Regular readers of this blog already know I am not a big fan of traditional life insurance plans. I make it a point to express my dislike towards traditional life insurance plans in one way or the other. And I have fairly strong reasons.
Though I have written against traditional plans many times before, I have stayed away from reviewing specific insurance products till now. However, a number of clients who I have advised, most of them had a common product in their portfolio: LIC Jeevan Anand. When I asked why they had purchased this plan in the first place, some mentioned they wanted to save on taxes. Some gave in to the excellent pitch by the insurance agent. In a few cases, the agent happened to a close relative too. So, I thought I should break the notion and pick up Jeevan Anand plan for review.
In this post, I will focus on New Jeevan Anand plan because from what I learned after talking to a few LIC agents, this is the plan that a number of people are finding attractive these days. As I understand, LIC Jeevan Anand has been withdrawn.
LIC New Jeevan Anand: Review of Policy Features
- LIC New Jeevan Anand is an endowment plus whole life insurance plan.
- It is a participating plan. You get regular bonuses if declared by the insurance company. Do note bonuses accrue and get paid only at the time of maturity or death.
- In the event of the death of the policyholder during the policy term, the beneficiary gets the 125% of Basic Sum Assured plus any accrued bonuses. Bonuses are NOT GUARANTEED. Therefore, the return is not guaranteed either.
- In the event of the death of policyholder after the policy term expires, the beneficiary gets the basic Sum Assured. You will find this feature in whole life policies. This is something you won’t find in term life insurance policies. We will see later if this feature is that beneficial.
- On Maturity, you get the Basic Sum Assured plus the accrued bonuses.
- Income Tax Benefits: The premium paid qualifies for deduction under Section 80C of the Income Tax Act. You must pay the premium for at least two years otherwise the tax benefits under Section 80C will be reversed.
- Maturity amount is exempt from tax if the annual premium is less than 10% of basic Sum Assured. With New Jeevan Anand, this won’t be a problem.
- There is a rider for Accidental Death and Permanent Disability that you can purchase for payment of additional premium. However, most term life insurance plans offer these riders.
- If you want to surrender the plan for any reason, there is a heavy penalty involved. You won’t get anything back if you have paid the premium for only two years. In the third year, you will get only 30% of premium paid and accrued bonuses. You can make the policy paid up after you have paid the premium for three years.
What are the problems with Jeevan Anand?
- Inadequate Insurance: Any insurance product must first provide adequate insurance. For a 30-year old, the annual premium for Rs 50 lacs cover comes out to Rs 2.21 lacs. You can check out LIC Premium calculator on your own. There are two questions that you need to answer. Is Rs 50 lacs enough? Can you afford Rs 2.21 lacs per annum?
Whether Rs 50 lacs is enough to take care of your family is something you need to decide. Try out life insurance calculator if you have any doubts.
Moreover, you need to see if you can afford such high premium. Your premium affordability does not determine your life insurance requirement.
Ideally, you must determine the life insurance cover you need and subsequently purchase a plan that you can afford. Unfortunately, most of us take the opposite route. We pick up a plan first and choose the premium that we can afford and are content with whatever life cover that comes with that premium. Hence, your premium affordability ends up determining your life cover. Sounds stupid, doesn’t it? In fact, that’s how a number of agents start their pitch. “How much do you want to invest?”
If you have only Rs 1 lac to invest per annum, you will settle for a lower Sum Assured (life cover) of say Rs 20 lacs.
On the other hand, if you had opted for a term cover, a 30 year old male could have purchased life cover of Rs 1 crore for an annual premium of Rs 7,000-10,000 per annum. The remaining amount can be used for investments.
For a young family, first get your insurance cover right and then think about investments.
- Low Returns: New Jeevan Anand is a participating plan. You will be fortunate to get returns in the range of 4-6% per annum. Please note the returns are not guaranteed. LIC declares different kind of bonuses every year and these keep getting added to the maturity value. I wouldn’t go deep into mathematical analysis. For the same, you can go through this post. Say No to Traditional Life Insurance Plans. PPF currently offers 7.6% per annum. A mix of term insurance and PPF investments will give better insurance coverage and returns.
