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.