LIC - JEEVAN VARSHA

LIC recently came up with a product named as Jeevan Astha and the product was marketed as providing 10% guaranteed returns. Many people fell prey to this gimmick and invested heavily in it. The yield (returns) on this product when calculated came to about 7.5%. Though the premium was tax exempt under section 80C, LIC never clarified on the taxability of the returns on maturity (under section 10 10(D)). As per Para 10.3 of (CBDT) Circular No. 7/ 2003 dated September 5, 2003 the returns will be taxable which changes the dynamics of the game and one would have been better off investing in PPF getting 8% and that too tax free!!

In this article I am trying to analyze the newly launched product – Jeevan Varsha (http://www.licindia.com/Jeeva_varsha_features.html) so that one can make an informed decision. This product is a special product and is available only till March 31, 2009.

Taxability Issues
This product qualifies for tax exemption under section 80C and 10 10(D)

Key Features
Policy Term : 9 years & 12 years
Premium Paying Term: 9 years

Survival Benefits

For 9 Years Policy Term

• 15% of the Sum Assured is payable at the end of 3 years
• 25% of the Sum Assured is payable at the end of 6 years
• 60% of the Sum Assured is payable together with Guaranteed Additions, and Loyalty Addition, if any, at the end of 9 years.

For 12 Years Policy Term

• 10% of the Sum Assured is payable at the end of 3 years
  
• 20% of the Sum Assured is payable at the end of 6 years
  
• 30% of the Sum Assured is payable at the end of 9 years
  
• 40% of the Sum Assured is payable together with Guaranteed Additions, and Loyalty Addition, if any, at the end of 12 years.

Death Benefit
In case of death of the life assured during the policy term, the full sum assured is payable irrespective of the survival benefits paid earlier.

• On death during the policy term excluding last policy year: Sum Assured with accrued Guaranteed Additions
  
• On death during last policy year: Sum Assured with accrued Guaranteed Additions along with Loyalty Addition, if any

Guaranteed Addition
The policy provides for Guaranteed Addition at the following rates:

• Rs. 65 per thousand Sum Assured per year for a policy of 9 years term
  
• Rs. 70 per thousand Sum Assured per year for a policy of 12 years term

Returns Analysis
This section analyses the returns for a Life Assured of age 35, the premiums and the benefits are as taken from LIC website (http://www.licindia.com/jeevan_varsha_benefits_illustration.html).

This policy could be split into a Term Plan and a simple Investment Plan. For analysis I remove the premium of Term plan that one would have paid from the premium paid in Jeevan Varsha and measure the returns This product is made complex as the Death Benefit increases as the term of the plan increase.

As per Amulya Jeevan – I plan of LIC, the annual premium for a life of age 35 is Rs. 2.94 per 1,000 sum assured for a term of 15 years. This rate of Rs. 2.94 is taken for analysis and total premium paid for Term Plan is calculated accordingly which changes every year

For a policy of 12 years term
It is seen in the table below that if we consider the variable benefit, then the returns on premium paid comes to 7.30% and if the benefit is ignored then the returns are mere 4.40%. In the table below "0 year" indicates start of 1st year.

For a policy of 9 years term

It is seen in the table below that if we consider the variable benefit, then the returns on premium paid is 6.33% and if the benefit is ignored then the returns are further reduced to 3.48%.

Conclusion
The Policy returns a percentage of Sum Assured at the end of 3rd, 6th and 9th year. The benefit of which is not available if the Life dies.

Hence, the product is not attractive if the insured dies and hence not a good insurance product

The returns even after considering the variable component is approximately 7.5% which is not guaranteed. Secondly, in a falling interest scenario one would face investment risk of money which is returned in the end of 3rd and 6th year.

Hence, this product is no better than a Debt Fund from an investment perspective.

Its Time to Invest in Equities!!

It has been long argued that Equity is better asset class to beat inflation and performs the best in the long run. This study is a small attempt to see how Indian Equity market has performed till date. I have taken S&P CNX NIFTY values since its inception (July 3, 1980) till December 31, 2008. The data period for the study is 18 years and 6 months. Nifty Index is taken as it is widely followed and also the data is freely and easily available unlike BSE’s Sensex. A similar study could be conducted on Sensex but conclusions would generally remain the same.

