LIC New Jeevan Shanti (Plan 858): A New Deferred Annuity plan from LIC: Review

LIC has launched a new deferred annuity plan, LIC New Jeevan Shanti (Plan 858).

This replaces their existing deferred annuity plan, LIC Jeevan Shanti (Plan 850).

A brief background. LIC Jeevan Shanti had started as both immediate and deferred annuity plan in 2018. Its immediate annuity variant was withdrawn in August 2020  with the launch of LIC Jeevan Akshay VII. Now, with the launch of LIC New Jeevan Shanti (Plan 858), even the deferred annuity variant will be phased out.

Hence, as an investor, if you are looking to purchase an annuity plan from LIC, you have the following options.

1. If you want an immediate annuity variant: LIC Jeevan Akshay VII (Plan 857)
2. If you want a deferred annuity variant: LIC New Jeevan Shanti (Plan 858)

In this post, let us find out more about LIC New Jeevan Shanti plan.

To give a background about annuity products, I will reproduce some parts from my post on LIC Jeevan Shanti in this post.

What is the difference between an immediate annuity and a deferred annuity plan?

Under an immediate annuity plan, you pay a lump sum amount once and the insurance company pays you a pension for life. It does not matter how long you live. The insurance company will pay you a pension for life.

Not just that, it pays you the contracted rate of interest for life (irrespective of how the interest rates move in the future). Therefore, the insurance company does not only assume the longevity risk but also the interest rate risk.

An annuity plan is a good way to cover longevity risk. By purchasing an annuity plan, you can guarantee yourself an income stream for life.

LIC Jeevan Akshay VII is an immediate annuity plan.

Under a deferred annuity plan, you make payment to the insurance company (in form of a single premium or regular premium). The money gets invested as per the investment mandate of the plan. At the end of deferral period, the accumulated corpus is used to purchase an immediate annuity plan.

Therefore, the income stream starts at the end of deferment period.  The quantum of regular income will depend on the returns earned on your investments, your age, deferral period, annuity variant and the prevailing annuity rate.

LIC New Jeevan Shanti is a variant of deferred annuity plan. It is a single premium plan i.e. you must pay premium just once. You can defer annuity for up to 12 years. The return on your investment is guaranteed and you are also guaranteed the annuity rate at the end of deferral period. Therefore, there is no uncertainty involved. You know upfront how you will get every year after the end of deferral period.

LIC New Jeevan Shanti comes in 2 deferred annuity variants.

LIC New Jeevan Shanti (Table 858): Review and Salient Features

1. Single Premium Deferred Annuity Plan
2. There is no WITHOUT return of purchase price variant. Both the variants involve payment of death benefit to the nominee.
3. Minimum Entry Age: 30 years, Maximum Entry Age: 79 years
4. Minimum Vesting Age: 31 years, Maximum Vesting Age: 80 years (Vesting age is the age at which annuity starts)
5. Minimum Deferment Period: 1 year, Maximum Deferment Period: 12 years subject to maximum vesting age
6. Minimum Purchase Price: Rs. 1.5 lakhs subject to minimum annuity restrictions as specified below. Lower minimum purchase price for differently abled.
7. Maximum Purchase Price: No Limit
8. Available in 2 options: Deferred Annuity for Single Life, Deferred Annuity for Joint Life
9. The Joint life annuity plan can be taken between two lineal ascendants/descendants of a family (Grandparent, parent, children, grandchildren) or spouse or siblings. In case of joint life, the age limits shall apply for both lives (annuitants).
10. Pension Payment Frequency: Monthly, Quarterly, Half-yearly or Annual pension.
11. Minimum Annuity: Monthly (Rs 1,000 per month), Quarterly (Rs 3,000 per quarter), Half-yearly (Rs 6,000 per half-year), Annual (Rs 12,000).

12. Loan facility is available after 3 months. The loan amount can be up to 80% of the Surrender value.
13. The plan can be purchased both online and offline modes. You get 2% rebate on buying policy online. Additionally, there is incentive for higher purchase price. (discussed later)
14. GST at 1.8% is applicable on the purchase amount. If you want to invest Rs 10 lakh, you will have to pay Rs. 10.18 lac (prevailing GST rate for annuities is 1.8%)
15. No medical examination is needed at the time of purchase.
16. Surrender option is available

You can visit LIC’s website for more information.

