Insurance is a contract which provides protection against a possible eventuality or risk. So, insurance in its purest form is an expense rather than an investment.
Unfortunately, many of us mix life insurance and investment. We expect Returns from our investment in Life Insurance. Investing in a Traditional Life Insurance Plan is one of the most common personal finance mistakes that many of us commit.
What are Traditional or Conventional Life Insurance Plans? – Traditional plans or conventional plans are the oldest types of insurance plans available. Term Insurance plans, Money-back plans, Whole-life Plans, Endowment plans etc., are considered as Conventional plans. Traditional policies are considered as risk-free, as they provide fixed returns in case of death (or) on policy maturity.
What is an Endowment plan? – It is a combination of insurance and investment. The insured will get a lump sum along with bonuses (if any) on policy maturity or on death event.
What are Money-back policies? – They provides life coverage during the term of the policy and the maturity benefits are paid in installments (at periodic intervals) by way of survival benefits.
What is Whole-Life Insurance Plan? – It is a life insurance policy which is guaranteed to remain in force for the insured’s entire lifetime. The Sum assured is paid to the Policyholder’s nominee in the event the insured dies.
The common thing with these policies is that they provide bonuses to the policyholder. Bonus is offered on traditional plans which are built in to the plan structure. These bonuses can be of different types like Simple Reversionary bonus, Loyalty addition, Final Additional bonus etc., So, traditional plans have two components i.e. i) Life cover & ii) Investment Component.
Traditional Life Insurance Plan & Premium amount
As discussed above, an insurance provides risk protection. You can get the risk cover by paying a certain amount as Premium. In a traditional life insurance plan a part of the premium goes towards mortality charges (for life cover) and the remaining is invested primarily in Debt or Fixed Income Securities.
(What are Mortality charges? – Mortality Charge is the amount charged every year by the insurer to provide the life cover to the policyholder on the life of the Insured. It is also known as Cost of Insurance.)
As these traditional plans have to pay BONUSES to the policyholders, they have to charge over and above the ‘cost of insurance’. This is the reason why the endowment plans or money-back plans are costlier than the pure term insurance plans.
For example : Arun pays a premium of Rs 10,000 towards his Endowment insurance plan for Sum assured (life cover) of Rs 1,00,000. His Life insurance company deducts a part of this Rs 10,000 premium as the ‘Cost of Insurance’ or ‘Mortality Charge’. This is kept aside by his insurance company and maintains a ‘Life Fund’. This Life Fund is not invested anywhere. Insurance company uses this Fund to pay out Death benefits.
Mortality Charge is usually a very small amount, say Rs 400 p.a. from the Rs 10,000 annual premium that Arun paid for his life insurance. From the remaining amount of Rs 9,600 (Rs 10,000 – Rs 600) various expenses like office administration, marketing expenses, policy maintenance etc. are deducted and the balance amount would go for investment.
Why Traditional Life Insurance Plan is a bad Investment?
- High Cost of Insurance & Low Life cover : As discussed above, the premium rates on Traditional plans are much higher than the term insurance plans. If you are buying an Endowment plan or money-back policy for life cover then kindly note that you are paying a very high premium for a low life cover.
- Low Investment Returns :
- The conventional plans can be of two types – i) Participating Insurance plans & ii) Non-participating insurance plans.
- In case of Participating plans, the investment returns are primarily dependent on the bonuses declared over the Policy term by the life insurance company.
- In case of Non-participating traditional plans, the death and maturity benefits are clearly mentioned upfront. That means a policyholder knows what he/she is going to get at maturity or on death.
- In both the cases, most of the traditional life insurance plans offer investment returns of around 3 to 5%.
- So, in terms of life cover you pay high premium & you get low life cover and at the same time in terms of Returns too, you get a meager return on maturity.
- Percentage of Returns are not guaranteed : The plans which fall under the category of ‘Participating plans’ the percentage of returns are not guaranteed. The rate of bonuses declared by a life insurance company can vary from year to year. The product brochures clearly state that the rate of return is for illustration purposes only. So, kindly be aware of this point.
- Terms & Conditions on Bonuses : Bonuses like Loyalty addition or Final additional bonus may or may not be applicable on all traditional plans. They can be applicable based on the quantum of sum assured and/or policy term.
