Two New Money Back policies (Table no 820 & Table no 821)were recently launched by LIC (Life Insurance Corporation of India). Let us understand how these plans work and how much returns can we expect from these kind of policies.
What are Money Back Policies?
The money-back policy from Life Insurance companies is a popular type of life insurance. It provides life coverage during the term of the policy and the maturity benefits are paid in installments by way of survival benefits in every 5 years.
LIC’s New Money Back Plans’ Features:
LIC is offering new money back policies in the form of two plans.
The main features of these plans are
- Death benefit: On death during the policy term (provided the policy is in full force), death benefit, defined as sum of “Sum Assured on Death” and vested Simple Reversionary Bonuses and Final Additional Bonus (FAB), if any, shall be payable. Where, “Sum Assured on Death” is defined as higher of 125% of the Basic Sum Assured (SA) or 10 times of annualized premium. This death benefit shall not be less than 105% of the total premiums paid as on date of death.
Death Benefit = Higher of 125% of SA or 10 times of premium) + Yearly Bonuses + FAB
- Survival Benefits (SB): In case of Life Assured surviving till the end of the policy then 20% of the Basic Sum Assured is paid as survival benefit. This is paid at the end of each of 5th, 10th & 15th policy year for 20 year plan. ( For 25 years plan, SB is paid at the end of each of 5th, 10th, 15th & 20th policy year)
- Maturity Benefit: In case of Life Assured surviving the stipulated date of maturity, 40% of the Basic Sum Assured along with vested Simple Reversionary Bonuses and Final Additional Bonus, if any, shall be payable.
Maturity Benefit = (40% of Sum Assured) + Yearly Accrued Bonuses + FAB
How does LIC’s New Money Back Plans work?
Let us understand how a 20 year LIC’s new money back policy work. (Both the plans are similar except for the tenure)
Money back Policies – Return Calculator :
Let us now calculate the returns of the 20 year LIC new money back plan. I have used IRR (Internal Rate of Return) function of MS Excel.
Life insurance premium quote – Money back Vs LIC’s Online Term Insurance :
In the above example, we have seen that the policy holder (30 years old) has to pay a premium of Rs 7,752 for a Sum Assured of Rs 1 Lakh. The expected return from this policy is around 5%. For a premium of Rs7,500 the policyholder can get Rs 75 Lakh coverage through LIC’s e-Term plan (online Term insurance plan).
Kindly note these important points:
- The average return on money back policies will be around 4% to 6%. You may find better investment avenues in the financial markets.
- LIC declares Simple Reversionary Bonuses every year. Generally the bonus will be at the rate of Rs 30 to Rs 40 per Rs 1000 Sum Assured. In the above calculation, I have assumed LIC may declare Rs 40 as bonus for the next 20 years. (FYI – LIC bonus rates)
- Remember the yearly bonuses are accrued but are not reinvested. So, the power of compounding is missed.
- LIC generally declares Final Additional Bonus if a policy term is more than 15 years. It may be around 5 to 7% of the sum assured (it may vary depending on the tenure, sum assured amount and plan).
- Few advisors/agents suggest the investors to use Survival Benefits (Money back installments) to reinvest in similar traditional policies. Please analyze your insurance requirements and then decide.
There is no good or bad financial product as such. You just need to find a suitable product as per your requirements. Before buying life insurance policy try to evaluate if the sum assured is sufficient to cover your life? Is the premium affordable? Can the family members lead the same standard of living in case of any unfortunate event?
“You don’t buy life insurance because you are going to die, but because those you love are going to live.” Life insurance is a must. Choose the right policy and cover.
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