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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.

dyerware.com

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.


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