“What's in a name? That which we call a rose by any other name would smell as sweet” - William Shakespeare quoted in Romeo and Juliet.

However when the name is the Life Insurance Corporation of India (LIC), many stand up and take notice. Recently, the leading life insurer launched a new insurance plan — Jeevan Shikhar, a single premium close-ended endowment plan eliciting queries on the benefits and return of this new product.

Our regular readers know our stance on life insurance—it is a tool that covers pure risk (death) only and shouldn’t be clubbed with investments. And for those who are keen to know about this new product, we’ve addressed it through these frequently asked questions (FAQs):

I am 40 years old; can I invest in this product?

Yes, you can. The minimum age of entry for an investor is 6 years (completed), while the maximum age is 45 (nearer birthday). That means, if you are close to 46 years or your child is less than 6 years old, neither will be eligible to subscribe to this policy. The insurance policy is open for subscription from January 11, 2016 to March 31, 2016 (a period of 120 days only).

Will I receive any money on maturity? If yes, how much?

One will receive the sum assured and/or maturity proceeds after the completion of the policy’s term of 15 years. The policyholders have a choice to decide the maturity proceeds at the time of investment, and the single premium is calculated backwards based on entry age, sum assured and of course, the decision of the underwriter. The minimum maturity proceeds are Rs 1.00 lakh. Loyalty additions, if any, are also payable. To illustrate:
 

Calculation of Premium based on Sum Assured and Age
Age of entry (nearest birthday)	Tabular single premium rates for per Rs 1,000 of maturity proceeds (Rs)	Expected Sum Assured (Rs) (to be received after 15 years)
		100,000	240,000	500,000	1,000,000	2,000,000
		Premiums (Rs)
10	398.55	39,855	95,652	199,275	398,550	797,100
20	410.25	41,025	98,460	205,125	410,250	820,500
30	425.80	42,580	102,192	212,900	425,800	851,600
40	514.80	51,480	123,552	257,400	514,800	1,029,600

(Note: The table is for illustration purpose only and does not include rebate for high maturity proceeds and the underwriter decision)
(Source: LIC India website)
As per the illustration, if an investor (age 40) needs Rs 20 lakh after 15 years (age 55); he needs to pay a single premium of a whopping Rs 1.03 lakh approx. This is steep vis-à-vis the benefit after 15 years, where inflation may potentially erode the value of Rs 20 lakh.

What about the death proceeds?

On the policyholder’s demise, the beneficiaries will receive 10 times the tabular single premium paid along with loyalty additions, if any, after the completion of 5 policy years but before the date of maturity. So, if your premium is Rs 5.15 lakh, your posthumous proceeds will be Rs 51.48 lakh (514,800 x 10). However, if the insured dies within the first 5 years of the policy and before the commencement of the risk term, the singular premium paid is refunded without interest.
 

Calculation of Death Benefit
During first 5 policy years		After completion of 5 policy years but before the date of maturity
Before the commencement of risk1	After the commencement of Risk
Refund of single premium without interest2	10 times the tabular single premium	10 times the tabular single premium + loyalty additions (if any)

(Source: LIC India website)
Note:

1. In case the age at entry of the life insured is less than 8 years, the risk under this plan will commence on the day before the policy anniversary coinciding with or immediately following the age of 8 years. For those aged 8 years or more at entry, the risk term will commence immediately from the date of issuance of policy.
    
2. The single premium mentioned above shall not include any additional amount charged under the policy due to underwriting decision and taxes.
    

What if I need the money during the policy term? Can I surrender the policy?

Yes, you can surrender the policy during the policy’s term. The ‘guaranteed surrender value’ will be:

• First year 70% of the single premium; and
• 90% of the single premium after the completion of one year A policyholder will receive a ‘special surrender value’ if this is greater than the ‘guaranteed surrender value’, on the date of the surrender. Moreover, loyalty additions, if any, will be paid after the completion of 5 policy years.

Will I be able to avail a loan on this policy?

Yes, a loan is available on the policy any time after the completion of 3 months from the date of issuance of the policy or after the expiry of the ‘free look-in’ period, whichever is later. Depending upon the age at entry, the maximum loan that can be granted, as a percentage of surrender value for different policy terms, is as under:
 

Maximum loan that can be granted as a percentage of sum assured
Policy Year	Maximum loan as a % of surrender value for age at entry = to 35 yrs	Maximum loan Amount as a % of surrender value for age at entry = 35 yrs
3 months to 3rd yr	55	35
4th yr to 6th yr	66	50
7th yr to 9th yr	75	70
10th yr to 12th yr	80	80
13th yr to 15th yr	85	85

(Source: LIC India website)
What is the Internal Rate of Return (IRR) on the product?

The IRR for a 40-year old expecting Rs 20 lakh on maturity, on paying a premium of Rs 10.30 lakh works out to 5%. The loyalty benefits or bonus has been excluded from the calculation as this isn’t guaranteed.

Calculation of IRR
Entry Age	Cash Flow
40	-1,029,600
41	0
42	0
43	0
44	0
45	0
46	0
47	0
48	0
49	0
50	0
51	0
52	0
53	0
54	0
55	2,000,000
IRR	5%

(Source: PersonalFN Research)
So, is the policy worth buying?

It is distinct that the returns offered on the policy is rather meagre given the cost paid. Over a span of 15 years, chances are inflation may have eroded the purchasing power of the benefit i.e. the maturity amount earned from the policy. So, the product doesn’t weigh well on the cost-benefit analysis scale. On the contrary, if one were to invest the same premium amount of Rs 1,029,600 in a consistently performing equity mutual fund scheme and stay invested for 15 years, one could earn Rs 5,635,583, assuming the average rate of return is calculated at 12% p.a.

When it comes to addressing insurance needs, pay heed to the human life value (HLV) to have the most optimal insurance cover. We at PersonalFN believe that when investing, take cognisance of your financial goals, and based on the investment horizon and risk profile, select the most suitable investment avenues.

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