- No Compounding effect : The bonus (simple reversionary bonus) declared by most of the Endowment plans or Money-back plans doesn’t compound itself. For example, let’s say your life insurance company declares bonus of Rs 40 per 1000 of sum assured for two consecutive years. If you have invested in an Endowment plan of sum assured Rs 1 Lakh, after 2 policy years you will receive a bonus of Rs 8,000 (Rs 4,000 + Rs 4,000). This Rs 8,000 would remain as Rs 8,000 till the maturity of the endowment policy. It is just accrued and compounding does not come into picture.
- High Penalty : If you decide to surrender a traditional life insurance plan in the initial years, you will end up paying a hefty penalty. You can surrender the policy for cash only after the premiums have been paid for at least three policy years.
- Tax saving is an additional benefit : Insurance is primarily for Protection and not for saving Taxes. Kindly note that Tax saving is an additional benefit, that’s it!
- Erosion of wealth – Life insurance policies are long-term contracts. When you are investing for long-term, would you like to get decent inflation adjusted returns or not? Your endowment or money-back plans are low-yielding investments. these may give you negative inflation adjusted returns.
Do not blindly go by projected illustrations given by your agents or advisors. A traditional policy may look attractive today by looking at the projected maturity corpus. But, always factor inflation into the calculation. For example: You may be offered a maturity value of Rs 50 Lakhs in 20 years. At 6% inflation the today’s value of it will be reduced to Rs 15.6 Lakh. (Read : What is Time Value of Money?).
Remember this simple point : “Any life insurance plan which pays money before a policyholder dies can be best avoided.” Else you may end up buying costly and unwanted life insurance plans. (Read : How to get rid off unwanted life insurance policy?)
Then, who can buy these traditional life insurance plans? If you already have adequate life cover, would like to safeguard your capital, and OK with lower (or negative , inflation effect) long-term returns then you may consider investing in a Traditional life insurance plan. Even in this case it is not an INVESTMENT OPTION but it is just a long-term SAVING option!
(Image courtesy of jscreationzs at FreeDigitalPhotos.net) (Post published on : 01-July-2016)
The debt Recovery Agent Certificate course has been developed on the advice of RBI (Reserve Bank of India) by the Indian Banks’ Association, in consultation with the Indian Institute of Banking and Finance (IIBF).
hello sreekanth, i am planing to take term policy if u can advice me which one to take.
Dear Vikesh,
Which is the best Term Insurance plan to buy? – You may take a term plan from any insurance company of your choice, it should not be of any issue. But do disclose all the required information in the proposal form accurately and honestly, that’s it!
“As per the recent amendment to Section 45 of the Insurance Act, if your policy is 3 years old, no matter what happens, the life insurance company will not be able to deny the claims. So, your life insurance company has only 3 years in hand to reject the policy based on any mis-representation or mis-statement. Once three policy years are completed then the life insurance company has to settle the claims and can not reject them.”
Related articles :
* How much Term Life Insurance Cover do I need? | Online Insurance coverage Calculator
* IRDA Claim Settlement Ratio 2017-18 Data | Top 10 Life Insurance Companies based on CSR
* Top 9 Best Online Term Insurance Plans in India
Anna, I got the answer for my comment on another article of yours from this article.. However, I have a small doubt with the last line “Then, who can buy these traditional life insurance plans?”.. What about the persons who are working in unorganized sectors, who receive salary/income in cash.? As far as I know, Term Plan requires ITRs/Form 16s/Pay slips etc. So, what would be your suggestion on this? My brother-in-law has this situation. He earns 50-60K per month but paid in cash.
Dear Raghav,
If ones requirement is to be conservative and happy even if returns are around 4 to 6%, can pick a traditional insurance plan.
If one earns, 50 to 60 k pm, he has to file ITR and can get a Term plan based on that.
For low-income earners, there are Govt sponsored schemes and one can also buy term plan with lower cover..
Kindly read this article – How to empower your Domestic help (Domestic Workers) Financially?
It is a great article. I personally feel that traditional plans should be banished. Thank you for sharing this article
Hi Sreekanth,
Hope you everything is well with you. Srikanth Varma from Hyderabad again. 🙂
I’m 30 year old with me and my spouse working in private sector and have a 3 year old daughter.
I’ve total four LIC polices for SA of 20 Lakhs and I’m paying approximately 85K as yearly premiums.
All are endowment policies (not even Jeevan Anand) and here are the details of the policies.
