LIC ATM Plan Analysis

LIC Jeevan Saral Plan is also called as ATM plan

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Product Summary

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This is an Endowment Assurance plan where the proposer has simply to choose the amount and mode of premium payment. The plan provides financial protection against death throughout the term of the plan. The death benefit is directly related to the premiums paid. The Maturity Sum Assured depends on the age at entry of the life to be assured and is payable on survival to the end of the policy term. It also offers the flexibility of term and a lot of liquidity.

Benefit Illustration

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http://www.licindia.com/special_plan_001_illustration.htm

Amount invested per annum = Rs 4704

Term = 25 years

Normal Circumstances :- Investor survives full term

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Sum Assured (Gauranteed) = 117600

Maturity Bonus (Variable @ 10%) = 211000

Total Amount (Maximum as per LIC) = 346296

Un-usual Circumstances :- Investor dies before full term

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Death Benefit:

250 times the monthly premium together with loyalty additions, if any, and return of premiums excluding first year premiums and extra/rider premium, if any, is payable in lump sum on death of the life assured during the term of the policy.

Year Sum_Assured Maturity_Bonus Total

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1 100000 0 100000

2 104800 0 104800

3 109600 0 109600

4 114400 0 114400

5 119200 0 119200

6 124000 0 124000

7 128800 0 128800

8 133600 0 133600

9 138400 0 138400

10 143200 18000 161200

15 167200 41000 208200

20 191200 100000 291200

25 215200 211000 426200

DISCLAIMER

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TO BE FAIR WITH LIC I AM TAKING THE MAXIMUM RETURNS THAT LIC IS DEPICTING ON THEIR SITE.

LIC CALCULATED THE RETURN @ 10%.

BUT IN THE 25-30 YEARS OF HISTORY OF LIC, THEY HAVE NEVER GIVEN MORE THAN 6% RETURNS.

BUT STILL TO BE FAIR, I HAVE BASED MY CALCULATION ASSUMING THE MAXIMUM RETURNS SHOWN ON THEIR OFFICIAL SITE.

Normal Case - Survival Benifit

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If you go through the link provided above (LIC site) you will see that in normal case (Survival),

For first nine years, You have paid the amount Rs 42,336 /-

And in return LIC is giving you Rs 37,892 /-. Less than what you have actually paid.

The policy term is of minimum 10 Years.

So in 10 years you have paid to LIC RS 47,040 /-

In return at the end of 10th year LIC will payback :-

43,360 (Guaranteed) + 18,000 (Bonus) = Rs 61,360 /-

What is the Rate Of Interest that you are getting ? [You need to apply ANNUITY Formulla]

Ii comes to 4.8 % ONLY (For survival person) (Shame on LIC)

If you continue for whole 25 years term

You would have paid Rs 1,17,600 /-

In turn LIC gave you back Rs 3,46,296 /-

What is the Rate Of Interest now that you are getting ? [You need to apply ANNUITY Formulla]

It comes to 7.55 % ONLY (For survival person)

Only in case of Un-Usual circumstances the benefit your "Nominee" will get is if you "DIE" before the first 10 years of the policy term. The benefit amount is less that 1.5 Lacs.

Is this really sufficient after 10 years?

As you know, I have always/repeatedly/insistly told not to go for ENDOWMENT POLICY.

Again I am repeating same thing, do not go for any endowment policies.

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Keep INSURANCE and INVESTMENT different. Do not try to merge both things.

Investment

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Go for PPF @ 8% returns. What will be the returns after 10 years ?

You paid # 47040 /- You will get # Rs 73,596 /-

If you continue this for 25 years

You paid # 117600 /- You will get # Rs 3,71,401 /-

Insurance

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Go for Term Insurance Policy

LIC Anmol Jeevan - I

Policy Term # 25 years

Current Age # 30 years

Sum Assured 5,00,000 [5 Lacs and not 1 Lacs]

Single premium comes to Rs 23,245 /-

Yearly Premium comes to Rs 1,911 /-

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After 25 years in case of LIC ATM plan you are getting Rs 3,46,296 /-

After 25 years in case of PPF you are getting Rs 3,71,401 /-

Gain in case of PPF # Rs 25,105 /-

This is more than the difference that you will be paying as one time to get the Term Life cover of 5 Lacs.

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If you could not afford single payment then next option will be :-

Go for annual premium of Rs 1911 /-

So you will be left with ( 4704 - 1911 ) = Rs 2793 /-

Invest this Rs 2793 in some tax free Mutual Fund.

