Sep 22, 2011

## Case Study: LIC Money Back Policy

Yesterday I received one cheque of Rs.40,000 from LIC India as survival benefit of its money back policy with sum assured of 2lac.I have bought this policy in 2001 and it was second benefit I received.I thought why not to do some calculation with some of the assumption as stated below.

## Assumptions:

1.Premiums paid monthly so that one can compare returns with recurring deposits.(Please do not compare it with mutual fund sip as risks are not comparable .)Monthly premium for 30 yr old and sum assured of 2 Lac comes to be Rs.1136 per month.

2.Bonus recevied is average Rs.50/1000 S.A.[As per bonus accured in my account in last 10 yrs]

3.Amount received as survival benefits invested in fixed deposits till period of completion of policy.

4.Avg.Returns offered by fixed deposits and recurring deposits are assumed as 8% compounded quarterly.

## If I invest in recurring deposit:

If anyone have invested Rs.1136 per month in postal recurring deposits of 8%,then after 20 yrs total maturity value will be

= Rs.6,69,160 ——————————————{1}.

## If invested in LIC money back policy:

## Bonus received:

Bonus is a main source of additions in LIC policy.As we have assumed average Rs.50 / 1000 SA ,each year bonus added will be Rs.10,000.So for a term of 20 yrs total bonus added in my account will be

= 10,000 x 20

=2,00,000 (2 Lac)——————————————-{2}.

## Survival benefits:

### 1.After 5 yrs: 20% of Sum assured

= (20/100) x 2,00,000

= 40,000 .

This amount is invested in fixed deposit at a rate of 8% for 15 yrs.Then maturity amount will be

= Rs.1,31,241. —————————————–{3}.

### 2.After 10 Yrs:

Survival benefit received = Rs.40,000/-.

This amount is invested in fixed deposit of tenor of 10 yrs.

Maturity amount =88,321 ——————————————{4}.

### 3.After 15 yrs:

Survival benefit received: Rs.40,000.

This amount is invested in fixed deposit of tenor of 5 yrs.

Maturity value: Rs,59,437.————————————————(5)

### 4.At maturity:

Survival benefit = 40% of Sum assured.

= Rs.80,000.———————————————–{6}.

So total survival benefits comes to be:

= {3} + {4}+{5}+{6}.

=1,31,241 + 88,321 + 59,437 + 80,000.

=3,58,999.

## So total Policy benefits:

= Bonus received + Total survival benefits.

=2,00,000 + 3,58,999.

=5,58,999

= Nearly 6.50% compounded quarterly ignoring insurance and tax benefits.

This post is updated (rather improved) after useful insights from Tejaswi in the comment section.

We have considered more scenarios :

1.Bonus added at rate of Rs.40/ 1000 SA.

2.Bonus added at rate of Rs. 30/1000 SA.

3.Instead of RD,money is invested in PPF account for the same period.

1.Bonus added at rate of Rs.40/1000 S.A.:

At this rate,total bonus accumulated will be:8000 x 20 =1,60,000.

So total policy benefits: Bonus + Total survival benefits

=1,60,000 + 3,58,999

= Rs.5,18,999.

= 5.90% compounded quarterly.

Bonus at rate of Rs 30/1000 SA:

At this rate,total bonus accumulated will be:1,20,000

Then total policy benefits=1,20,000 + 2,58,999 =4,78,999 : 5.20% Compounded quarterly.

Invested in PPF at avg rate of 8.60% :

Then accumulated amount will be: Rs.6,97,549.

## Final comparision is:

### 1.Recurring deposits:

Maturity value: Rs.6,69,160(8% compounded quarterly) + taxable income + no 80c benefits + no insurance.

### 2.Money back policy:

Money Back Scenario-1:

Maturity Value If bonus received is 50/1000 SA:Rs.5,58,999 (nearly 6.50% compounded quarterly)+ 80C benefits + Insurance+Tax free maturity amount.(interest received on fixed deposit will be taxable only).

Scenario-2:

Maturity Value If bonus received is 40/1000 SA:Rs.5,18,999 (nearly 5.90.% compounded quarterly)+ 80C benefits + Insurance+Tax free maturity amount.(interest received on fixed deposit will be taxable only).

Scenario-3:

Maturity Value If bonus received is 30/1000 SA:Rs.4,78,999 (nearly 5.20% compounded quarterly)+ 80C benefits + Insurance+Tax free maturity amount.(interest received on fixed deposit will be taxable only).

If Invested in PPF at rate of 8.60% and invested before 5th of every month:Maturity value Rs.6,97,549 + tax free income + 80C benefits.