Policy1 – SA 5,00,000 – Tenure 30Years – Started on Dec 2005
Policy2 – SA 3,00,000 – Tenure 21 Years – Started on Sep 2007
Policy3 – SA 5,00,000 – Tenure 21 Years – Started on Feb 2008
Policy 4 – SA 7,00,000 – Tenure 21 Years – Started on May 2008.
I’ve taken these policies during starting of my career as per my father’s suggestion. (His only concern then was to make me save some money than spending all the salary for expenses hence engaged me in LIC Policies).
After reading several blogs, I now feel that I should take a serious decision to scrap them. But I’m puzzled if I’m making the right choice or not. After reading your blog, best suggestion seems to be to make them paid-up policies. Is it the right choice in my case or should I just continue them for next 10 years? (For additional Insurance I’ve already taken Aegon Religare Term Insurance, that too after reading your blogs only. Thanks to you on that matter 🙂 )
Moreover, I generally use the loan on LIC policies as a contingency fund for all kinds emergencies. My second question is, if I convert all the policies to paid-up, would I still be able to avail Loan on these policies? Please shred some light on this.
Thank you,
Srikanth Varma
Dear Srikanth,
Suggest you to make these 4 policies as PAID-UP ones.
Yes, you can take Loan against Paid-up policies too, generally the loan value can be around 70 to 80% of surrender value in case of Paid-up ones.
Thank you for your prompt reply. Will make them PAID-UP ones.
Hi, Before i drop This Query I would like to thank you for the detailed description of the policies and their benefits. Really it helps a lot.
I Invested 1Lakh in HDFC Classic Assure Plus plan for 10years term (I am going to pay for 7Years only).
HDFC agent who offered me this plan said and showed some figures which shows around 11.5lakhs of profit at the closing of term (i.e., On the 1st of 11th year). But when i see the Policy details in online It shows Sum Assured is 3,80,000 (which is nearly less than what i have paid 7* 1,00,000 = 7lakhs) + min 3% reversal bonus on sum assured + Term Bonus. I am completely shocked with this details and No words to say.
I have below questions, if you can provide your feedback or suggestion it will be great help as like me two of my friends also invested in the same fund.
1. At max what is the min guarantee amount we are going to get after term year (10years) ? Is there any guarantee we get more than what we have paid ( I mean more than 7 lakhs).
2. Can we surrender this policy now itself (i paid only two installments yet). ? Based on your reply on first question i may get some clarity.
Once again thank you so much.
Dear Krishna,
It is an endowment plan. You will get more than what you have paid, on maturity. But the returns can be very nominal, after adjusting for inflation.
You can surrender the policy if you had paid the premium for three years.
Do you have a term insurance cover?
Kindly read: How to get rid off unwanted life insurance policy?
Dear Sir
I purchased one Jeevan Anand policy in Sept 2010 for a total sum insured 20 lacs over a tenure of 21 years. So till today, about six installments of about one lac rupees per year have been made.
Should at his juncture, it would be a wise decision to discontinue in between?
Dear Maninder,
Do you have any other existing life insurance policy?
If your requirement is life cover, you may buy a term plan and then discontinue this plan.
Read:
How to get rid off unwanted life insurance policy?
Best term insurance plans.
Hi Shreekanth
Truely eye opening article I.must say.
I request your suggestion on my issue. I am a 34 yeAr old working women, with annual income of 6 lakhs ,married and has one son.
I plan to rework on my finances by taking a term plan and start on sip. Before that I want to correct the mistakes in my earlier investments in.lic
1. I have 2 lic jeevan anand policies.
One bought in 2006 , 20 years term with premium of 7000pa , for which 10 years premium is paid till date.
2. Jeevan anand bought in 2011,20 years term with premium 22000 p a. 5 years premium paid.
Now I feel it’s terrible investment and I should make it paid up or surrender them. After reading all these posts I feel paid up is better. Kindly suggest the right option and what would be my loss approximately.
I have around 6.5 lakhs fd in banks .Now planning for term plans . I have to choose btwn hdfc click to protect plus and icici prudence..which is better?
Kindly suggest.
Thank you.
Dear Keerthi,
1 – You may consider making 2011 policies as PAID-UP.
2 – I believe it is better to Surrender and re-invest this amount in better investment avenues.
Any specific reason for maintaining FDs?
Kindly go through below articles;
How to get rid off unwanted life insurance policies?
Why it is advisable to avoid FDs/RDs for longer period?
Best Term insurance plans.
