Analysis of LIC - Jeevan Varsha - Part 1

I always try to write the articles in the simplest possible way I can.
If still anyone of you have any doubt/queries/suggestions/clarification or need help on tax planning, pls mail me back. I will be more than happy to resolve your queries.
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Also you can suggest me some topics on which you want to get the information. I wil ltry my best to prepare article on that.

Today I am passing a chat conversation with one of my friend to all of you.

One of my friend had a friendly argument on why she should NOT go for LIC policies as that are the safest option for TAX saving. Her stake was she will not loose per money as LIC has Govt of India backing.

Very True, you will not loose ur money in LIC, but did you thought of what the value you gain for your investments in endowment policies ?


Chat Conversation

------------------------------- Start of chat conversation ------------------------------

Sachin : Hi, How r u ?
Xyz : Ya, I am fine, How about you.

Sachin : Me too. Have you done ur tax planning for this year
Xyz : Yes almost done, I have taken a LIC policy - Jeevan Varsha.

http://www.licindia.com/Jeeva_varsha_features.html

This is the latest and the best policy ever by LIC. You can see so many adds in TV and newspaper.

Sachin : But I recommended not to go for it :(
Xyz : The LIC agent is our close family freind. A good friend of my father.
He will never give any bad advice to me.
Anyways its ok, as I will not be losing my money. I will get the amount that I am investing + they are providing a good insurance cover + their is bonus amount which I will get at the end of policy tenure.

Sachin : What is the yearly premium you are paying for this and what is the insurance cover ?
Xyz : Yearly premium is Rs 78,500 /- and sum assured is Rs 5 lacs. What you say on this?
Sachin : I need to calculate it in my way. Need to put some complex formulas to get the actual returns. As the LIC has made this policy (Jeevan Varsha) so complex, that it is difficult to understand to peoples like me.

Note: Rs 78500 is the premium for a 30 year old person for the 12 years insurance cover for Rs 5 lacs.

Xyz : Not at all. Its very simple. I will explain.
Sachin : Yeah, pls explain.

Xyz : Policy tenure is for 12 years, but we have to pay premium only for 9 years :)
Means I have to pay premium only for 9 years and get the insurance cover for 12 years.

In case of death any time during policy term. I will get Rs 5 lacs (we will not consider it for time being).

In Case of Survival, I will get as below
In 3rd Year : Rs 50,000 (10% of SA)
In 6th Year : Rs 1,00,000 (20% of SA)
In 9th Year : Rs 1,50,000 (30% of SA)
In 12th Year: Rs 2,00,000 (40% of SA)
Bonus at the end : Rs 4,20,000

isn't it good that I am getting returns start from 3rd year of policy.
I am getting back all of my money + I am also getting some extra bucks + an insurance cover for Rs 5 lacs.

Sachin : So total amount returned is (50,000 + 1,00,000 + 1,50,000 + 2,00,000 + 4,20,000) = 9,20,000

And the amount you paid to LIC is 78500 * 9 = 7,06,500

Xyz: See you understood it very easily, I am getting more than what I invested. Moreover I am also insured for Rs 5,00,000 for 12 years. Isn’t it a good policy ?

Sachin : let me do some jugling here. will tell what is the exact return from this policy.

Xyz: Ya sure, Bye for now

Sachin : Bye.
------------------------------- And here ends our conversation ------------------------------

After going through the above conversation, you will feel that this is very good policy.
As you are paying only Rs 7 lacs , that too in installment and getting return Rs 9.2 lacs.
Right from 3rd year LIC is paying back the amount + You are getting the insurance cover for Rs 5,00,000.

Though the insurance cover is less, still for a common person this policy looks very attractive.

What’s your take on this ??????? YES / NO

----------------------------------------------------------------


I did my calculation as usual and came with the below results ==>>
Here you need to be very good with math’s OR you should trust some one like me



Returns from this Policy at the end of 12 years
Now how do we calculate the returns from this policy for this person. There are two way (Models) of doing this. One way is that we can just add the amount of money she receives from the policy and see how much total money she gets at the end of 12th year. The other way is to assume that she is investing her money (which she gets at 3rd , 6th and 9th) year somewhere , so that she can get it at the end of 12th year (this way is a better way of calculating and the ETHICAL way as I will not be misleading you) .

