Before reading review of LIC Jeevan Vaibhav – check what’s the current position of insurance industry & specifically LIC. The insurance industry is at cross roads. The wide spread misselling in Insurance Products, even by reputed Banks has marred the image of the industry. The Insurance regulator has started cleaning operation since the year 2010 starting with new ULIP regulations. The Government of India has also joined the chorus and made protection cover 10 times the annual premium for eligibility on Income Tax exemptions. It is widely believed that the customers interest is the last thing by the Insurance Companies. Even now the regulator has come to the level of making “Needs analysis” mandatory as a pre selling exercise.
In this back ground, the Life Insurers should be careful about their image. They should bring transparency in their functioning by more disclosures and display seriousness while dealing on policy holders interest.
LIC is the largest Life Insurer who commands 77% of market share as of April 2012. LIC was in the news recently for some wrong reasons. LIC is a sovereign pride and trusted universally across the whole country in rural, semi urban, urban and metro areas. We expect LIC to reciprocate the trust and goodwill in designing appropriate products suitable for the consumers.
LIC Jeevan Vaibhav Review
Let us look at Jeevan Vaibhav launched recently and analyse if it has taken consumers interest in product design:
Insurance or Mutual Fund ?
LIC Jeevan Vaibhav is a close-ended single premium endowment assurance plan which offers guaranteed benefits on death and maturity along with loyalty Addition, if any, payable in the last policy year. The plan is opened for sale for a maximum period of 120 days. The loyalty addition can be decided only at the end of 10 years. The protection cover is a little more than twice the premium paid.The question now is whether LIC aims to provide protection to the under-insured masses or mobilize funds by promising doubling money in 10 years?
Transparency in Surrender value?
The Policy term is for 10 years, but the policy can be surrendered after 1 year. The minimum Guaranteed Surrender Value allowable is equal to 90% of the Single premium paid. LIC may however pay Special Surrender value as applicable on the date of surrender provided the same is higher than the guaranteed Surrender Value. The Special Surrender Value will be the discounted value of the Sum Assured as on date of surrender. It is widely known that in traditional products, the insurers pay 30% of the premium paid excluding the first year premium. Will the surrenders be discouraged with high discount rates to the premium?
Lack of clarity in Tax treatment!
In the recent Finance bill, it has been proposed that the Sum Assured should be atleast 10 times the annual premium so as to be eligible for exemption under Section 80C income tax and exemption of maturity benefit under Section 10(10D). But there is no clarity on single premium like LIC Jeevan Vaibhav. So it is presumed that the maturity benefit will be subjected to Income Tax . However 10% of the Sum assured can be taken for 80 C deduction in terms of the extant Income Tax regulation. The tax issues should have been clarified so that the prospects are not taken for a ride.
Inappropriateness of Benefit illustration!
The investment regulation of IRDA has prescribed the exposure norms of traditional products by specifying that the investments will be made mostly in Govt and AA and above rated securities. Since this is a single premium product, the investment will be made initially for which yields can be known at the beginning. So what is the appropriateness of 6% & 10% benefit illustration?
Higher service tax will lead to Lower returns!
It is also known that the prescribed asset allocation cannot generate more than the yields of Fixed Income Securities. But the recent hike in service tax from 1.55% to 3.09% for the traditional products in the Finance Bill should have been mentioned since this will increase the premium and suppress the return. Taking the service tax , the expected returns are furnished in the table.
Who should buy LIC Jeevan Vaibhav?
- The consumers who have already adequate protection cover.
- The consumers whose risk appetite is low and who do not want to take risk in investment.
- The consumers who do not come under Income Tax or come under lower tax slab.
- Bank’s Fixed deposit (100% tax rebate under 80C for FDs of 5 years and more)
- Mutual Funds(Debt/MIP ; Short term gain at Tax slab rate and long term gain at 10% without indexation /20% with indexation)
- PPF(EEE category in Tax treatment but maturity after 15 years)
Prakash also worked as Chief Risk Officer in one of the insurance companies so feel free to ask any questions related to insurance.