Thank you very much Sreekanth. Will check it out with lic for surrender benefits if any. Regarding FD no specific reason. Just thought it may cm handy for son’s higher education or in case of emergency. I Will chk the articles you have suggested. Any inputs abt SIP plz suggest. Thanks n regards,
Keerthi
Dear Keerthi,
Regarding MF SIPs, you may go through below articles;
How to select the right mutual fund scheme?
Best Equity funds.
MF portfolio overlap analysis tools.
What are Large/Mid/Small-cap funds?
Hi sir,
i am rajendran.R (age- 33 years ) working as a stationmaster at ariyalur, we want to get idea regarding with term insurance.
our questions are as follows:
1.we are planning to get a term insurance plan from hdfc life, it offers 4 types of term plans by name, lifecover , extra life, income option, income plus option.
which one is better among these?
is it beneficial to get any rider along with term insurance?
now we plan to get only basic life cover, later 3 to 4 years we want to add any rider means is it possible?
Dear Rajendran,
1 – Kindly read my review – HDFC click 2 Protect plus.
2 – Advisable to take basic cover and then buy a stand-alone Personal Accident insurance plan. Also, a health plan.
3 – Adding riders after the issuance of policy is generally not allowed.
Hi,
I really appreciate if you could advice on the following:
1. What would be the maturity value if I continue with my LIC Jeevan Saral and LIC New Jeevan Anand policies?
2. What would be the surrender value if I surrender my Jeevan Saral policy now? I know that for New Jeevan Anand I will not get any money as I have paid only for 2 years but If Iam loosing huge amount of 88,000 if I am surrendering
3. What would be the paid-up value if I stop further payments on Jeevan Saral & what if I pay another premium for New Jeevan Anand and make it as Paid Up
4. Finally What would be your advice – surrender or paid-up?
Also I would like to know that if am surrendering my both the policies then the income tax benefit that I have claimed earlier for the premiums I have paid will be taxable as income if the policy is terminated?
Dear Rizwan,
Kindly refer to my above comment.
Read: Tax benefits can be revoked..
Hi Sreekanth,
I have following two policies taken in LIC as per my Father’s wish . But I regret taking this after reading your blogs since this seems to be a bad investment.
Current age – 27.
1) LIC Jeevan Anand(With Accident Cover)
Sum Assured – 2,50,000 (12900 Yly Premium).
Total Premium paid – 4
Tenure 21 years.
2) LIC Marriage Endowment Annuity plan with Accident Benefit
Sum Assured – 5,00,000 (22,500 Yly premium)
Total premium paid – 3
Tenure – 21 years
I have taken a Term Cover of 1 Crore this year and planning to invest in ELSS manually in a lumpsum investment and am in process of shortlisting the Long term and Short Term Financial Goals to start with proper financial planning.
Please provide your suggestion , Whether I can make this policy as Paid Up after paying 5 years premium.
Thanks,
Vignesh
Dear Vignesh,
1 – You may surrender it.
2 – You may surrender it.
Kindly read:
How to get rid off unwanted policies?
Term insurance + PPF Vs endowment plans.
List of articles on key aspects of personal Financial Planning.
Thanks Sree for responding.
Whether policy 1 can’t be made as Paid Up rather than surrendering ? If I surrender policy 1 – I may get ~12K only. But If I let it mature after making it as paid up then, I would get Paid up value which may come around 48K + Accured bonus for 21 years as Maturity Value. Isn’t this Good Option rather than compromising with 12K being received now ?
I’m just asking this out of curiosity 🙂 to know why to surrender and why not it can be paid up. Is there any reasons for suggesting to surrender the policy ?
Kind regards,
Vignesh.
Dear Vignesh,
It can be made PAID-UP. But considering your age & probability of making good returns over & above the loses (if surrendered) is high, if you re-invest the surrender amount in right avenues for long-term. There is no right or wrong answer, you need to take decision based on which is suitable to you.
Hi Srikanth,
I have invested in some bad products which really doesn’t provide good insurance coverage I hold LIC Jeevan Saral & LIC New Jeevan Anand, Now that I have decided to go for a Term Plan+ SIP investments to gain maximum coverage to my family, But before taking any call I need your advice.
I am aged about 34 years and married, I have recently take a Home Loan of 32 lakhs for which EMI has already started but I know that Insurance products that I hold are definitely not covering my Home Loan Amount, So I need your valuable advice of you on my below insurance policies that I hold. Kindly advice what should be done with my bad investments that was made and how can I recover from any further loss.
