The simplest life insurance policy is the term insurance policy. The terms of this policy are simple – if the insured dies while the policy is effective, the family gets the benefits (sum assured). If the insured does not die, nobody gets anything. Such policies provide high coverage for a low cost and are easy to understand.
However, these policies are not the most popular life insurance policies around.
The most purchased type of life insurance policy is something called the ‘Endowment policy’. The amount of premium that a person has to pay for the same amount of coverage as a term insurance policy is significantly higher in this case, but the insured person gets his money back with some returns – whether he/she lives or dies while the policy is in effect.
And the most popular of such endowment policies is a policy called the “LIC New Jeevan Anand”. It makes a simple, attractive proposition to its policyholders – pay a premium for ‘n’ number of years and get a fixed sum assured PLUS bonus at the end of this period. AND, when the policyholder dies post this period, the family will get the sum assured again. You benefit when you live and your family benefits when, eventually, you die!
Too good a proposition?
We decided to put it to the test.
With simple, conservative assumptions, we compared the LIC New Jeevan Anand with a combination of a term policy and low-risk debt mutual funds.
Is the LIC new Jeevan Anand as attractive as they make it sound? Let’s find out!
Key features of LIC New Jeevan Anand
Before we dive in, let’s first look at the key features of the LIC New Jeevan Anand policy. The formal language to describe it is to call it a “a non-linked, participating, individual, life assurance savings plan”. What this means simply is that the returns are not linked to the markets, and it is linked to the performance of the life insurance company. (You can read more here – How LIC’s bonuses work)
This policy is available for those between 18 and 50 years old (entry age). The Policy term options are 15 years, 25 years, and 35 years. The maximum age at which policy matures should be 75.
As mentioned earlier, there are two key features of this policy:
- A payout after policy term with both fixed and non-guaranteed elements and a life cover during the policy term. Meaning, at the end of the policy term, the insured (assuming he/she is alive) will get the sum assured plus some (non-guaranteed) returns on top of it.
- Continued life cover even after premium payment and benefits payout is completed.
Let’s say a 30-year old opts for the policy for Rs 50 Lakh sum assured and for a 15-year tenure. Here Rs 50 Lakh is the life cover. Let’s see what all benefits the insured is entitled to.
- The Sum Assured: In this example, Rs 50 Lakh is the guaranteed amount that will be paid after the policy tenure of 15 years.
- Bonus: The payment at maturity will also include a non-guaranteed element, called reversionary bonus. This is announced by LIC at the end of each year and is based on the sum assured. This bonus will be added every year and paid out (without any accrued interest) at the end of the policy term along with the Sum assured(mentioned above).
The insured is covered for the entire life for the Sum Assured. This means even after disbursement of the cash benefits mentioned above, the insurance coverage will continue for the entire life of the insured. And when the insured passes away, the sum assured will be paid out to the nominee/family.
So, as we said in the intro, the insured will get cash benefits while he/she is alive, and the family gets the sum assured in the future date when he/she passes away.
It sounds magical, right? Like almost they can’t stop giving you their money!
Let’s do some math and figure out the truth.
How can we replicate these benefits?
With LIC New Jeevan Anand, you get a sum after a fixed period and continue to enjoy a life cover. Let us see if these benefits can be achieved with a pure insurance (term Insurance) to match the life cover offered by LIC New Jeevan Anand and an investment product. A term insurance policy will have lower premiums compared to insurance products with investment components. The difference in premiums can be invested into a pure investment product like a debt fund. The return of this combo can be compared with LIC New Jeevan Anand plan.
Let’s take an illustration of LIC New Jeevan Anand versus a combination of Term Insurance + Investment option for a 30-year old person for a tenure of 15 years, with a sum assured of Rs 50 lakh.
Option 1: LIC New Jeevan Anand
The details of the premium for a 15-year policy for a 30-year old with sum assured of Rs 50 lakh. To estimate the bonus component, we have taken LIC’s last 5 years’ declared bonus and extrapolated it for 15 years. In reality, this component may be much lower (and further decline for longer periods) given the long-term nature of this projection and that it may even change (rather reduce) after LIC gets listed post IPO.
Option 2: Term plan plus debt fund combination
Debt fund returns are calculated considering taxation with indexation. Please note that debt fund taxation has since undergone a change. Indexation benefit will not be available for investments made from April 1, 2023 onwards. You can read about this in our article, ‘Tax changes in mutual funds: How to manage your investments now‘.