I have tried overall comparison in the graph shown below..Please note that we are comparing here return scenarios only..Each scheme offers different unique features and have its own benefits and limitations.The cumulative flow can be as shown below.

It is assumed that Rs.1136 per month invested in different schemes from 01st Apr 2011 to 01st Apr 2031.

This is a comparison of Money back plan,RD and PPF . finally investor needs to choose the correct product based on his needs.

### Should anyone surrender policy at this juncture?

Answer should be NO.I will be a big looser if I give up policy at this point.Rather I will use survival benefit amount to buy mutual funds or few units of silver to improve returns with some risk.

### Disclaimer:

Author is not associated with LIC or any other insurance company.This is totally independent analysis and if anyone found any loopholes please comment same in the comment section.

While I am not an LIC agent and have recently fallen into this trap of buying Jeevan Anand and Jeevan Tarang LIC policy(ended up purchasing 2 such policies of JA and 1 of JT) and I was doing a similar such exercise myself for my JA/JT and a very old Endowment Assurance (EA) policies based on the bonus information provided in the LIC iste. In the process I was did the calculations for Money Back(MB) policies using the bonus info on the LIC site and the returns are very similar to the one calculated by Paresh (the returns vary only due to the premiums-which again due to the age at which one is buying the policy..higher the age..higher the premium and lower the returns!!). One important thing that Paresh possibly forgot to mention is the Final Assurance Bonus (FAB) in case of most of the Endowment and Money-Back policies which will make the returns of the LIC policies “hopefully” very close to the RD and also to PPF. While purely from a returns perspective, one should always invest in PPF and then only in LIC policies (if one has extra cash after investing in PPF). But assuming the FAB is good enough (which generally is – as I can see from the FAB info from the LIC sites) the overall return from LIC policies should match the returns from PPF and RD and that too the maturity amount of LIC is tax-free (which is not true for RD though true for PPF) and you get the life risk cover as an add-on!!! Let me know if my analysis is wrong. Since I am an investor too..I would be interested in knowing your opinion.

Yes as far returns are concerned,it will be equivalent to the recurring deposits…Though investing in PPF will offer you some more but these are also now dynamic in nature.

This calculation is all false. Let me calculate how:

1. Why do you want to invest in RD…why not PPF? Maturity is non taxable

2. Assuming one invests 1136 per month at 8%, one would get 6,73,588

3. Why do you need to assume Bonus as 50/1000 SA. Use realistic figures. It is 40/1000 SA as average. This should give 160000

4. The return after 5,10,15 years is less than what is quoted above!!

40K in 15 years @ 8% -> 126886

40K in 10 years @ 8% -> 86357

40K in 5 years @ 8% -> 58773

Total would be 352016 (including 80K recieved at 20th years)

So the final amount is 352016 + 160000 = 512016

This is 5.75% returns!!

Kindly prove me wrong….

Hi,

Thanks for the comment and I do not mind if anyone criticized me here…Always wel-Come to point out the errors / mistakes done on the blog.

First let me disclaim that I am not related to any insurance company any way,neither this post is to suggest that one should buy the endowment or money back policyJust we will take the facts one by one.

1.I choose RD because as an investor i believe that I will be more consistant in investing recurring deposit scheme as it will be linked to my saving account and installments will be directly debited from my account.I believes in investing psycology which most of the persons forget about..

2.You have assumed compounded monthly returns for banking recurring deposits,in fact it is always compounded quarterly.So your figures are higher.

3.I have assumed bonus based on actual accumulated in my account in last 10 Yrs…I can not claim that it will be avg 50 / 1000SA..But you can not also claim that it will be 40/1000 SA.No one will be accurate assuming the bonus rate.Its similar for RDs or PPF where one can not guarantee that returns will be same as today for next 20 yrs.Today it is 8.6% but it can be 6% in future…no guarantee.

4.You have assumed banking fixed deposit returns on compounded annual basis which is not true.But its always compounded quarterly so your figures are slightly lower.

Finally just quoting few lines from one of the book read in college life(don’t remember authors name):”No model is accurate.In fact system always behaves differently.This happens because we always fail to incorporate all the parameters or make invalid or ignore vital assumptions’I think this is as well true for such insurance policies also.One can show returns as 2-4%,One can 4-6% or one can even 8-10%..it all depends how we focus on the system.

Thanks for your response. Let me also disclose that I am not a Anti-LIC agent 🙂 Infact, I have LIC policies myself.

1. I agree. But when one quotes that the return is taxable, you may have quoted that this could be avoided if one invests in PPF.

