If you purchase a product that provides poor/inadequate returns, you will get poor returns.
If you purchase two of those products, you will still get poor returns.
Or is there a chance that you can get good returns?
There is no chance.
2+2=4, and not 5 (unless you believe in magic)
Therefore, if you bundle two or more low return traditional life insurance plans, you will still get low returns.
The unfortunate part is that many insurance agents do that. The fancy presentations can sweep you (and your apprehensions) away if you do not dig deeper.
LIC Retire and Enjoy is a prime example.
Do note it is not a plan by LIC, It is a product that has been structured by LIC agents.
Essentially, you will end up purchasing multiple LIC New Jeevan Anand or LIC New Endowment Plans. So, you may feel that you are purchasing a single product. However, you are buying multiple products with varying maturities.
By the way, LIC Retire and Enjoy is not the only product. You can structure many different products in similar fashion. I have heard about LIC Kanyadaan plan. Simply by looking at the name, I believe the policy maturity will coincide with the time your daughter turns major.
A few weeks back, I got a comment from a reader, where he was presented with a similar bundled structure of multiple LIC plans.
I copy the comment (policy details) verbatim:
Entry Age: 41 yrs (Apr 2018)– New Jeevan Anand
Below are the Policy Break-up details as provided by Agent:
Age:57 –> Term-15 yrs –> Premium: 17334, Total Pay: 266250
SA 2 Lac –> Maturity Amt:3,27,000 + 2 lac + 2 lac
Age:60 –> Term-19 yrs –> Premium: 13473, Total Pay: 262047
SA 2 Lac –> Maturity Amt:3,81,000 + 2 lac + 2 lac
Age:62 –> Term-21 yrs –> Premium: 12111, Total Pay: 260316
SA 2 Lac –> Maturity Amt:4,25,800 + 2 lac + 2 lac
Age:64 –> Term-23 yrs –> Premium: 11013, Total Pay: 259251
SA 2 Lac –> Maturity Amt:4,75,400 + 2 lac + 2 lac
Age:66 –> Term-25 yrs –> Premium: 10092, Total Pay: 258202
SA 2 Lac –> Maturity Amt:5,35,000 + 2 lac + 2 lac
Age:68 –> Term-27 yrs –> Premium: 9337, Total Pay: 257979
SA 2 Lac –> Maturity Amt:5,98,600 + 2 lac + 2 lac
Age:70 –> Term-29 yrs –> Premium: 8691, Total Pay: 257918
SA 2 Lac –> Maturity Amt:6,66,200 + 2 lac + 2 lac
A bit about LIC New Jeevan Anand
At maturity, you get
Sum Assured + Vested Simple Reversionary Bonuses + Final Additional Bonus, if any
Life cover continues even after policy maturity i.e. Sum Assured is paid in the event of death after policy maturity.
How do you interpret the data?
Age:57 –> Term-15 years –> Premium: 17334, Total Pay: 266250
SA 2 Lac –> Maturity Amt:3,27,000 + 2 lac + 2 lac
Policy term of 15 years, annual premium: Rs 17,334, Sum Assured: Rs 2 lacs
Maturity amount: Rs 3.27 lacs (through bonuses) + Rs 2 lacs (Sum Assured) +Rs 2 lacs (this is a trick)
What is the trick?
The second Rs 2 lacs is for death after maturity. Clearly, nobody knows when they are going to die. Therefore, it is wrong to assume that this Rs 2 lacs will also be paid at the time of maturity. This is clearly incorrect representation.
What are the returns like?
Therefore, I adjusted the numbers and calculated the returns without accounting for the death benefit.
As you can see, the returns are quite good for a debt product. You must also consider that these plans provide life coverage too, in which case the returns are excellent.
But, haven’t we discussed many times before that traditional life insurance plans provide poor returns?
Where is the catch?
The catch lies in the value of bonuses.