First Model: Amount is just added

Total Sum received = 50,000 + 1,00,000 + 1,50,000 + 6,20,000 = 9,20,000

Second Model: Amount received is invested @8% such that she recives it at 12th yr (for 9 yrs , 6yrs and 3 yrs). I am considering 8% because we are assuming safest option here.
She will be investing in PPF, which gives 8% returns TAXFREE.

50,000 after 9 yrs : 99950 [ 50,000 * (1.08)^ 9 ]
1,00,000 after 6 yrs : 158687 [ 1,00,000 * (1.08)^ 6 ]
1,50,000 after 9 yrs : 299850 [ 1,50,000 * (1.08)^ 3 ]
Bonus + 40% of SA after 12 years : 6,20,000

Total = 99950 + 158687 + 299850 + 620000 = 11,78,487

lets calculate the CAGR return from this policy , We have to use annuity formula for it for 9 yrs and then Compound interest formula for 3 yrs . The formula would be
A = [Annuity part for 9 yrs] [Multiply] [Compound interest part 3 yrs]

A = [ P * [{(1+i)^9 - 1 }/i] * (1+i) ] * [ (1+i)^3 ]

where
A = Total money she accumulated till now
P = yearly Premium (78,500)
i = CAGR return which we want to find out


What we have done here ?

For this person we have calculated annuity returns for first 9 yrs (because she is making the payments for 9 yrs) , then she does not pay anything for 3 yrs (Very happy), so we have calculated compound interest for next 3 yrs(remeber power of compounding) . It may be a bit complicated to understand i know but bear with me on this.
As I have already told that LIC had made this policy very complex to understand even for peoples like me.



For First Model
The value of i which satisfies this equation is 3.3%, Yes you read correct, no typo here.

(78500 * (1+.033) * ((1+.033)**9 - 1)/.033)*(1+.033)**3 = 919262

Rs 9,19,262

But this is not a good way of seeing things , so lets look at Second Model (Ethical one).

For Second Model
The value of i which satisfies this equation is 6.4% . This is the true representative of returns .

(78500 * (1+.064) * ((1+.064)**9 - 1)/.064)*(1+.064)**3 = 1175443.41

Rs 11,75,443

So as per Mathematics, Xyz will be getting her returns back @ 6.4 percent.
Pls remind that she is also investing back the amount that she is getting from LIC every third year @8%.
So now you yourself think what is the actual returns that LIC is paying you back if you had not invested it @ 8% PPF option.


If she would have invested the same amount in PPF for 9 years and keep it as it is for next 3 years (total 12 years), Same case as above then the return will be ==>

Rs 13,33,650

In simple terms PPF investment @ 8% will beat the LIC's top policy Jeevan Varsha for

Rs 1,58,207
Both the options have tax benefit under section 80C.

Amount gained in PPF compared to LIC policy: -

One Lacs Fifty Eight Thousand and Two Hundred and Seven Rupees.

isnt it a good amount ????

Note: I will explain about insurance cover in my next mail. That will be continuing to his mail. But by any means do you think the insurance cover of Rs 5 lacs is sufficient for the person who is paying premium of Rs 80,000 yearly ??

If one can pay a premium of Rs 80,000 then his/her salary has to be atleast Rs 5 Lacs. Agreed !!!

So that person it insured only for his/her one-year income by paying so much of hefty amount.

So in my next mail I will not be such Uncaring as this policy and will provide an adequate insurance cover (30 Lacs) along with very long tenure (30 Years).
And will try to see can we beat the Jeevan Varsha policy. You know we can and we will do it !!!

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Once again I remind to all of you, Never ever go for endowment policies from any company.

Do you know what is the commission that insurance agents get on your policies?

It’s from 10% to 70%.... You have read correct, 70% commission on Jeevan Anand policy.

And the commission these agents get in TERM policies is just 2 %.
And this is the reason these peoples do not tell you about term policies.


I have no intentions to hurt anyone but I am sure that most of the Insurance agents DO NOT know the actual returns and the real value of the product they are selling. They just want to sale it, as this is the bread earner for them. These people will only think of their commissions. And this is the reason that your own very near relative who is an insurance agent will not recommend you a Term policy.


So pls do the calculations yourself and get the actual returns, as it is your own hard earned money.

As your company is paying you salary in Lacs. Just think if they do not pay bonus or do not increase your salary then you will cry like any thing and tell of everyone you meet that my company is worst of all.

If you have an ability to earn money, you should also learn on how to save the money.
Start with learning some basic mathematics!!!