2. Regardless of whether I use quaterly compounding/monthly compounding, the results should be matching, as long as I use the same formula for both RD and LIC returns. I am confused as my formula yields more returns in case of RD and the same formula yields lesser returns in case of LIC (although I used the same formula for both!)

3. I cannot quote what would be the bonus in future but I can certainly quote what was declared in the past. I could see that the latest bonus declared in 39 in the past 2-3 years and 41 7-8 years back. Since the bonus is not varying much from past so many years, how can we justify that the bonus would be 50?

4. As I have mentioned, regardless of whether you use monthly compounding/quaterly compounding, the values should comparatively match as long as you are using the same calculator. Do you agree?

I showed returns on the basis of pure numbers. There are so many parameters but we choose to ignore/highlight for our convenience to show the returns higher or lower. In this case, you mentioned that people tend to continue with RD but not PPF what is the guarantee that the same person would pay the premiums duly and so on.

Hi,

Sorry for comment policy.As per comment policy of the blog,every comment need approval every time.

You are true quoting that I should have mentioned that investing in PPF will be more tax efficient..We also have PPF account but by experience I can claim that it lacks the consistency effect which is soul of any saving process..tax benefits on maturity comes next to this.

Bonus accumulated in last 10 yrs is just above 90,000/- + I can hope for some revisionary bonus at the end of period which I think can overall avg out at Rs.50.

You have shown the fixed deposit returns on compounded annual basis…which you needs to calculate based on compounded quarterly basis..You need to check on which basis your calculator is designed but your output is on compounded annual basis for FDs and compounded monthly basis for Rds…when you will improve the FD returns for quarterly basis,,final value of LIC Money back + FD combination will more and final RD returns will be higher for this combination..

Just after focusing on last line of comment: I think,Most of the policy holders prefer to pay timely premium due to fear of policy lapsation, the key motivational factor.

I digged this further. Please find the bonus information

Bonus For 2010-2011 39

Bonus For 2009-2010 39

Bonus For 2008-2009 39

Bonus For 2007-2008 39

Bonus For 2006-2007 39

Bonus For 2005-2006 37

Bonus For 2004-2005 41

Bonus For 2003-2004 46

Bonus For 2002-2003 52

Bonus For 2001-2002 52

Bonus For 2000-2001 53

Average Bonus 43.27

The bonus has consistently decreased. If you see the LIC bonus chart starting its inception, you would see that bonus has been decreasing because the number of insured have increased over the years and hence bonus is divided…So to get a 50 SA, the bonus needs to be more than 58 every year for the remaining 10 years. I am not sure if this is possible to anncounce 58 from 39 all of a sudden (almost 50% more!)

“I think,Most of the policy holders prefer to pay timely premium due to fear of policy lapsation, the key motivational factor.”

Going by that logic, there is no gurantee that the money back at 5,10,15 years is being invested in FD or being used up buying a new LCD TV. In case of PPF, atleast the amount is locked for atleast 15 years.

To go back, For the sake of simplicity can you please assume that instead of RD, the person invests in PPF a lumpsome (value equal to the Premium amount) every year. Kindly let me the value you get. Also, let us assume the person invests in PPF in a disciplined manner.

Hi,

Thanks for insights.

Just updated (rather improved) the post as possible I can with different scenarios like assuming different bonus rates like Rs 40/1000 SA , Rs 30/1000 SA and PPF(though I found it too complicated ).

Insurance graph is shown in terms of overall returns only and its not a bonus only graph.

Finally, Always welcome to find out the bugs.

Paresh.

Thanks Mr. Paresh.

To be even more realistic (and make things more complicated:) ), these are the PPF rates since 2000

2000-01 -> 11.00%

2001-02 -> 9.50%

2002-03 -> 9.00%

2003-04 to Nov 2011 -> 8.00%

Since Dec 2011 -> 8.60%

So the return amount would be much higher if we use the realistic PPF rates. I would appreciate realistic data as far as possible to arrive at an unbiased analysis so that the readers can conclude opnions themselves.

Thanks for considering my comments…..

You are true that one needs to use the realistic data..

I have shown the calculation for next 20 yrs start from 01st Apr 2011 to 2031 for all the instruments…so considered todays rate of 8.60%…not looking significant avg appreciation.

LIC has been the pioneer in Indian Insurance sector. For many Indians, life insurance truely implies LIC. Therefore, education about their products is of immense importance to every Indian. The private insurers are doing their bit to create awareness about life insurance. But to take the understanding of insurance to the public it is critical that discussions happen in forums like these!