Last 5 years return for top 10 Mutual funds are as below:-

MF Performance Link

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Mutual Fund Percent

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SBI Magnum taxgain 37.22

Sundaram BNP paribas 32.57

HDFC Taxsaver 29.43

Canara Robeco tax 28.69

Tauras Tax Shield 27.73

ICICI Prudential tax 25.79

Sahara Tax gain 25.78

Franklin Taxshield 23.40

HDFC LT Adv 22.64

Franklin Index Tax 21.95

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If we think of conservatively and think to get the decent return of 12% ONLY

So the amount Rs 2793 /- invested for 25 years at 12% returns will fetch Rs 4,17,089 /-

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So what you should do (Instead of LIC ATM Plan)

Take Term Insurance "LIC Anmol Jeevan - I", Term # 25 years

Sum Assured 5,00,000 [5 Lacs and not 1 Lacs].

You will have to pay Rs 1911 /-

Remaining amount Rs 2793 /-

You can invest in any one of the above top 10 TAX FREE Mutual Funds

Mutual Fund Returns after 25 Years Rs 4,17,089 /- (Insurance of 5 Lacs)

PPF Returns after 25 Years Rs 3,71,401 /- (No Insurance cover)

LIC ATM Plan Returns after 25 Years Rs 3,46,296 /- (Insurance of 1 Lacs) (Survival)

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LIC ATM Plan :- In case of Death :- Benifits to nominee are as below :-

Returns after 10 Years Rs 1,61,200 (You have paid Rs 47,040)

Returns after 20 Years Rs 2,91,200 (You have paid Rs 94,080)

Returns after 25 Years Rs 4,26,200 (You have paid Rs 1,17,600)

Term Insurance + Mutual Funds @ 12 % returns in case of Death :-

Benifits to nominee are as below :-

Returns after 10 Years Rs 5,00,000 + Rs 54,895 (You have paid Rs 47,040)

Returns after 20 Years Rs 5,00,000 + Rs 2,25,391 (You have paid Rs 94,080)

Returns after 25 Years Rs 5,00,000 + Rs 4,17,089 (You have paid Rs 1,17,600)

Term Insurance + Mutual Funds @ 10 % returns in case of Death :-

Benifits to nominee are as below :-

Returns after 10 Years Rs 5,00,000 + Rs 48,965 (You have paid Rs 47,040)

Returns after 20 Years Rs 5,00,000 + Rs 1,75,966 (You have paid Rs 94,080)

Returns after 25 Years Rs 5,00,000 + Rs 3,02,151 (You have paid Rs 1,17,600)

Conclusion :- The LIC ATM policy is not WORTH !!!

Reason to Pay OFF Your Bank Loan ASAP

How Bank Loan EMI is calculated

In this post we will learn how do we calculate monthly EMI for home Loan (or any Loan) and how increasing tenure does not help much after a certain point.

In Housing Finance, Equated Monthly Installment(EMI) refers to the monthly payment towards interest and principal made by a borrower to a lender. EMI is calculated using a formula that considers.

- Loan Amount
- Interest Rate
- Loan Period

Formula to get EMI = ( L x i ) X (( 1 + i ) ^ N) / ([(1+i)^N] - 1)

Where,
L = Loan amount
i = Interest Rate (rate per annum divided by 12)
^ = to the power of
N = loan period in months

Assuming a loan of Rs 1 Lakh at 11 percent per annum, repayable in 15 years,
the EMI calculation using the formula will be :

EMI = (100000 x .00916) x ((1+.00916)^180 ) / ([(1+.00916)^180] - 1)

====> 916 X (5.161846 / 4.161846)

EMI = Rs 1,136

Note : i = 11 percent / 12 = .11/12 = .00916


EMI calculator : http://contentlinks.asiancerc.com/mt/tools.asp?pageSubType=emi_calculator


Do the calculation yourself to get better understanding.

Q. How much benefit we get by increasing the Tenure of the Loan. Considering a Loan of Rs 30 Lacs at 12% interest rate.

Ans: The difference in EMI value is not very significant compared to the change in tenure and at one stage its almost of no gain to increase the tenure. To prove this argument i would like to present an example.

I am listing down the EMI value for different tenures from 10 years to 100 years.
Check the difference in EMI when tenure is increased by 5 years.
Loan Amount 30 Lacs taken on 12% interest rate.

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Tenure EMI
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10 43041
15 36005

20 33032

25 31596

30 30858

35 30466

40 30254

45 30139

50 30076

55 30042

60 30023

65 30012

70 30007

75 30003

80 30002

85 30001

90 30000

95 30000

100 30000

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What it tells us is that it's almost useless to extend the tenure after some time.
So better pay off your loans as soon as possible.


Few more EMI Calculator
http://www.icicibank.com/Pfsuser/loans/homeloans/emicalculator.htm

http://www.ucobank.com/EMI_calculator.htm

Diversified Protfolio

What is Portfolio ?
Your investments all together is your portfolio , as simple as that .

So , if i have
10,000 in shares
20,000 in real estate
30,000 in Fixed Deposits
1,000 cash

that's my portfolio


What is an Asset Class ?

An Asset class is something where we can invest and build assets. If i buy a Home or land, i build an asset in real estate category, if i buy anything in shares or mutual funds (equity), i create assets in Equity asset class. They are just categories.


