LIC has a tradition of launching a single premium plan in the last quarter of financial year and it has kept it going. Amid the sea changes made by IRDA on traditional products from 1st January 2014, LIC has launched the first product – LIC Single Premium Endowment Plan, in compliance with these changes. The main reason of coming out with such a product in the last quarter of financial year can be attributed to the tax benefit which most salaried individuals seek to avoid high deduction from their income in these months. Due to this aspect, even the business of Life Insurance companies increase manifold and LIC too have always garnered a heavy collection with its single premium product.
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But considering the change in the tax provision in Budget 2012 and the alternatives available to investors, is LIC Single Premium Endowment Plan or any other single premium product worth investing now? Let’s find out through this brief review-
Features of LIC Single Premium Endowment Plan
General: The new plan is a single premium endowment plan and so the premium has to be paid only once. On completing the required term the policyholder receives the maturity amount. Anyone from age 90 days to 65 yrs can invest in the product which means it can be bought for children/grandchildren too. It’s a participating non-linked savings cum protection plan so the policy will accrue bonus during the term. The benefit, which will include sum assured and bonuses declared, will be paid either on maturity or on death of the policyholder. The minimum term policy can be bought is for 10 years and the maximum term of the policy is 25 years. However, the maximum age of maturity is kept at 75 years which means a person with age of 65 years cannot buy the policy for more than 15 years.
Sum Assured: The minimum sum assured in LIC Single Premium Endowment Plan has been kept at Rs 50000 while there is no limit for maximum amount and it has to be in multiple of Rs 5000 only. As per IRDA new regulations, the sum assured in all traditional products has to be min 10 times of annual premium if less than 45 years of age and minimum 7 times if age of life assured is more than 45 years for all policy term greater than 10 years.
Maturity/Death Benefit in LIC New Single Premium Endowment Plan
On Maturity, LIC will pay the sum assured along with the bonus accrued during the term of the product. The bonus declared in LIC Single Premium Endowment Plan policy will be simple reversionary bonus plus final addition bonus, if any.
The policy will pay death benefit differently at two instances:- If the death of the policyholder is after the risk commencement then sum assured along with accrued bonuses will be paid. But if the death occurs before the risk commencement then only the single premium paid to the company will be returned without any interest.
(In case the age at entry of Life Assured is less than 8 years, risk will commence either 2 years from the DOC OR policy anniversary after completion of 8 years of age whichever is earlier, for others risk shall commence immediately).
Surrender Charges of LIC Single Premium Endowment Plan: Since the policy is launched in 2014, it has to abide by IRDA new regulations. Hence the surrender charges in this product are in line with it. In first year 70% of the basic premium will be paid while any time after 1st year 90% of the premium paid will be paid as surrender benefit.
A loan can be availed from LIC which will be a defined % of surrender value. This option starts from 2nd year onwards and the loan value is higher in case the remaining policy term is lower. So for a term of 21 year and above if the loan is taken after completing 15 years, LIC can give upto 90% of surrender value.
The Return-IRR of LIC Single Premium Endowment Plan
Yes, this is the most important factor now to evaluate the product, especially after so many changes in life insurance from 1st January, 2014. Now all insurance companies has to show illustration on two assumptions – 4% and 8% investment return. One factor which all investors have to take in consideration is that this is return is on your investment amount i.e. net premium you paid after deducting the charges.
LIC Single Premium Endowment Plan – Illustration
I have assumed the figures based on LIC new Single Premium Endowment Plan benefit illustration at its website for a 30 year old. The policy term is taken as 25 years.
|Premium Invested (Rs.)||Bonus (Rs.)||Maturity Amount (Rs.)||IRR|
The IRR of the product comes to 6% at 8% investment return shown by the company. Since there is no bonus illustrated at 4% return assumption, no IRR is calculated.
Alternatives of LIC Single Premium Endowment Plan
First let’s see what alternatives you have for this product if you want to invest one time:
- ELSS– Equity linked Savings scheme are market linked product and so it will not be wise to compare the net return of these two. But if investing for such a long period won’t ELSS be a more lucrative option considering thelower cost of investment and the returns it can generate.
- PPF– A PPF is also a long term investment and can be continued for 15 years. If you have one going then considering the higher rate of return and tax free status, it will be more lucrative to invest your contribution in PPF to avail the tax benefit and fetch higher returns.
- Tax saving FDs – not at all bad if we compare with LIC Single Premium Endowment Plan
Argument in favor of LIC Single Premium Endowment Plan 🙁
While I was looking at arguments in favor of the product I found the following three more common but interestingly they fails:
1. Family Protection– The first argument is the protection it gives to you for your family. But if you analyze your insurance need, the requirement is generally into lakhs or crore. The premium you will have to pay in this policy for such a cover will be way beyond your means. A term plan is far cheaper means to avail a higher protection. For e.g.to buy a cover of Rs 50 lakh for a 30 year old person, the premium in this product will run into lakhs while in a term insurance it will be range between Rs6000- Rs 10000 p.a. So it’s difficult to avail any high insurance coverage here.
2. Investment– I have shown clearly that the investment return will be way below what you can generate from other instruments. Although earlier death can produce higher IRR but then you make investment for wealth creation in your life and not for early death benefit.
3. Tax Benefit– The product will come under section 80C & Sec 10(10D). As per budget provision of 2012 the premium paid towards insurance policy will qualify for tax benefit only when the SA in a respective year is at least 10 times of the premium paid. If it doesn’t happen then even the maturity amount will not be tax free under sec 10(10D). The biggest losers in this provision are single premium policies which are not able to meet this criteria. If we look at the illustration alone, then this criteria is not met. Even the sample premium rates given by LIC at its website do not benefit either. If this is the case then you will loose any tax benefit on this product.
Thus, while analyzing on various parameters the single premium product launched by LIC does not fulfill either of the requirement- Protection and Investment. Hence, It’s good to avoid. The basic of financial planning says “keep investment and insurance separate’. Choose a term plan if you really want to buy high protection for your family but only after a detail analysis and weigh the investment options for long term instead of building your wealth from a combo product.
Have you invested in any single premium plans? Were you aware of the tax provision of 2012? Have someone pushed traditional polices to you in last 2 months? Share your view in comment section & if this article makes sense share with your friends…