SUBSTITE FOR TERM PLAN???

INTELLIGENT(?) INSURANCE INVESTOR

One reader of my blog Raj sent me this letter
Hi Srikanth,

Can you guide me on this ULIP doubt. I am 35yrs of age and I have a ULIP from Metlife(Met Smart Premier) which covers me for 100 yrs with a sum assured of 20 Lacs. My annual premium is one Lac. Minumum premium payment period is 3 yrs as with most ULIP's.
Since the objective is to keep investment and insurance separate, I plan to make premium payments for the first 3 - 4 yrs and leave it to grow till the 5th year. At a very conservative rate I expect a return of 5% p.a at the end of 5 yrs. If I pull out my money leaving back one annualized premium (1 lac), I am still covered till 100 yrs of age without paying any more premium. I expect the amount that I have left behind to suffice the policy expenses till the age of 100. Net to net, what I spend for an insurance cover of 20 lacs till 100 yrs would be far far less than what it would be for a term policy. I guess Metlife has discontinued this policy and no more new policies are opened under this scheme. I am not sure if there are other ULIPS that give 20 times cover. If there are I would be interested in opening another one. How is my idea???

Raj




SRIKANTH MATRUBAI replies :

Dear Raj,
You are playing with fire. Already you are on the wrong side of the age. As the policy in question is Type - 1 ULIP, & as per your own admission, you are planning to withdraw money after completing 5Y up to the extent that fund value equal to 1Y premium remains there.
The basic problem is with your thinking................................................
The moment fund value decreases below the 1L figure, the policy will be terminated with immediate effect.
Now let us see how this will happen - As there is no more extra money so the sum at risk is always around 19L Rs. for the ins. co. (20L basic sum assured - 1L fund value) now as the person ages, his mortality charges 'll keep on increasing & in case the market is not favorable, the fund value 'll come down below the 1L figure very easily. Rest you can guess!!!!

From the query, it seems you want to run this policy as a substitute of Term plan. Well well well. Even in this case, there are too many problems. I don't see any merit to run a cover for age 100. While you are comparing the non productive term cover premium (as per your own admission) to your own calculation that keeping 1L fund value in this ULIP is a better option, you are missing the point, that you are paying upfront 1L Rs.

In my view if you are opting Aegon Religare I-term plan for maxium possible term of 25Y, the annual premium will be around 5K Rs. for 20L cover from now onwards & invest remaining 95K rupees in a good funds like HDFC top 200/DSP Eq., Reliance Growth Fund, etc (you can go through the list in other articles in my Mutual Fun blog http://goodfundsadvisor.blogspot.in) the final outcome will be far far better than what you are planning to opt for at present.

Regarding the non issue of new policies of this class, the same are banned due to IRDA's guidelines of capping of charges.


Regards,
Srikanth Matrubai

P.S.
Dear Raj,
You need to read your Policy Document, in the case of premium holiday.........
Premium Holiday
The Policyholder is however entitled to submit a written notice to the Company within the period allowed for the reinstatement of the Policy opting to continue the Policy provided 5 full years premiums have been paid. The Company will continue deduction of applicable Policy Charges and keep the Policy in force until the Fund Value does not fall below the amount equivalent to the Sum of 120% of Annualized Regular Premium of the Basic Plan and applicable Surrender Charge. Switches and Partial Withdrawals are allowed during this period, subject to satisfying the applicable criteria for the same.
Where the Fund Value falls to the level of an amount equal to the sum of the 120% of Annualized First Year Regular Premium of the Basic Plan and applicable Surrender Charge or the Fund Value is inadequate for the deduction of the applicable Policy Charges whichever is earlier, the Policy shall stand Terminated and the Surrender Value, if any, shall be paid.

Either you hasn't read your policy document or you are an another victim of MIS SELLING.




thanks to dear Ashalanshu for invaluable inputs.

Also visit

LIC Jeevan Anand is actually LIC Agent's Anand

"I am 32 years and have a 1 year old kid. My friend who is a LIC agent, suggested to me take LIC Jeevan Anand. What would be your advise?" asked Mr.Chandrashekar from Chennai. 

He continued : "Shall I go ahead with this plan or is there any other alternative available?"

 

SRIKANTH SHANKAR MATRUBAI  advised :

At first glance, Jeevan Anand looks attractive. All insurance policies look great while buying and look quite meagre when you receive it.

Please run...run...run away from your friend.

Obviously, it is advisable to check whether your friend has any formal Financial Planning Qualification. Is he acting like a Agent or advisor?

