What the 10% income in LIC Jeevan Utsav policy implies

Experts say the policy is good option for those in the upper tax bracket who want higher annuities for their families. (Mint)
Experts say the policy is good option for those in the upper tax bracket who want higher annuities for their families. (Mint)

Summary

  • The policy only offers subscribers a guaranteed 10% payout of the sum assured annually

New Delhi: Guaranteed income for the lifetime! Sounds enticing, especially when it is from insurance behemoth Life Insurance Corporation (LIC) of India, whose famous tagline in ads ‘jeevan ke saath bhi; jeevan ke baad bhi, has influenced generations to buy a policy. Many of its polices continue to be popular, be it Jeevan Umang or Saral Pension, for its multiple benefits—so much so that many people look forward to its new launches. And with LIC Jeevan Utsav’s launch on 29 November, the insurer created a buzz in investment circles. The reason: 10% guaranteed payouts annually, for the rest of your life. But what exactly does the 10% imply for an investor?

All about the product

Jeevan Utsav is a non-linked, non-participating, savings whole life insurance plan. This implies that the policy payouts are not linked to stock market movements or the company’s profits. The payout though is guaranteed. Also, the policy will be in force for the entire life of the subscriber. And in case of the policyholder’s death, the benefit or proceeds goes to the family.

LIC Jeevan Utsav has a premium payment term (PPT) of 5-16 years.. The deferment period will range from three to six years. It means, in case the PPT is 5 years, the guaranteed income will be given from the 11th policy year onwards. In case of 10 years or 16 years of PPT, the pay-outs will start from the 13th and 19th policy years, respectively.

As for the payouts, the policy offers 10% guaranteed annual income for the lifetime. That, though does not mean 10% annual returns on the investment. This is not the right way to interpret it, say financial experts. What LIC means is policyholders will get 10% of the sum assured as annual income once the payout period starts .

For instance,for a policy with 10 lakh sum assured, the premium works out to 1.1 lakh annually (without goods and services tax, or GST) for a term of 10 years. The guaranteed income will be 1 lakh every year for the lifetime. Do note that the payout will remain constant and no adjustments are made for inflation. To be sure, none of the existing policies from any insurer guarantee this. In the example above, the lifetime pension will continue at 1 lakh even as the purchasing power of 1 lakh will reduce over time.

However, policy subscribers can opt for flexi-income benefit if they prefer to receive the payments in bulk rather than yearly payouts. In this option, policyholders can defer receipt of the payout for a certain period and accumulate 10% of the basic sum assured every year and withdraw it a later period, subject to the terms and conditions of the policy. “LIC shall pay interest on such deferred flexi income payments @ 5.5 per cent p.a., compounding yearly," says LIC in its policy document.

The death benefit in this plan is equal to the sum assured along with accrued guaranteed additions at the rate of 40 per 1,000 basic sum assured at the end of each policy year during the PPT. There will be no further accrual of guaranteed additions after the PPT is over. “The death benefit shall not be less than 105 per cent of total premiums paid up to the date of death. ‘Sum Assured on Death’ is ‘Basic Sum Assured’ or ‘7 times of Annualized Premium, whichever is higher," LIC says in its policy document.

What happens if you stop paying premium in the middle of the PPT? “The policyholder can surrender the policy at any time provided two full years’ premiums have been paid. On surrender of the policy, higher of Guaranteed Surrender Value (GSV) or Special Surrender Value (SSV) shall be payable," says a spokesperson of the LIC. Assume a 10 lakh sum assured policy for 10 years of PPT for a 35-year-old individual. “If the subscriber surrenders the policy immediately after paying the premium for five years, he will receive 285,745," says the LIC spokesperson. Note that the subscriber would have paid more than 5 lakh premium cumulatively during this period.

The real returns

(Graphic: Mint)
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(Graphic: Mint)

While the guaranteed income sounds good, the internal rate of return (IRR) ) in the policy is unflattering. IRR denotes the total returns of inconsistent cash-flows.

Vivek Banka, co-founder, GoalTeller, an investment advisory firm registered with market regulator Sebi, explained that the IRR in such plans will be typically less than 6%. “Assume a 30-year-old healthy male opt for a life cover of 10 lakh for the premium payment term of 12 years. He will get 1 lakh annual income from 15th year onwards. If he receives it till 100 years of age, the IRR will come in at 5.68%," he says. (see graphic).

If we calculate the IRR purely for the investment value in the premium, it will come in at 5.92%, he says. To simplify, premiums in savings life plans have two elements – investment value and mortality charges. A significant chunk of the premium is used to provide the investment value while the insurer deducts a small portion of it as a fee (called mortality charges) to provide the death benefit. It is nearly the same as the premium paid for a pure term plan of the same death benefit.

“While the post-tax IRR is not bad, one will have to block a significant amount of money to run this policy. In a turbulent world like today, people may face an emergency and not be able to pay the premium in the policy. Do you really want to lock in your money in this product that does not offer much flexibility? Other similar products will give you better liquidity," says Suresh Sadagopan, a Sebi-registered investment adviser.

Jeevan Utsav vs others

(Graphic: Mint)
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(Graphic: Mint)

Before you buy an investment product, you must compare it with other similar options available in the market, say financial experts. “We did a like-to-like comparison of LIC Jeevan Utsav with the National Pension System (NPS) and Fixed Deposit (FD)," says Banka.

In the case of NPS, you could accumulate 64.47 lakh by the age of 60 years, assuming annual returns at 10%. While 60% of it can be withdrawn tax-free, the remaining 40%— 25.79 lakh—will be converted into lifetime annuities. As per the annuity calculator available on the Sebi’s website, annuity at the rate of 7% will provide 1.26 lakh assuming lifetime annuities until 100 years of age. The IRR will be 8.92% considering 30% tax rate on annuities. In case of a hybrid fund, it will come to around 10% post-tax over the entire period.

“LIC Jeevan Utsav should be avoided by investors in the low-medium tax bracket as alternatives like fixed deposits and high-quality bonds offer better returns and higher liquidity. Those in the higher tax slabs who want to provide protection and annuity income to their families can explore this option," says Banka of GoalTeller.

It is important to understand the taxability of annual payouts. “In LIC Jeevan Utsav, if the annual premium paid is more than 10% of the sum assured of the policy, the maturity proceeds (survival benefits) would be taxed," says Abhishek Kumar, founder, SahajMoney, a Sebi-registered investment advisory firm.

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