Under this option, we considered the same amount paid annually as premium for LIC New Jeevan Anand. The only difference was that a term premium of Rs 10,089 (for a policy of Rs 50 lakh up to age 80) was deducted and only the surplus was invested in a debt fund. This way, we achieved life cover and investment.
(note that we have written later about how even after the age of 80, you can still leave a corpus for your family, just as LIC New Jeevan Anand has a continuing cover).
For the debt fund investment, we considered 8% return (based on the average 5-year returns of gilt funds at 8.13% and corporate bond funds at 8.06%).
The results were as follows:
The data will tell you that the IRR (internal rate of return is nothing but the return from a series of cash flows) on the term plan plus debt fund combo is far higher than that of the IRR from the LIC New Jeevan Anand
- We assume that the investor withdraws the debt amount at the end of 15 years (to match the receipt period under LIC New Jeevan Anand). In reality, an investor may continue to hold and redeem as and when he/she wants.
- The above investment redemption is also done to keep our return calculation conservative - so that capital gains tax (applicable with debt funds) is considered at the end of this 15-year tenure. There will be no tax if it is not redeemed.
Note: A reader pointed out that in case a policyholder dies during the policy period, LIC New Jeevan Anand policy will pay 125% of the sum assured. We decided to incorporate that as well. In this example, this will work out to be Rs 62.5 Lakh. If we increase the term insurance cover to account for that, this will increase the term insurance premium to Rs 12,609 and reduce the debt fund investments to Rs 4,09,571 in the first year and Rs 4,00,481 from the second year to the 15th year. This will change the debt fund’s post-tax corpus after 15 years to Rs 1,12,13,404, with an IRR of 7.08% as opposed to 7.16% calculated with Rs 50 Lakh death benefit.
If we thus increase the term policy to Rs 62.5 lakh and the policyholder dies in say 10 years (in our 15-year policy illustrated), then the IRR for LIC’s New Jeevan Anand would be 12.22% and for that of the term insurance and debt fund combo, it would be 19.17% (including death benefit from term insurance) As you will observe the term policy plus policy combo still works out to be far better.
The table below summarises this return differential for different policy periods - 15, 25, 35 years for different age groups for a sum assured of Rs 50 lakh.
Continuing cover of the LIC New Jeevan Anand policy
Now, this doesn’t end here. We stated earlier that the life cover continues in the LIC New Jeevan Anand plan. That means it will continue even after the 15, 25, 35 year policy term. However, in our term plan plus debt fund option, the life cover is available up to the age of 80.
So, that means you will have term premium outflows until then. So let us extend our illustration further to see where it takes us. In our 15-year policy illustration, we had a corpus of Rs 1,12,83,847 under the term plus debt fund combo at the end of 15 years, post tax. Now, we will remove the corpus equivalent of what you received in LIC New Jeevan Anand - which is Rs 80 lakh - since you may have earmarked it for any goal or for specific investment.
Now, let us allow the remaining corpus of Rs 32,83,847 to grow, with annual withdrawals of Rs 10,089 for term premium for 35 years - that is from age 45 to 80. We reduce our return expectation on such investment into 2 scenarios - 6% and 7%. The table below will tell you how much corpus you have left, at the end of those 80 years.
Yes, your term policy will end at 80. But the benefit is that while LIC New Jeevan Anand will pay your family only Rs 50 lakh (in our example) in the event of your passing away, the corpus accumulated by you (through the term cover plus debt fund combo) at 80 is far higher than that. In other words, having a continuing cover under LIC New Jeevan Anand is not really as attractive as you may have thought it to be.
The data above will not only bring out the low returns in the endowment policy but also the far superior returns in keeping your insurance and investments separate. It also tells you about the benefit of compounding - the earlier you invest, the better the return.
Where most investors get caught is the seeming attraction of ‘getting money in hand’ from an endowment or money back policy, while term insurance provides no such return. What you need to ask yourself is whether the amount diverted to a good investment product can fetch better returns than what an endowment policy can deliver. Also, much of the returns in the LIC policy come from bonuses. Such bonuses may not repeat, as we discussed in an article on how LIC bonuses are calculated.
Note: For policies issued starting 1-Apr-2023, the maturity amount will be taxable if yearly premium exceeds Rs.5 lakh. For more details, see How is your insurance policy taxed?