It’s that time of the year when you have to submit the Investment Proofs (Tax saving investments) to your employers. It is also the right time for some Life Insurance / Financial advisors to mis-sell financial products.
Recently LIC of India has launched a new plan called, LIC Limited Premium Endowment plan. Without any doubt, this plan is creating quite a buzz in the market. The unique selling point (feature) of this plan is “pay premiums for limited period and get risk coverage for the entire policy term.”
Let’s do the calculations and analyze the returns of LIC Limited Premium Payment Endowment Plan. Let’s find out what this plan has to offer, high returns or low returns??
Limited Premium Paying Terms:
As I said, the main feature of this plan is Limited paying term. For example, if you opt for 21 years policy term and 8 years as PPT (Premium Paying Term) then you need to pay the premiums for 8 years only. The risk coverage will be available till the maturity of the policy (i.e., 21 years).
This plan offers the following options with respect to Policy Terms and Premium Paying Terms.
- Policy Term as 21 years and PPT as 9 years
- Policy Term as 21 years and PPT as 8 years
- Policy Term as 16 years and PPT as 9 years
- Policy Term as 16 years and PPT as 8 years
- Policy Term as 12 years and PPT as 9 years
- Policy Term as 12 years and PPT as 8 years
Now that you are clear with Policy term and PPT, let us analyze the Returns on Limited Payment Endowment Plan.
Returns of LIC Limited Premium Endowment plan
Let us consider an example, MR Gupta (35 years) wants to invest in LIC’s new plan Limited Premium Payment Endowment policy. He is not clear as to which is the best combination (policy term and PPT). He wants to calculate return on investment under various combinations of Policy and Premium Paying Terms. (Click on the below image to open it in a new browser window).
If Mr Gupta opts for Policy term of 12 years and PPT as 9 years, premium is Rs 31,021. Under this option he has to pay the premiums for 9 years. In the beginning of 13th year he may receive the maturity benefit of Rs 4.5 Lakh ( inclusive of Sum Assured, accrued bonuses and final additional bonus). The expected return on his investment is around 6%.
Like wise, Mr Gupta will get returns in the range of 6% to 7% under different options of LIC limited Premium endowment plan.
- The returns are very much dependent on the bonus rates ( Simple Reversionary and Final Additional Bonuses) that LIC declares every year.
- I have assumed SRB and FAB (provided in the above table) based on LIC’s bonus rates for 2014-2015.
- Generally LIC do not pay FAB on policies that have less than 15 years as the term. So, we need to wait till next year to know the actual bonus rate for a plan which has 12 years as Term. But I have considered 2 % of SA as FAB.
I am sure you are now very clear on how much returns can we expect from these kind of endowment policies. Returns of 6% to 7 % that too over a period of 12 to 21 years sounds very low for me. Kindly be aware of financial products before you buy. Let me know your views. Do share your comments. Cheers!
(You may like visiting my post on “LIC Limited Payment Endowment Plan – Features & Graphical Presentation”)