LIC has launched a new life insurance plan with LIC Bima Jyoti (Plan 860). LIC Bima Jyoti is a non-affiliated, non-participating life insurance plan with limited premium payments. Let’s review this plan and see if you should invest.
LIC Bima Jyoti (plan 860): main features
- Not linked: It’s not a ULIP. It’s a traditional life insurance policy.
- Not participating: This means that you know in advance what you will receive at the time of the contract period. There will be no confusion. No surprises, positive or negative.
- Limited premium payment: The payment term for premiums is shorter than the contract term.
- Contract term: 15 to 20 years
- Premium Payment Period (PPT): Contract period – 5 years.
- With a contract term of 15 years, the term of the premium payment is 10 years.
- For a term of 20 years, the PPT is 15 years.
- Entry age: 90 days (minimum), 60 years (maximum)
- Sum insured: Rs 1 lac (minimum) / No upper limit (maximum)
- Age at maturity: 18 years (minimum), 75 years (maximum)
- Loan option available after 2 years.
- Option to receive installment and death grants in installments
- High Basic Sum Assured Discount Available
LIC Bima Jyoti (Plan 360): Due payment
Maturity Benefit = Basic Insurance Amount (BSA) + Accrued Guaranteed Supplements
You know the insured basic sum in advance.
Guaranteed supplements (GA) The policy is taken out at a rate of Rs 50 per 1,000 sum insured per year (during the term of the policy).
If the BSA for the policy is Rs 10 lacs, your policy will earn Rs 50,000 GA each year. 50 * 10 lacs / 1000 = Rs 50,000
Note that you will NOT receive this amount every year.
This is only credited to the policy each year and paid out at the time the policy matures and the investors die.
If the BSA is Rs 10 lacs and the contract period is 20 years, the investor will receive Rs 20 lacs back at the time of the contract period. Maturity Amount = 10 lacs + (50/1000) * 10 lacs BSA * 20 year contract period = Rs 20 lacs.
So when you buy the policy you know exactly how much you will get at the time it is due.
LIC Bima Jyoti (Plan 360): Death grants
Death grants = sum insured in the event of death + accrued guaranteed supplements
The sum insured in the event of death is the highest of the following 3 amounts.
- 125% of the insured basic sum
- 7 times the annualized premium
- 105% of all premiums paid to date
The calculation of the guaranteed supplements is carried out as in the previous section.
Note that the minimum death benefit (sum insured in the event of death) must be at least ten times the annualized premium for the proceeds of a life insurance plan to be tax-free.
I don’t have access to the premium table for LIC Bima Jyoti yet, but You can see that there is no explicit provision that guarantees tax-free maturity proceeds. One of the parameters used to determine the amount insured in the event of death is seven times the annualized premium. If it had been ten times the annualized premium, you could have been sure that the maturity proceeds are tax-free.
So you hope that 125% of the insured basic sum is at least ten times the annual premium. If this is not the case, the proceeds from the maturity are taxable.
This won’t be a problem for younger investors. The sum insured in the event of death is more than ten times the annual premium. However, if you are over 50, check this aspect out. The seller will not notify you of such problems.
I am copying sample rewards from the product brochure.
You can find that the premium for a 50 year old is 1.22 for a 15 year term. The premium is for the insured base sum of Rs 10 lacs. The minimum death benefit for this policy is 12.5 rupees (125% of the BSA). This is a little more than ten times the annual premium. With increasing age, the premium increases and the minimum death benefit may not be more than ten times the annual premium. In this case, the proceeds from the due date are not tax-exempt.
Keep this in mind
With all traditional plans, benefits are linked to the sum insured and not to the annualized premium.
Let’s say a 30 year old and a 45 year old buy a LIC Bima Jyoti plan with a basic amount of 10 rupees. Premium payment period: 10 years, contract period: 15 years.
When the policy matures, they both receive the same amounts.
Insured base sum + 15 years x 50,000 guaranteed supplements per year = Rs 17.5 lacs
However, will their returns be the same?
Because they have to pay different annual premiums.
The 45-year-old (at the time the contract is signed) pays a much higher annual premium than the 30-year-old. For example, suppose the annual premium for 30 year olds can be 80,000 while it can be 90,000 for 45 year olds.
And this will decrease the return for the older investor.
By the way, this is not just about LIC Bima Jyoti. This applies to all traditional life insurance and ULIP. Your age at entry will affect your return on investment in ULIPs and traditional plans.
If all else is the same, an older investor will get lower returns.
LIC Bima Jyoti (Plan 360): What will the returns be?
The returns from non-participating plans are usually quite low. Don’t expect anything other than this plan.
I am copying the sample premium from the product brochure available on the LIC website.
Include one of the return calculation examples.
Entry age: 30 years
Contract term: 20 years.
Premium payment term: 15 years
So you pay the premium for 15 years. And get a term advantage after 20 years.
Insured basic sum (BSA): Rs 10 lacs
Annual premium: Rs 77,790 (includes drivers who have died in an accident and are disabled). The premium for the first year is Rs 82,290 (including 4.5% GST). Premium for the following year: Rs 79,540.
What is the due amount?
We already know that. Rs 10 lacs (BSA) + (50/1000) * 10 lacs * 20 years = Rs 20 lacs.
This corresponds to an IRR (net return) of 3.93% pa
That’s too low for a long-term investment.
Also note that these returns are for a 30 year old only. If the entry age is higher, the premium is lower (with the same maturity benefit of 20 lacs).
For example, if a 50 year old investor buys the same plan (20 year contract term) from 10 rupees, they will have to pay an annual premium (before tax) of 88,178 rupees (instead of 77,790 rupees for 30 year old). Both have the same maturity value of Rs 20 lacs.
Therefore, the returns for 50-year-olds are lower at 2.98% pa (instead of 3.93% pa for 30-year-olds).
Should You Invest?
The returns are too low for a long-term investment. And if you want to expand your coverage, buy simple risk insurance.
I see limited merit in this plan.
I read a strange illustration about LIC Bima Jyoti in a Financial Express article that messed up premium payment terms and policies and showed an IRR of 7.15% pa. That doesn’t make much sense. You will not receive more than 7% pa from this plan. That’s for sure.