Is he able to asertian your Human Life Value?

Has your friend himself invested in this Policy? (This is the easiest way to find out whether he is fooling you).

Well let me also tell you, your friend may be genuinely interested in helping you....LIC brainwash all the agents and made them believe they are selling GOLD for copper price. The problem is these agents do not adequate Financial Planning knowledge.

FIRST THINGS FIRST :

Before taking any insurance, please answer the following questions yourself :

1. How much insurance you need

2. How much insurance you already have

3. How safe is your job/income profile

You have to answer all these questions faithfully and then decide on the quantum of insurance cover you require.

No one should buy more than what is required or buy less than what is needed.

If you are already not covered, the BEST INSURANCE WOULD BE A TERM PLAN.

I have come across many people who buy from Insurance from friends/relatives have hid the Policies even from their family as it is extremely difficult for them t accept that have been fooled.

WHAT IS LIC JEEVAN ANAND? 

 

This Jeevan Anand is whole life plan. It means the life cover is available even after the maturity period of the policy for the sum assured.

The Sum Assured along with the vested bonuses is payable in a lump sum on survival to the end of the term. An additional Sum Assured is payable on death thereafter.

Benefits in case of death during the selected term:

The Sum Assured along with the vested bonuses is payable on death in a lump sum.

Benefits in case of survival to the end of selected term:

The Sum Assured along with the vested bonuses is payable in a lump sum on survival to the end of the term. An additional Sum Assured is payable on death thereafter.

Accident Benefit:

An additional Sum Assured (subject to a limit of Rs.5 lakh) is payable in a lump sum on death due to accident up to age 70 of life assured. In case of permanent disability of the life assured due to accident this additional Sum assured is payable in instalments.

Features: http://licindia.in/endowment_005_features.htm

Benefits: http://licindia.in/endowment_005_benefits.htm

Illustration : http://licindia.in/endowment_005_illustration.htm

Illustration 1
Age at entry: 35 years
Sum Assured: Rs.1,00,000/-
Premium Paying term: 25 years
Mode of premium payment: Yearly
Annual Premium: Rs. 4,535 /-

End of year	Total premiums paid till end of year	Benefit payable on death / maturity at the end of year
		Guaranteed *	Variable		Total
			Scenario 1	Scenario 2	Scenario 1	Scenario 2
1	4,535	100000	1500	5100	101500	105100
2	9,070	100000	3000	10200	103000	110200
3	13,605	100000	4500	15300	104500	115300
4	18,140	100000	6000	20400	106000	120400
5	22,675	100000	7500	25500	107500	125500
6	27,210	100000	9000	30600	109000	130600
7	31,745	100000	10500	35700	110500	135700
8	36,280	100000	12000	40800	112000	140800
9	40,815	100000	13500	45900	113500	145900
10	45,350	100000	15000	51000	115000	151000
15	68,025	100000	22500	76500	122500	176500
20	90,700	100000	33000	113000	133000	213000
25	1,13,375	100000	41500	141000	141500	241000

End of year	Total premiums paid till end of year	Benefit payable on death / maturity at the end of year
		Guaranteed *	Variable		Total
			Scenario 1	Scenario 2	Scenario 1	Scenario 2
26	1,13,375	100000	41500	141000	141500	241000
27	1,13,375	100000**	-	-	100000**	100000**

 * In addition to the benefits given in the column, an Accident Benefit of Rs. 1,00,000 /- will also be available without payment of extra premium in case of death/disability due to accident

 ** Benefit payable on death after the selected term. If the death occurs due to accident up to age 70 an additional Rs. 1,00,000/- will also be paid.

(i) The above illustration is applicable to a non-smoker male/female standard (from medical, life style and occupation point of view) life.

(ii) The non-guaranteed benefits (1) and (2) in above illustration are calculated so that they are consistent with the Projected Investment Rate of Return assumption of 6% p.a.(Scenario 1) and 10% p.a. (Scenario 2) respectively. In other words, in preparing this benefit illustration, it is assumed that the Projected Investment Rate of Return that LICI will be able to earn throughout the term of the policy will be 6% p.a. or 10% p.a., as the case may be. The Projected Investment Rate of Return is not guaranteed.

(iii) The main objective of the illustration is that the client is able to appreciate the features of the product and the flow of benefits in different circumstances with some level of quantification.

(iv) Future bonus will depend on future profits and as such is not guaranteed. However, once bonus is declared in any year and added to the policy, the bonus so added is guaranteed.

 

BONUS :

The Bonus is NOT guranteed. It depends on the returns generated by LIC's investments.

