C and section 10. Then why would anybody opt for a lower return ( i.e. 7% p.a. )?
So here's the anwer: You get insurance cover as well.
The death benefits of Aviva India Bond are:

• 1st Year: 5 times the single premium
• 2nd Year: 4 times the single premium
• 3rd Year: 3 times the single premium
• and 2 times the single premium thereafter
  

So you are saving on the premium you would pay towards insuring your life, while still getting 7% on your investment.
Let's take an example:
Scenario 1: You invest Rs. 1Lac in Aviva India bond. The insurance cover during your first year is Rs. 5Lac and after 10 years you would receive Rs. 1,96,715/-

Scenario 2: You buy a term insurance for Rs. 3Lac term insurance for 10 years. Annual Premium including service tax is Rs. 756 for SBI Life hence the premium amount for 10 years is Rs. 7560/- You invest the remaining amount ( Rs. 1 Lac - Rs. 7560 ) in PPF which will yield Rs. 199571.02 after 10 years (assuming PPF interest rates remain at 8% p.a.).

But there are two risks in Scenario 2:

1. The rate of interest on PPF may decrease ( on the other hand, if the rate of interest on PPF increases, then it is beneficial to you ).
2. The service tax may increase, which will increase the premium amount payable. ( if service tax decreases, then you will benefit ).

Aviva India Bond protects you from the above two risks by ensuring a guaranteed rate of return at 7% p.a. And since you don't pay any annual premium, you are protected from changes done to the service tax structure. Also Aviva India bond has a surrender value starting second year onwards ( compare this to the lock-in of 15 years for PPF ).

Still I would not recommend Aviva India Bond to everybody. But only for those who haven't taken an insurance policy yet. This can be their first insurance policy which gives an assured return after 10/5 years.
During the tenure of this policy i.e. in the third or fourth year, the insured life must buy for himself a term insurance policy as per his needs,as Aviva India Bond has a reducing death benefit. Also those who would like to protect themselves against a downturn in the general interest rates can opt for this policy.

I expect Aviva India to re-launch this policy. Since the interest rates in the economy are on the rise, the later avatar of Aviva India Bond may carry a higher yield. But this last paragraph is pure speculation, not facts!

Disclaimer: This is not an offer for sale or investment. The author is not an registered/authorised insurance advisor.