Maturity Amount = Sum Assured + Bonuses
The Sum Assured is Rs 2 lacs for each of the policies.
So, if there is a problem, it has to be with the value of the bonuses.
Bonuses are not guaranteed and are announced by LIC every year.
Bonuses = Vested Simple Reversionary Bonus + Final Additional Bonus
Simple Reversionary Bonus is announced every year but paid at the time of policy maturity. Simple Reversionary Bonus depends on the policy term.
Final Additional Bonus is announced in the year of maturity/death.
I checked the Simple Reversionary Bonus for LIC New Jeevan Anand for FY2018. It ranged from Rs 41 to Rs 49 per thousand Sum Assured.
Let’s be optimistic and assume that the Simple Reversionary Bonus for the entire policy term is Rs 50 per thousand Sum Assured. This translates to Rs 10,000 per annum (Rs 2 lacs/1000 X 50) on Sum Assured of Rs 2 Lacs.
In that case, for the 15-year term policy (first policy), total Reversionary Bonus will be Rs 1.5 lacs (Rs 10,000 X 15).
For you to get a total bonus of Rs 3.27 lacs (as mentioned in the comment), Final Additional Bonus must be Rs 1.77 lacs. That means FAB of Rs 885 per thousand of Sum Assured.
I have calculated the implicit FABs for other policies too.
Must say the value of FABs is extremely optimistic. FAB is applicable only in the year of maturity.
Therefore, it is unfair to assume a very high value for a one-time item. What if the FAB is low in the year of demise/maturity?
Final Additional Bonus (FAB) increases with policy term and Sum Assured. However, it is unlikely to be as high as assumed in this plan presentation.
I searched for FAB values for previous years on LIC website. Couldn’t find. Found such details on a website (http://insurancefunda.in/lic-bonus-rates-2017-2018/)
I do not vouch for the authenticity but I used a couple of online calculators and the maturity values were in line with the FAB values on the aforementioned site.
I reworked the numbers with these new values of FAB
Now, the return of 5.08% p.a., as you can see, is more in line with what we see with traditional life insurance plans.
You may argue that, in case of LIC New Jeevan Anand, the life cover continues even after policy maturity. Fair enough.
All the 7 policies have a life cover (Sum Assured) of Rs 2 lacs.
Let’s assume the policyholder passes away immediately after the maturity of the last policy. In such a case, the policyholder would have received all the amounts as mentioned in the above image.
Additionally, the nominee will get Rs 14 lacs (Rs 2 lacs x 7) at the time of the death of the policyholder. Even with this, the return rises up to 6.86% p.a. (and the policyholder has to die).
Therefore, good returns in the presentation were a result of very optimistic (impractical) assumptions about bonuses.
Points to Note
- No matter how you spin it, two or more low return products can combine to give you only a low return product. This is a fact.
- A salesperson can present the information in various ways to avoid any reference to returns.
- Since the maturity amount depends on the value of the bonuses assumed, an agent can assume very high values (that you won’t get) to show you a good return.
- You need to ask your agent if the bonus has been that high for LIC New Jeevan Anand for the previous years. In fact, you can ask him to reproduce the data about past bonuses. And be prepared for excuses and roundabout answers.
- It would have been fine if they had shown the numbers with reasonable assumptions. However, making a presentation with almost impossible assumptions is wrong.
- I have been critical of the traditional life insurance plans. Such plans are opaque and provide low life cover and poor returns. I have reviewed many plans from LIC in my blog posts. It is not that other life insurance companies do not have such poor products in their portfolio.
- However, most of us trust LIC more than any other insurance company. It is our faith in LIC that is exploited by the agents. These bundled plans can sell only easily when LIC plans are being bundled. I doubt any attempt to bundle plans from other insurance companies will be as successful.
- I have nothing against LIC agents either. I can’t fault them for selling something that LIC makes and that people want to buy. However, if agent indulges in misrepresentation as discussed above, it is better to avoid such advisors.