What LIC gives as Bonus is not like your Salary which you go and spend in a Mall. LIC gives what it calles Simple Reversionary Bonus.

And....the Bonus the LIC declares is not given to you now, nor is it given if you surrender your plicy, but is given ONLY on maturity or on Death.

For Ex: LIC recently gave Bonus ranging from 34 to 41 on the Jeevan Anand Plan. (Avg -37).

This means if you have a Rs.10 Lakhs Sum Assured Jeevan Anand, you would have got Rs.37,000 bonus (avg) which would be added to your fund value.

What is the value of 37,000 that you will get after 15 years ?

At a nominal discount rate of 10%, the value is Only Rs.7,181. How big is that ?

COMPARING JEEVAN ANAND WITH JEEVAN ANMOL

Policy Comparison for a 35 year old male.

Plan Name                          LIC Jeevan Anand                                                            LIC Anmol Jeevan I

Plan Type                            Endowment                                                                       Term Assurance

Sum Assured                     Rs. 10,00,000                                                                      Rs. 10,00,000

Premium Amount           Rs. 79,911                                                                            Rs. 3,841

Death Benefit                   Sum Assured plus Bonuses                                         Sum Assured

 Maturity Benefit             Sum Assured plus Vested Bonuses                                Nil

Riders                                   Accident Benefit                                                                  NA

For 35 year old male, 10L sum assured, 15 years term plan, the premium is 79,911.

Same 35 year old male, 10 L sum Assured, 15 years in LIC itself (LIC anmol jeevan), the premium would work out to Rs.3841.

The difference is a huge huge Rs.76070. The amount over a period of 15 years even at a conservative return of 10% would work out to more than Rs.24 Lakhs.

Take a Term Plan and have all the money in the world to accumulate your own retirement and give BONUS TO YOURSELF!!!!!!

Why do you need LIC to declare anything?

If you see the chart given here...

If the LIC manages to generate 10% return, then the policy holder receives Rs.2,41,000 which in effect gives a return of ......just...5.8% compounded. Meagre, meagre returns, especially considering the long time frame where you have invested.

And, my friend, LIC itself says..............

"These assumed rates of return are not guaranteed and they are not upper or lower limits of what you might get back as the value of your policy is dependent on a number of factors including future investment performance. Future bonus will depend on future profits and as such is not guaranteed. However, once bonus is declared in any year and added to the policy, the bonus so added is guaranteed. "

FINALLY,

Even respected website like www.policywala.com has said in its review of Jeevan Anand :

"""On a simple note, you are not even getting double of your money after paying for continuously 25-30 years and the sum assured you will be getting after 25-30 years may seems high at present but think for next 45-50-60 years & think about the effect of inflation on the sum assured.

Insurance is an expense, not an investment. Go for Term Insurance Cover. Invest the difference in premium in mutual funds, it will give you far higher returns."""

It makes no sense to commit 4 Lacs per year for 15 years to get something like 70 Lacs after 15 years. Also if for some reason, you can't pay after 5 years, you will only get back what you paid in premium minus commission.

 

Jeevan Anand is meant to make Jeevan of insurance agent Anand at the cost of investors..

Also read..

http://goodfundadvisor.hubpages.com/hub/MY-VIEW-ON-LICS-JEEVAN-ANAND

Insurance is not Investment. Go for PURE TERM COVER. The difference in premium if invested in mutual funds will give you far higher returns. Remember your insurance agent gets 35 to 40% commission on your first premium .

     Insurance is an EXPENSE, not an INVESTMENT. No amount of money put in INSURANCE will make you richer or recover the loss suffered by your dependants in your absence. As policy holder if you receive any money from Insurance - you are a loser because you have taken a policy which is costlier than a basic term cover. As nominee if you receive money - you are the biggest loser . What you receive from insurance will only give you temporary relief. The best thing for a nominee is the policy holder staying alive and earning well. So do not look for returns when you are choosing an insurance policy. As policy holder look for the least premium payable per lakh of sum assured. Best & cheapest is PURE TERM COVER.

Instead always go for Mutual Funds. Even Mutual funds do offer you Life Cover. Do consult your Financial Advisor before investing.

Best of luck,

Srikanth Shankar Matrubai

P.S.

FREE advice can be expensive and a good paid advice will earn you money  from the savings itself. LIC agents offer lot of free advices and also give you expensive plans.

I do receive commission from insurance products. But I don't sell insurance products for earning commission. This is big difference. I stay independent but I do sell service and products in customer's interest.