LIC New Jeevan Shanti: Interest Rate (Annuity Rate)

The interest rate (annuity rate) depends on your age and the annuity variant. In case of joint life plans (where the spouse or any other family member), the annuity rate will also depend on the age of the second annuitant.

Annuity rate usually increases with the entry age of the investor. However, this may not hold for deferred annuity plans such as LIC New Jeevan Shanti.  Please refer to the section “The Strange thing about LIC New Jeevan Shanti” later in the post.

Annuity rate will increase with the increase in deferral period.

LIC website does not yet have sample rates. Hence, do not have data points.

The sales brochure has an illustration. Reproduced below.

Points to Note

1. GST at 1.8% is applicable on the premium. Hence, to get the benefit as mentioned above, the investor will have to pay Rs 10.18 lacs (and not Rs 10 lacs).
2. The pension (annuity) will start after the end of the deferment period. Since the pension is paid in arrears, you will get your first pension payment 13 years after your purchase (yearly payments). If you opted for a monthly pension, you would get the first pension payment after 12 years and 1 month.
3. You will get pension for life. You may go on to live till the age of 100 years or even 150 years. LIC will continue to pay interest as per above rates. The interest rate will not change.
4. If you buy LIC New Jeevan Shanti plan online, you will get 2% more pension. If a 45-year-old person invests Rs 10 lacs in option 1, he will get an annual pension of Rs 99,400 every year (after the end of the deferment period). If pays online, he will get 2% more i.e. he will get an annual pension of 99,400 * 102% = Rs. 101,388 per annum.
5. There is a minor incentive if you invest a big amount. I am not sure if the illustration above has accounted for the incentive for high purchase price.
6. Assuming the illustration does not account for the high purchase price, if you invest 10 lakh rupees, then you will get a pension of Rs. 101,500 per annum instead of Rs 99,400. As you can see, the pension is higher by Rs 1,500 per annum (2.1 * 10 lacs/1000).
7. If you invest a big amount online, you will get the benefit of both High Purchase amount and online purchase.

LIC New Jeevan Shanti (Plan 858): Death Benefit

In immediate annuity plans, death benefit calculation is simple.

If you have bought the variant WITHOUT return of purchase price, nothing is paid in the event of demise of the policy holder.

If you have bought the variant WITH return of purchase price, the nominee gets the purchase price in the event of demise of the policy holder.

The calculation of Death Benefit in the Deferred annuity plan has to be slightly complicated.

Why?

Because, under the deferred annuity variant, you do not get anything till the end of the deferral period. Therefore, if the demise of the annuitant were to happen during the deferral period, the nominee shall get at least a bit more than the purchase price. Makes sense, right?

Thus, LIC calculates the Death Benefit as follows:

Higher of A and B, where

A= Purchase Price + Accrued Additional Benefit on Death – Total annuity amount paid till the date of death

B=105% of Purchase Price

In case of the joint-life variant, the death benefit is payable only after the demise of both the annuitants.

How is Additional Benefit on Death calculated?

Additional Benefit on death accrues at the end of each policy month, until the end of deferment period or death, whichever is earlier.

Additional Benefit on Death per month = Purchase price * Monthly tabular annuity rate

Monthly tabular annuity rate shall depend on the variant chosen, age of annuitants at the time of entry and the deferment period opted for. Monthly tabular annuity rate = (Annual Annuity Rate * 96%)/12.

Therefore, if the death were to happen during the deferment period, your nominee will get Purchase Price + Accrued Additional Benefit on Death (since no annuity payments have been made yet).

Death benefit will rise during the deferment period and start going down as annuity payments start.

You can opt to receive Death Benefit in the following 3 ways (You will opt, but your nominee will receive):

1. Lumpsum
2. Use the death benefit to purchase an immediate annuity plan.
3. Receive the benefit in 5, 10 or 15-year installments (monthly, quarterly, half-yearly or annual). The interest rate for calculation of such installments shall be 10-year GSec rate – 200 basis points. This is likely a bad option.

