LIC has recently launched a new participating LIC Navjeevan plan in March 2019. It is a non-linked participating traditional life insurance plan.
Regular readers will know that I am not a big fan of traditional life insurance. You get low life coverage and poor returns. By the way, this has nothing to do with LIC. Such plans from private insurers come with similar issues too.
In this post, I will not delve in the various features of the plan. I will briefly touch upon the product structure and comment on why the product structure is the way it is.
Salient Features about LIC Navjeevan Plan (Plan 853)
LIC Navjeevan comes in two variants:
Single Premium Variant: You pay the premium just once. Policy term can range from 10 to 18 years. Available only to investors less than 45 years. Life cover is 10 times Annual Premium.
Limited Premium Variant: You pay premium for 5 years. Policy term can range from 10 to 18 years. Under the Limited premium variant, you have two options when it comes to death benefit.
Option 1: Death Sum Assured = 10 times Annual Premium
Option 2: Death Sum Assured = 7 times Annual Premium (available only if your age at the time of entry is 45 or above)
If your age at the time of entry in the plan is less than 45 years, you can only pick up Option 1 i.e. Sum Assured will be 10 times annual premium.
If your age at the time of entry in the plan is 45 years or above, you can pick either Option 1 or Option 2.
Death Benefit under LIC Navjeevan
If event of death within 5 years from purchase, your nominee gets Death Sum Assured. If the event of death after 5 years of purchase, your nominee gets Death Sum Assured+ Loyalty Benefit, if any.
Maturity Benefit under LIC Navjeevan
You get the Base Sum Assured along with the loyalty benefits, if any. Do note base Sum Assured can be different from Death Sum Assured. Your premium depends on the base Sum Assured. Death Sum Assured is the minimum death benefit you get. Death Sum Assured can affect your return from the plan.
Why this threshold of 45 years under Limited Premium Variant?
For the investors under the age of 45, minimum life cover (Minimum Death Sum Assured) is 10 times Annual premium for regular and limited premium payment plans. This is specified under IRDA Linked Insurance Products Regulations, 2013. Therefore, option 2 cannot be made available to investors under the age of 45 (at the time of entry).
What happens when you pick Option 2?
Everything else being same, an investor will earn better returns under Option 2 than under Option 1.
Why?
This is because you get a lower life cover under Option 2. Therefore, the mortality charges will be lower under option 2. Traditional life insurance plans are opaque and do not give the breakup of various charges. However, be rest assured that returns will be higher under Option 2 than Option 1.
Why would you choose Option 1 over Option 2?
When you know that the returns under Option 2 will be better than Option 1, why would you choose Option 1?
You may choose to go with Option 1 because maturity proceeds from Option 2 are taxable. This will bring down post-tax returns.
Why does this happen?
This happens because life insurance maturity proceeds are taxable if the Death Benefit (Sum Assured) is less than 10 times Annual Premium. With Option 2, the Death Sum Assured is only 7 times Annual Premium.
Everything else being same, you will get better pre-tax returns under Option 2. However, option 2 maturity proceeds will be taxed. Therefore, for all you know, post-tax returns under Option 2 may be lower than option 1.
Do note death benefit is still exempt from tax even under Option 2. This tax rule only applies to maturity proceeds.
What about returns under Single Premium variant?
For single premium plans, death benefit (Death Sum Assured) is 10 times the Single Premium. Since there is just one premium paid and the Sum assured is 10 times that number, a good portion of your investment will go towards mortality charges. Expect returns in the single premium variants to be the lowest under LIC Navjeevan. A saving grace is that single premium variant is not offered to those over 45. The impact of mortality charges (life insurance cover charges) would have been even higher for such investors.
The maturity proceeds will be exempt from tax under Single Premium variant.
The choices and what you should do?
If you are below 45, you have the option of Single Premium variant and option 1 under Limited Premium Variant. Option 2 under Limited Premium Variant not available to you.
If you are 45 and above, you have both the options under Limited Premium variants. Single Premium variant not available to you.
You can expect return ranging from 4% to 7% per annum. The return will also depend on your entry age, choice of variant and the policy term chosen.
The death benefit will be exempt from tax under all the variants.
The maturity benefit will be exempt only for Single premium and Option 1 under Limited premium variant.
Even though all the variants are not available to everyone, expected pre-tax returns would have looked like this in increasing order (if all the variants were available to everyone):
- Single Premium
- Option 1 under Limited Premium
- Option 2 under Limited Premium
I have never been a proponent of traditional life insurance plans. Life cover is not adequate, and the returns are low too. My opinion does not change for LIC Navjeevan. Stay away.
What would you do?