Following are some asset classes:

Asset Class	Source	Return	Risk	Liquidity
Equity	Shares, Equity Mutual Funds, Derivatives	Very High Returns	Very Unsecure	Good
Debt	Fixed Deposits, PPF, NSC, FMP	Low Returns	Secure	Average
Real Estate	Land, Flat, Home, Commecial Plots	Good Returns	Stability	Very Low
Gold	Gold/Silver	Hedge against Inflation	Stability	Average
Cash	Cash	Negative due to Inflation	N/A	Excellent

Why Diversification ?

When you diversify you investments over different asset class, not only your money gets diversified, but also risk, so if some particular asset class is not performing well, it will affect only that part of your portfolio and not whole of it.

Obviously it also effects the returns, you returns are collection of returns from all the asset class, so even if some asset class did not perform over a period, it doesn't affect you hardly.


Lets see some examples :

1. Anyone who was heavily invested in "Debt" around 2003-2004 didn't get high returns
from the zooming stock markets (equity) for 4-5 yrs
2. Anyone who was heavily invested in Equity around start of 2008, saw his investments
go down by 40-60%
3. Anyone who is totally invested in Debt cant get instant money if required, either he has
to take some loan over those investments or break his PF or FD etc.


That does not mean, non-diversification always hits ...

1. Anyone heavily invested in Equities before the bull run of stock markets in 2003 onwards
made fortunes (but at their risk) .
2. And people who had most of there money in GOLD in 2007 got the highest returns
compared to any asset class.
3. It totally depends on person to person. Also inside every asset class, another level
of diversification is important. Like in Equity there are different categories like Large Cap,
Mid Cap, Small Cap

In Mutual funds there are sectoral funds, equity diversified, balanced funds, debt funds, liquid funds etc. Another level of diversification is also necessary to achieve high level of diversification .


Case study

Ajay a software engineer earning Rs 35,000 monthly (post tax) with a Family of 4 (1 wife and 2 kids) has following portfolio

Expenditure : 20,000 per month

Portfolio :

Tax savers Mutual funds : 1.25 lacs (locked for another 2 years)
Fixed Deposits (for 5 years) : 2 lacs
PPF : 1 lacs
Cash (in bank) : Rs 25,000
Insurance Payout : He pay 50,000 per year as life insurance premium for an endowment policy, for which he is insured for 12.5 lacs for 20 years. he started this policy before 4 years.


His Future plans

1. His goals are to buy a home in another 5 years for which he need down payment
of 3-4 lacs
2. Want to save 10 lacs for his each son's education in 10 years
3. He want to retire early with monthly income of 45,000 atleast


This Portfolio looks like diversified, and yes it is, but not in a well mannered way.
The asset wise allocation is

* Equity : 25%
* Debt : 70%
* Real Estate : 0%
* Cash : 5%


His overall Portfolio Shortcoming

- His exposure to different asset class is not well balanced
- His Life insurance is very less and and not at all enough.
For this he is paying a hefty amount every year which adds a lot to his burden.
- His Equity Allocation needs to go up
- His Debt allocation needs to go down
- His cash needs to go up for liquidity.
If he needs 1 lacs suddenly he can't get it, or will get it after breaking his FD.


Suggestions :

The first thing he must do is to restructure his portfolio.

* He shall surrender his existing Endowment policy and take a Term Insurance of 35-40 lacs for 20 years for which he will pay around 13000-14000 per annum. he will save surplus of 40,000 per year because of this. Also when he surrenders the policy he will get back around Rs. 2.4 lacs

* He must invest more in Shares and Mutual funds (as his risk taking capabilities is more because of his less age and less dependents). Now he got 2.4 lacs back after surrendering endowment policy

* He shall consider increasing his Cash to a level which can meet his contingent needs if any arised. He shall have atleast 2 to 3 times of his monthly expenses as contingency fund, which is totally liquid. Soo in this case it will be Rs 60,000.

* Also apart from Cash and investing in Tax saver mutual funds, he shall consider investing in some non-tax saver mutual funds which also gives him near liquidity. As per Govt laws you cannot break Tax Saver mutual fund investment before three years (lock in period)

* He may leave the debt investments as it is. If he wants he can break his FD incase he is going for the Home loan, he can increase the down payment part from this money.

* Incase he is going to take home loan after 1 year, he can also take some loan on his PPF, atleast for some part he will pay less interest than the home loan.

* Also he shall invest some money in GOLD, to give more stability and security to his portfolio.

* Atlast he shall consider taking a Family Floater Health Insurance plan , which helps him to secure his Family from and health problems or illness.


Recommended Portfolio

Apart from His Home (considering he takes Home soon)

* Equity 65% ( Direct shares 20%, Equity Funds 60%, Balanced Funds 20%)
* Debt 20%
* Gold (ETF) 10%
* Cash 5%

Diversification does not say that you have to invest in some money in every asset class for sure , the idea behind it is just that the risk is minimized by diversification and the portfolio is more stable.