Plan: Jeevan Saral
Sum Assured: 5,00,0000
date of Commencement: 26/12/2009
Policy Term:21 Yrs
Premium Amount:24,020
Scenario-1: I have paid premium for 7 years now, will I get my maturity amount along with Loyalty Bonus if I surrender my policy now or is that I get loyalty bonus only after premium payment for 10 years, If So If I am Surrendering my policy this year, How much will I get as Maturity Amount, Appreciate if you can calculate and let me know the exact figure
Scenario-2: If I Paid up my Policy instead of Surrendering, How much will be the insurance Coverage or Sum Assured, In paid up I think I will not get my money back but would like to know by how much amount will my insurance coverage gets reduced from 5 lakhs?
Scenario-3: If I partial withdraw after 10 yrs, How much amount will I get, Even after partial withdraw will my Sum Assured will be 5 Lakhs or will it be reduced, if reduced how much will be my premium amount?
I have enquired my Surrender amount for my Jeevan Saral policy with LIC, the surrender amount at present is 1,39,000. Amount that I have paid as premium from 7 years is 1,70,000, obviously here am in Loss, so is it better go for paid up else should I surrender undergoing Loss?
Plan: New Jeevan Anand
Sum Assured: 8,00,0000
date of Commencement: 28/08/2014
Policy Term: 21 Yrs
Premium Amount: 43,958
Querry: I have paid Premium for this policy for 2 years with Taxes I have paid 90,000 till date, I know that I will not get any amount If I surrender my policy now, since I have not fulfilled lock in period, Suppose If I Paid up my Policy instead of Surrendering after 3 yrs lock In, How much will be the insurance Coverage or Sum Assured will I have, will I get my money that I have paid for 3 years when policy term ends after 21 yrs along with the insurance coverage till 21 years? Kindly let me know if my understanding is correct. If not, Is it correct to go for paid up or surrender? Which will be correct decission?
Dear Rizwan,
For exact figures, suggest you to kindly contact your Life insurance agent or the insurance company.
Jeevan Saral – You may consider making it a Paid-up one.
Jeevan Anand – You may get the policy lapsed, book loses and move one.
Thanks Sreekanth for replying to my Queries,
Regarding Jeevan Saral policy:
Case-1: If I make it a paid up now The Total Amount of 1,68,140 (24020*7 yrs) which I have paid in form of premiums will be only the paid up value right? and I guess no Loyality addition would be added(since loyalty addition is given only after 10 years Continuous premium payments, So I am not able to figure out whether the amount of 1,68,140 which I had paid as premiums till now will hardly have any value after 14 years. Since My policy term is for 21 Yrs and I have paid premiums for 7 yrs, remaining 14 years.
Case-2:At present my Surrender Value of Jeevan Saral policy is 1,39,000. In case If I am surrendering, I need to Book a Loss of 29,140 (1,68,140 -1,39,000)
Case-3: If I am Surrendering my policy after 10 yrs, The maturity Amount what I am getting including Loyalty addition is 3,10,000(As Said by LIC DO) what I will pay for 10 Years is 2,40,200(24020*10 yrs) In this case I am getting benefit of approx 70,000(3,10,000-2,40,200)
So, Among all the above 3 cases, Please suggest the appropriate choice to take my decision
Regarding Jeevan Anand Policy:
Case-1: Lapsing the Policy,As I have paid premium of 90,000 for 2 years, It’s bit painstaking to book a loss of this amount
Case-2: If I pay another premium of 45,000 for this year and if I am surrendering after 3yrs Lock- In, after all the calculations the surrender value what I am getting after 3 yrs is 54,000 but what I have paid is 1,35,000 in this case the loss is 81,000 which is little better than the earlier case where I am making policy to Lapse.
Case-3: Otherwise, to minimize the Loss can I make the policy paid up after 3rd year premium payment? Only thing is the premium amount that I have paid for 3 years (1,35,000) I will get that after 21 years I don’t know whether any Bonus get’s added to the maturity amount to the paid up value after 21 yrs I know paid up value of 1,35,000 is too low considering the inflation, but atleast am not loosing anything.
So, among all the above 3 cases, Please suggest the appropriate choice to take my decision.
Best Regards,
Rizwan
Dear Rizwan,
Your views with plan 1 & plan 2 are contradicting.
Kindly note that its better to amputate a finger rather than taking a risk of losing entire hand.
There is no right or wrong answer for this scenario.
