News of companies listed on the stock exchange coming out with rights issues, wherein new shares are offered to existing shareholders in some ratio based on their existing share holding, is very common. But this is not a common scenario among insurance companies, wherein companies come out with a new policy / product which can be bought only by the existing policy holder’s. On 29^th October 2009 India’s largest life insurance company came out with something which can be compared to a listed company coming out with a right’s issue. Yes, you guessed it right; we are talking about Jeevan Nischay. Riding on the high success of Jeevan Aastha last year, this is the latest guaranteed return product from LIC which has been launched on 29^th October 2009 for its existing policy holders. Let’s have a closer look at the product.

Features

Jeevan Nischay is a single premium closed ended (open for subscription for a limited time period) product for existing policy holders who have atleast one risk bearing policy in force. This is a guaranteed return plan. The global economy is slowly recovering from financial mess left behind by the subprime crisis. Stock markets are volatile. People are scared to take risks because many of them burnt their fingers in the stock market crash in October 2008. With such a gloomy economic scenario, LIC’s guaranteed return plan couldn’t have come at a better time. This plan gives investors an opportunity to invest their money into a product which not only protects their capital but also assures them guaranteed returns on maturity.

As per the LIC website following are the features of the policy:

Also the amount that a person can invest in this product depends on the insurance that he already bought from LIC. The maximum cover that a person can avail of will be the lower of either Rs 50 Lakhs or 50% of total sum assured (total death benefit) under all existing in force policies. For example if a person already has insurance cover of Rs 20 Lakhs from LIC, he can invest a maximum of Rs 2 Lakhs in Jeevan Nischay with an insurance cover of Rs 10 Lakhs in the 1^st year.

Benefits:

The maturity amount depends on the premium paid, age and the tenure chosen. For higher premiums, Rs 25000 and above, the policy holder will be eligible for incentives, which will result in higher maturity amount. The policy holder can avail a loan against the policy after completion of 1 year. The policy can be surrendered after completion of 1 year. On surrender the policyholder is assured surrender value equal to 90% of single premium paid.

Death Benefit:

Ø If death happens during the 1^st year of the policy, five times the single premium is payable as death benefit.

Ø If death happens after 1^st year but before the last year of the policy then the maturity sum assured amount is paid.

Ø If the policy holder survives the entire tenure of the policy or death happens in the last year of the policy, then the maturity sum assured along with loyalty bonuses, if any, is paid.

So this product provides insurance cover only in the 1^st year and in the subsequent years it becomes an investment product like a single premium bond.

Maturity Benefit: On maturity of the policy, the maturity sum assured along with the loyalty bonuses, if any, is paid.

Returns

As per the benefit illustration, following details are available.

For a person who is 35 years old, on an investment of Rs 25,000 for 10 years, he gets a guaranteed maturity amount of Rs 44,674. This gives a guaranteed return of 5.97% (roughly 6%) without any loyalty additions. If we take the loyalty additions of Rs 8935 into consideration, then the maturity amount comes to Rs 53609. This gives a return of 7.92% with loyalty additions, if any. In the above scenario the guaranteed return for 5 year tenure and 7 year tenure works out to 5.25% and 5.54%. As the entry age increases the returns dip due to higher mortality charge.

Comparison of Returns with Tax Saver Bank FDs

If we compare the 5 year guaranteed return of 5.25% to 5 year tax saver bank FD the return is lower. Tax saver bank FDs are offering rates in the range of 5.5% – 8%. But the interest earned on these FD’s is fully taxable and the tax amount depends on the tax slab in which the individual falls. This suppresses the overall return from tax saver bank FDs. Higher the tax bracket in which the individual falls, lower will be the overall return from the FD. Also these bank FDs do not offer any loyalty additions. So if LIC declares good loyalty bonus then Jeevan Nischay may turn out to be better than bank FDs because all the returns earned from life insurance are tax free. So for a person falling in the highest tax bracket investing in Jeevan Nischay may be better than investing in a tax saver bank FD, after taking into account the income tax implications.

Conclusion

Ø To conclude Jeevan Nischay seems more of an investment product rather than an insurance product. This product offers life insurance cover of 5 times the one time premium, but restricted only to the 1^st year.

Ø From the second year onwards the maturity sum assured is paid which is far less than the life insurance cover in the 1^st year. It’s more of a single premium bond.

Ø Further if we consider the loyalty bonus then the overall return in this product comes to 7-8% which is good considering the returns from this product are tax free. So investors falling in the highest tax bracket may have a slight advantage in investing in this product over other fixed income products where the returns are taxed on maturity.

Ø The plan is open for sale till 31^st March 2010.

Ø After buying the product, if the customer is not satisfied with the ‘Terms and Conditions’ of the policy he may return the policy within 15 days.