LIC New Jeevan Shanti: Option 1 (Deferred Annuity for Single Life)

Pension Benefit: No pension till the end of deferral period. After the end of deferment period, the investor will get pension for life. 

Death Benefit: The nominee will get the death benefit. Calculation as mentioned above

Maturity Benefit: Not applicable

Surrender Benefit: Permitted

Loan Option: Available

Illustration

The sample annuity rates are not available on LIC website yet. Hence, I use the data from an illustration shared in the brochure.

A 45-year-old person invests Rs 10 lakh in Option 1. The total outgo will be Rs 10.18 lacs (inclusive of GST). Deferment period chosen is 12 years.

You will not get anything for the first 12 years.

After the end of deferment period (12 years), you will get this pension of Rs 99,400 per annum for life. Had you chosen monthly annuity option, you would have received Rs 7,952 per month for life (after the end of deferment period).

Every month till the end of deferment period, addition benefit on will accrue to your policy at the rate of (99,400*96%)/12 = Rs 7,952.

Therefore, if the death happens after 10 years (before the end of deferment period), the nominee will get Rs 10 lacs + 120 months * 7,952 = Rs 19.54 lacs.

If the annuitant survives the deferment period, the policy would have accumulated additional benefit on death worth Rs 11.45 lacs.

If the investor passes away at the age of 70 (let’s say), the investor would have got annuity payments for 13 years. At the time of demise of the annuitant, the nominee will get

Rs 10 lacs + Rs 11.45 lacs (accrued additional benefit) – 13*99,400 (annuity payments already made) = Rs 8.52 lacs

LIC New Jeevan Shanti: Option 2 (Deferred Annuity for Joint Life)

The only difference between Option 1 and Option 2 is that, under Option 2, the pension continues to the second annuitant too. And death benefit is payable only after both the annuitants have passed away.

The second annuitant could be spouse, sibling or any lineal ascendant or descendant (grandparents, parents, children, grandchildren).

 Additionally, the annuity rate will also take the age of the second annuitant into account.

Pension Benefit: No pension till the end of deferral period. After the end of deferment period, the investor will get pension for life. After the demise of the investor, the second annuitant will get the same pension for life. If the second annuitant predeceases the investor, the pension will stop after the demise of the investor.

Death Benefit: Death benefit is payable only after both the annuitants have passed away. The calculation of death benefit is same as under Option 1.

Maturity Benefit: Not applicable

Surrender Benefit: Permitted

Loan Option: Available

Illustration

I use the same illustration as available in the sales brochure.

A 45-year-old person invests Rs 10 lakh in Option 2. The total outgo will be Rs 10.18 lacs (inclusive of GST). Deferment period chosen is 12 years.

The second annuitant’s age is 35. The second annuitant’s age also affects your annuity rate.

The annuity rate will be (deferred annuity, 12 years) is 99,400.

You will not get anything for the first 12 years. After the end of deferment period (20 years), you will get this pension of Rs 94,100 per annum for life. 

After you, the second annuitant (spouse/relative) will get pension for life. If second annuitant dies before you, the pension will stop after your demise. The nominee will not get any pension.

Every month until the end of deferment period, additional benefit on death will accrue to your policy at the rate of (94,100*96%)/12 = Rs 7,528.

In this case, the death benefit is payable to nominee once both the annuitants die.

Therefore, if the last surviving annuitant passes away after 10 years (before the end of deferment period), the nominee will get Rs 10 lacs + 120 months * 7,528 = Rs 19.03 lacs.

If any of the annuitants survive the deferment period, the policy would have accumulated benefit (including purchase price) worth Rs 20.84 lacs.

If the last surviving annuitant passes away 13 years after the end of deferment period, the investor would have got annuity payments for 13 years. At time of demise, the nominee will get

20.84 lacs (Purchase price + Accrued Additional Benefit on Death) – 13* 94,100 (annuity payments already made) = Rs 8.6 lacs

LIC New Jeevan Shanti: Tax Benefits

Investment under LIC New Jeevan Shanti plan is eligible for tax benefit under Section 80CCC. Benefit under Section 80CCC comes under the overall limit of Rs 1.5 lacs under Section 80C.

The annuity income (pension income) is taxable at your income tax slab rate.

