LIC Bima Jyoti (Plan 860): Review

LIC has launched a new life insurance plan, LIC Bima Jyoti (Plan 860). LIC Bima Jyoti is a non-linked, non-participating, limited premium payment life insurance plan. Let us review this plan and see if you should invest.

LIC Bima Jyoti (Plan 860): Salient Features

1. Non-linked: It is not a ULIP. It is a traditional life insurance plan.
2. Non-Participating: This means that you will know upfront what you will get at the time of policy maturity. There will be NO confusion. No positive or negative surprises.
3. Limited Premium Payment: Premium payment term is less than the policy tenure.
4. Policy Term: 15 to 20 years
5. Premium Payment Term (PPT): Policy Term – 5 years.
6. For 15-year policy term, premium payment term shall be 10 years.
7. For 20-year policy term, PPT shall be 15 years.
8. Entry Age: 90 days (Minimum), 60 years (Maximum)
9. Sum Assured: Rs 1 lac (Minimum)/No upper limit (Maximum)
10. Age at maturity: 18 years (Minimum), 75 years (Maximum)
11. Loan option available after 2 years.
12. Option to receive Maturity and Death benefit in installments
13. High Basic Sum Assured rebate available

LIC Bima Jyoti (Plan 360): Maturity Benefit

Maturity Benefit = Basic Sum Assured (BSA) + Accrued Guaranteed Additions

You know the Basic Sum Assured upfront.

Guaranteed Additions (GA) accrue to the policy at the rate of Rs 50 per 1,000 of Sum Assured every year (during the policy tenure).

Therefore, if the BSA for the policy is Rs 10 lacs, your policy will accrue Rs 50,000 of GA every year. 50*10 lacs/1000 = Rs 50,000

Note you will NOT get this amount every year.

This will just get accrued to the policy every year and will be paid out at the time of policy maturity and investor demise.

If the BSA is Rs 10 lacs and the policy term is 20 years, the investor will get back Rs 20 lacs at the time of policy maturity. Maturity Amount = 10 lacs + (50/1000) *10 lacs of BSA* 20 years of policy term = Rs 20 lacs.

So, when you buy the policy, you know exactly how much you will get at the time of maturity.

LIC Bima Jyoti (Plan 360): Death Benefit

Death Benefit = Sum Assured on Death + Accrued Guaranteed Additions

Sum Assured on Death is the highest of the following 3 amounts.

1. 125% of Basic Sum Assured
2. 7 times annualized premium
3. 105% of all the premiums paid until date

The calculation of guaranteed additions is the same as in the previous section.

Note that, for maturity proceeds of a life insurance plan to be exempt from tax, the minimum death benefit (Sum Assured on Death) must be at least 10 times the annualized premium.

While I do not yet have access to the premium table for LIC Bima Jyoti, you can see that there is no explicit provision that guarantees tax-free maturity proceeds.  One of the parameters used to determine Sum Assured on Death is 7 times annualized premium. Had it been 10 times annualized premium, you could have been sure that maturity proceeds will be exempt from tax.

So, now you hope than 125% of Basic Sum Assured is at least 10 times the annual premium. If that is not the case, the maturity proceeds will be taxable.

This will not be a problem for younger investors. Sum Assured on Death will be greater than 10 times annual premium.  But, if you are above 50, do check this aspect. The salesperson will not tell you about such issues.

I copy sample premiums from the product brochure.

You can notice the premium for a 50-year old for a 15-year policy term is 1.22 lacs. The premium is for Basic Sum Assured of Rs 10 lacs. For this policy, the minimum death benefit will be Rs 12.5 lacs (125% of BSA). Now, this is just over 10 times the annual premium. As the entry age increases, the premium will increase and the minimum death benefit may no longer be more than 10 times the annual premium. In such a case, the maturity proceeds won’t be exempt from tax.

Keep this in mind

For all the traditional plans, the benefits are linked to the Sum Assured and not the annualized premium.

Let us say a 30-year-old and a 45-year-old buy LIC Bima Jyoti plan with Basic Sum Assured of Rs 10 lacs. Premium payment term:10 years, Policy term: 15 years.

At the time of policy maturity, both will get the same amounts.

Basic Sum Assured + 15 years X 50,000 of Guaranteed Additions per annum = Rs 17.5 lacs

However, will their returns be the same?

No. Why?

Because they must be paying different annual premiums.

The 45-year-old (at the time of policy entry) will pay a much higher annual premium than the 30-year-old. Say, annual premium for 30-year-old may be 80,000 while it could be 90,000 for 45-year-old.

And this will reduce returns for the older investor.

By the way, this is not just about LIC Bima Jyoti. This applies to any traditional life insurance plan and ULIP. Your entry age will affect your returns in ULIPs and traditional plans.

Everything else being the same, an older investor will earn lower returns.

LIC Bima Jyoti (Plan 360): What will be the returns like?

The returns from Non-participating plans are usually quite low. Do not expect anything different from this plan.

I copy the sample premium from product brochure available on LIC website.

Picking up one of the examples for returns calculation.

Entry age: 30 years

Policy Term: 20 years.

Premium Payment Term: 15 years

So, you will pay the premium for 15 years. And get maturity benefit after 20 years.

Basic Sum Assured (BSA): Rs 10 lacs

Annual Premium: Rs 77,790 (includes Accidental death and disability rider too). First year premium shall be Rs 82,290 (including 4.5% GST). Subsequent year premium: Rs 79,540.

What will be the maturity amount?

We already know that. Rs 10 lacs (BSA) + (50/1000) *10 lacs* 20 years = Rs 20 lacs.

That is an IRR (net return) of 3.93% p.a.

That is too low for a long-term investment.

Also, note that these returns are only for a 30-year-old. If the entry age is higher, the premium (for the same maturity benefit of 20 lacs) will be lower.

For instance, if a 50-year old investor were to buy the same plan (20-year policy term) of Rs 10 lacs, he/she will have to pay annual premium (before taxes) of Rs 88,178 (instead of Rs 77,790 for 30-year old). Both end up with the same maturity value of Rs 20 lacs.

Thus, the returns for 50-year old are lower at 2.98% p.a. (instead of 3.93% p.a. for 30-year old).

Should you invest?

The returns are too low for a long-term investment. And if you are looking to add to your insurance cover, buy a simple term insurance plan.

I see limited merit in this plan.

Stay away.

I read a strange illustration about LIC Bima Jyoti in a Financial Express article, where they messed up the premium payment terms and policy terms and showed IRR of 7.15% p.a. Makes little sense. You will not get over 7% p.a. from this plan. That is for sure.