NIFTY RETURNS

Chart I show values of Nifty for the period considered. To gain insight into its returns, it is better to see how Nifty has fared in smaller periods viz. monthly or yearly.

Nifty Yearly Returns

Returns analysis has been done for 18 Calendar years starting from January 1, 1991 till December 31, 2008 and is tabulated in Table I.

• Maximum return given in a year is 71.90% in CY 2003
• Minimum return given in a year is -51.79% in CY 2008
• Nifty has given 4 years of consecutive positive returns in CY 91 till CY 94
• Next 8 years of CY 94 till CY 2002 happens to be a consolidation phase with Nifty giving 4 years of negative returns and 3 years of positive phase with 1 year of flat returns. Nifty has given a return of only 0.9250% in this 8 year period
• 4 years of positive returns in period CY 03 till CY 07
• Maximum negative return is -51.79% in CY 08

Nifty Monthly Returns

Analysis has been done for 216 months starting from January 1990 month till December 2008 and the returns are as shown in Chart II

• Maximum returns of 45.82 in the month of February 92
• Minimum return of -22.96 in the month of October 08
• 96 months of positive returns in a period of 222 months
• 13 months of positive returns in 36 month period of CY 91 to CY 94
• 57 months of positive returns in 108 month period of CY 94 to CY 02
• 17 months of positive returns in 60 month period of CY 03 to CY 07
• 9 months of positive returns in 12 month period of CY 08

SIP Investment Returns

People are wary of investing in stock market because of the risk involved, but so called Financial Consultants try to allay this fear by mentioning that the risk is compensated by investing regularly and staying for long term!! This section analyses the returns if an investor invests regularly a same amount at the start of the year say Rs. 1, 000. The results are startling as one would generally expect the returns to consistently beat inflation. Moreover, investments in equity related instruments like ULIPs, MFs and ELSSs are made regularly with the assumption that returns would be in the range of 15% to 20%.

Table II shows the Nifty returns if an investor has invested regularly every year starting January 1991.

• The maximum return that Nifty has given is 68.84% in 1991
• Minimum return is 4.33% in year 2002, meaning an investor who invested regularly every year since 1991 got only 4.33% had she withdrawn the money in December 2002
• Nifty gave a return of less than 5% had the investor withdrawn in years 1998, 2001 and 2002
• Nifty gave a return of only 10.19% if one invested regularly every year for the last 18 starting 1991
• Nifty had given a return of 18.23% till year 2007 but this return decreases to 10.19% as the market fell by nearly 52% in CY 2008. This means that nearly 50% of the value earned in last 17 years was wiped out in a single year of 2008

CONCLUSION

Market Phases

• Two distinct phases of market are observed – Bull Phase and Consolidation Phase
• In Bull phase the market gives positive and exorbitant returns year-after-year
• Consolidation phase in which there is no clear trend observed and the market fluctuates widely with positive and negative returns (year 1995 to 2002)
• In consolidation phase though the market is volatile year-on-year but the return for the whole period is generally low
• Consolidation phase is often followed by Bull phase

Market Timing

As we all know that no one can time the market but it has been observed that the time the investment starts has a very important implication on returns. Investment in the long run suffers if the investment is made in bull phase (we observed in Table II the investments started in year 1991 have given minimum returns of 4% and maximum of 40% - “a wide variation”).

If we change the analysis by starting to invest regularly in the consolidation phase (assuming year 1999) then we observe that the returns are negative till the consolidation is over (year 2002) and in the bull phase it gives returns in excess of 15% as shown in Table III.

CY 2009 has been the worst year in history of Nifty giving returns of -51.79%. Looking at the past pattern this seems to be a start of consolidation phase. When this phase would end cannot be ascertained but investments started at this phase are bound to give good returns when this consolidation phase is over. Hence, this is the time to start investing!! Happy investing!!