The cost structure of traditional plans is opaque. These are like a black box. Difficult to assess the methodology used to declare bonuses. I used the benefit illustration on the LIC website to get an idea of returns for New Jeevan Anand. On the site, if a 30 year purchases a cover of Rs 1 lacs for 35 years, the maturity value shall be Rs 2.81 lacs. Annual premium before service tax is Rs 3,165. Assumed gross investment return is 8% p.a. If you calculate the internal rate of return, the return comes out to 4.61% p.a. You can see the return of 8% on invested funds gives you a return of only 4.61%. Hope you get the idea about the heavy cost structure. If you had opted for Sum Assured of Rs 10 lacs, the return would have been slightly higher at 5.07% p.a.
- Exit is difficult: If you want to exit the plan for any reason, you will have to pay a heavy penalty, at least in the initial years. In fact, if you surrender after paying the premium for two years, you won’t get anything back. In the third year, you would get only 30% of premium paid and accrued bonuses back. If you have paid premium for at least 3 years, you can make the policy paid up. If you have an existing traditional life insurance and are not sure what to do, go through this post. Life Insurance: Continue or Surrender or Paid-up
- Marketing Gimmicks: Offering 125% of Basic Sum Assured is a pure marketing gimmick. So, if the Basic Sum Assured is Rs 50 lacs, LIC will pay the beneficiary at least Rs 62.5 lacs in the event of death during the policy term. Bonuses will be extra. Please note payment of bonuses will be linked to Basic Sum Assured only. After the expiry of the policy term, the beneficiary gets only Basic Sum Assured in the event of the death of the policyholder. Such small things make for an excellent sales pitch. You are paying a premium for Rs 50 lacs and getting cover for Rs 62.5 lacs. Risk underwriting teams are smart enough to price the product accordingly.
- Coverage after the Policy Term: I agree the feature of life cover even after expiry of policy term is good. But if you have planned your investments well, there is no need for life cover after term expiry.
You need to go back to the basic question why you need life insurance in the first place. You purchase life insurance to bridge the gap between your net worth and the amount required to meet all your financial goals and liabilities. Suppose you are 30. I would expect that by the time you retire, you would have already bridged the gap. Once you have the money to meet all your financial goals and liabilities, you don’t need life insurance anymore. In such cases, I would suggest you invest to increase your net worth rather than paying life insurance premium.
Book Suggestion: How to Retire Rich: Invest Rs 40 a day? (P V Subramanyam)
When can plans such as New Jeevan Anand come in handy?
Term insurance is the cheapest form of life insurance. Under term insurance, you purchase pure life cover. There are no investment benefits.
However, if you have an ailment that jacks up your annual life insurance premium by a significant amount, you may find term life insurance plans a bit too expensive. In some cases, the insurer may even decline to issue the policy altogether.
Under the amended Insurance Act, life insurance companies cannot reject claim if your insurance plan is 3 year old. Therefore, you can expect life insurance companies to be extra careful in issuing high Sum Assured term policies now.
Packaged insurance products (such as traditional plans or ULIPs) follow relaxed underwriting norms. So, in such cases, you may find it easier to purchase insurance traditional insurance plans or ULIPs. I am not saying you will get these plans easily or without any medical tests. Just that you will find it easier to get covered under LIC New Jeevan Anand than a pure term plan.
I have no special dislike for LIC New Jeevan Anand. In my opinion, you must stay away from any traditional life insurance plan. New Jeevan Anand simply happens to be a traditional life insurance plan. I picked up the plan for review because I thought this is one plan most of the readers would relate to. And LIC is not the only one offering such policies. Even private insurers such as ICICI Prudential offer such plans. You must stay away from all such plans.
In general, keep your insurance and investment needs separate. Purchase a term life cover for your life insurance needs. Term Insurance remains the best form of insurance. It provides you adequate life cover at a low cost. For your investment needs, you can pick up something based on your investment horizon and risk appetite. For instance, for long term goals, equity mutual funds will be best suited. Alternatively, if you are not comfortable with mutual funds, you can look at PPF. A combination of term plan and PPF gives you all the tax benefits of a traditional insurance plan. Moreover, the combination will provide you better life cover and investment returns.
I do not deny I have a bias against these traditional insurance plans such as New Jeevan Anand. I have tried to explore if these plans can add value to your insurance and investment portfolio but I have never been able to see any value in traditional life insurance plans. New Jeevan Anand is no different.
What do you think?