LIC - Jeevan Varsha - A Cost Benefit Analysis

After the overwhelming response garnered by Jeevan Astha, LIC has introduced Jeevan Varsha, a moneyback policy (life insurance + Investment) with assured returns. This has caught the imagination of investors who are tired of the prevailing uncertainty in asset markets. But one needs to do a costbenefit analysis of insurance policy & insurance quotes before putting one’s money in it, rather than get carried away with features such as assured returns and risk cover.

This policy is nothing but a general money-back policy offered for a limited period — 6th February ‘09 to 31 March ‘09. Another attractive feature of the policy is assured returns. The policy holder will get Rs 65 per thousand (6.5%) of sum assured (SA) for a policy of 9 years and Rs 70 per thousand (7.0%) for a 12 years’ policy. As is known, the returns earned are tax-free.

Tax-free returns of 6.5% to 7% look attractive on the face of it. However, comparing these returns with the total costs incurred— premium paid—raise doubts about the economic viability of the policy. For example, a 30-year old person will have to pay an annual premium of Rs 78,497 for a 12-year policy of Rs 5,00,000. As a policy feature, the premium payment term is 9 years. So the total premium outflow will be Rs 7,06,473.

At the time of maturity, the policyholder will get 40% of the sum assured (as 10%, 20% and 30% of SA will be paid at the end of three ,six and nine years respectively) along with accrued guaranteed returns for 12 years. So, the total guaranteed amount received during the policy period is Rs 9,20,000. Therefore, the tax-free assured net gain (difference between total premium paid and guaranteed benefit) on the policy investment will be Rs 2,13,527. The policyholder is also entitled for variable returns, known as loyalty addition, at the time of maturity. But this depends on the profits earned by LIC.

Does this mean that investment in Jeevan Varsha is a better option? One needs to compare the policy with other fixed income instruments. Let us assume that a 30-year old person invests Rs 78,497 — the amount equivalent to the premium paid — in a bank FD for 12 years, maturing in 2021. Subsequently, the person may open a new FD of an equivalent amount every year with the maturity year as 2021. Thus, the person will have 9 FDs maturing in 2021 for a total sum of Rs 706,473. The total interest accrued on these FDs will be Rs 544,205 in 12 years, assuming an average annual deposit rate of 7% compounded quarterly. (The assumed deposit rate is based on the simple average of deposit rates observed in the past seven years, which have witnessed swings in deposit rates to higher and lower ends.)

Yes, the interest earned on FDs is taxable. Assume that a person belonging to a higher income tax bracket pays Rs 1,68,159 as tax on interest earned. Yet, investment in FDs is better off as interest earnings adjusted for tax at Rs 376,046 are much higher than the assured returns on the Jeevan Varsha policy. One can argue that the insurance policy covers death risk. But one could buy term insurance policy (pure) to get a life cover.

This may cost Rs 10,145 (single premium) for a 25-year policy of Rs 5,00,000. Thus, an investment combination of bank FD and pure insurance is preferable to an insurance policy with dual benefits of investment and life insurance.

Going ahead, insurance policies may offer attractive assured returns. But a cost benefit analysis is a must before making any investments.