How to buy LIC New Jeevan Shanti?

You can buy this plan by going to LIC branch or with the help of an LIC agent.

You can also buy LIC New Jeevan Shanti plan Online. You have to go to the LIC website. 

The Strange thing about LIC New Jeevan Shanti

Ideally, with annuities, you would expect the annuity rate to increase with age.

However, that may not be the case with deferred annuity products.

Why?

I think this is because there is death benefit involved. The death benefit is dynamic and will be greater than the purchase price, at least during the deferment period.

Death benefit = Purchase price + Accrued Additional Benefit on Death – Annuity payments already made.

Additional Benefit on Death, in turn, depends on the annuity rate.

Therefore, death benefit will initially go up with time (till the end of deferment period). Thereafter, it will come down as the annuity payments are made.

If the annuitant were to die early, the insurer has to make a significant pay-out (death benefit). Clearly, the insurance company will prefer if the pay-out does not happen soon.

And the chances of an older man dying soon are higher. A lower annuity rate for such cases is a good way to lower your outgo (and perhaps good underwriting too).

I believe this is the reason why annuity rates in deferred annuity variants may go lower with age (if your entry age is beyond a certain threshold).

LIC website does not yet have the sample annuity rates to support this argument. Hence, we shall see.

Should you invest in Annuity plans?

An annuity plan is perhaps the only investment product that I like from insurance companies. Yes, there are merits and demerits of every product. However, there can be a gap (or risk) in your financial planning that only an annuity plan can fill.

Yes, there are merits and demerits. The following post covers such aspects in detail.

Retirement Planning: When to Buy an Annuity Plan?

Therefore, not everybody must purchase an annuity plan.  Product suitability is important.

You must purchase the RIGHT variant at the RIGHT age.

You can also use annuity strategies to increase income and reduce risk.

Retirement Planning: How Staggering Annuity Purchases can help increase income and reduce risk?

Should you invest in LIC New Jeevan Shanti?

Now, LIC New Jeevan Shanti is a deferred annuity plan.

The deferred annuity plans are a bit complex. Personally, I am inclined towards immediate annuity plans (such as LIC Jeevan Akshay VII). That too without return of purchase price variant. Of course, that needs to be done at the right age.

As an alternative to a deferred annuity plan (such as LIC New Jeevan Shanti), you could have invested for 10 years (or deferment period chosen by you). And at the end of such deferment period, you could have used the proceeds to purchase an immediate annuity plan. And not just immediate annuity, you retain an option to explore other retirement income products such as Pradhan Mantri Vaya Vandana Yojana (PMVVY) and Senior Citizens Savings Scheme (SCSS).

Let’s assume you are 50 years old. You need cashflow once you retire at the age of 60.

Assuming you want to take annuity route to generate cashflows, you have two options.

1. Purchase deferred annuity (LIC New Jeevan Shanti) today with deferment period of 10 years
2. Invest the amount somewhere. After 10 years, sell the investments and use the proceeds to purchase an immediate annuity plan (LIC Jeevan Akshay VII). Alternatively, you can invest in retirement income products such as PMVVY and SCSS.

Both approaches should have merits and demerits.

Approach 1: LIC New Jeevan Shanti, as the name suggests, give you shanti. You invest once. You know upfront what you will get for life. No uncertainty.

Approach 2: It gives you potential for higher income. At the same time, you can completely mess up your investments during the next 10 years. Annuity rates might move down (or move up) over the next 10 years. Hence, a lot of uncertainty.

Depends on what you are comfortable with.

I am inclined to work with Approach 2 (but I am biased too). However, my answer can change depending on case specifics.

Many investors might find merit in LIC New Jeevan Shanti because of the certainty it offers.

I trust your judgement.

Do not fall for mis-selling in LIC New Jeevan Shanti

While LIC New Jeevan Shanti is a fine product, mis-selling can happen in good products too.

For instance, in the illustration given above, you (45-year old) might be told that you will get 9.94% p.a. if you invest. The fact that the payment will start after 12 years can be ignored. Don’t fall for this.

I covered this aspect for LIC Jeevan Shanti in one of the posts.

If you plan to invest in LIC New Jeevan Shanti, keep this aspect in mind.