Considering your age (34), if you are confident and can be patient enough, you can re-invest the saved premiums + surrender value amount (if surrendered) in right investment avenues for long-term. May be, the amount of loses you are booking now can be easily surpassed and can get even better returns.
Thanks Sreekanth for your valuable suggestion
Hi Sreekanth,
I am in late 40 age and NRI. Long back I took LIC money back policy and next year going to complete maturity period. Now, I would to know is it good to buy term policy at this age? what could be the benefit, approx.,premium and which insurance companies is the best in India.
Appreciate your kind feedback soon.
Venky
Dear venky,
If you have dependents and/or have financial obligations/liabilities then consider buying a Term plan with adequate Life cover.
NRIs can buy a term plan from Indian Life insurance companies.
Read: Best Term insurance plans.
Hi Sreekanth,
My Father -55 Years old working as Central Government Employee. has invested in 7 LIC Policies and out of which all the premiums have been paid (Approx 25000 INR PA) and Maturity is at 2021/2026 .
And 2 Single premium (Growth Funds) also been paid in 2012 and 2015 (250000 INR).
Two Money back Policy is Active and going to be complete by 2021 Approximately 50000 INR per Annum.
Apart from these, Last year he has taken MAX Life Insurance’s Guaranteed Income Plan (12Yrs) with the Premium of 50000 INR which comes around ~ 6.2Lakhs of total premium(inclu of taxes) at the end of 12 years. But returns are mentioned as Income benefit – 50000 PA for first 5 years and 1lakh for next 5 year then 6.81Lakh as Lumpsum at the end of 10 year pay out. He is already showing VPF of 1.5 lakh and drained his 80C limit. I feel this Max life Insurance policy could have been bad investment and is it advisable to surrender this and book loss of 50000 INR (Only premium paid) or shall I continue with this Insurance policy and reap the benefits after 20 year 🙁 . Please suggest.
Dear Vignesh,
Max life Guaranteed income plan is a traditional annuity plan. Kindly check out the annuity rate that is applicable for this plan, mostly it will be on the lower side. You may ask him to discontinue the plan and opt for other better investment avenues.
Life insurance may not be the right choice for him at this age (assuming he does not have any dependents). Kindly review his health insurance cover.
Thanks for your suggestion Sree . I have raised grievances with Axis bank official and they have agreed to switch this policy as ULIP for 5 years. Such that we can avoid 50K loss now., and try to get returns of 6% in Conservative fund. And at the end of 5 Years I can surrender the ULIP, and in parallel we will do investment in ELSS / PPF from this year. So that we can avoid the loss of 50 K and also down the lane say in 10 years we can get good returns.
What is your opinion.
Dear Vignesh,
Kindly check is this SWITCH or are they trying to SELL one more new plan (ULIP)?
Thank you for sharing the article.
I personally feel traditional plans are like toxin which need to be banished from one’s financial portfolio.
However, irony is that majority business of Life insurance companies (specially LIC) consist of such toxin. And I believe LIC is to be blamed for the same.
Since it inception, LIC only promoted traditional plans. Even though private life insurance companies introduced Term Plan and LIC reluctantly introduced it after many years, LIC agents never recommend Term Plans to gullible investors who are in false sense of belief that Government company can take care of their life.
LIC still occupy 70% of Life insurance business and has been the main culprit of its investors perennially remaining under-insured. This is because its business model is heavily commission based. LIC investors neither get proper return nor life cover from its pathetic traditional plans.
Even today, if you go through LIC’s financial statements, you will find more than 90% of its business is of traditional plans. So LIC does not promote life insurance but it is merely an investment company of Government which is inefficient at managing people’s money. Government is also not bothered since it requires LIC to fund its dis-investment program. Eventually, investors are loosing big time. They do not understand that their LIC policy is not making them rich but poor. (since inflation effect is not considered)
I hope the situation will improve in future with spread of financial awareness.
I have a question though. What is your view on future of traditional plans? Will it have any relevance in future? This is because more better options of investment are available today as compared to 20 years ago when LIC was a monopoly.
Thanks.
Dear Rupali,
As long as life insurance is SOLD and not BOUGHT in India, Traditional plans will continue to be the main CASH COWS for life insurance companies. Also, the mindset of most of the prospective policyholders have to be changed. Majority of us expect RETURNS from an insurance policy. So, as long as we treat insurance as an investment product so long most of the agents would sell the same. Also, the commissions are high for this product category.
Hi Sreekanth,
I find something confusing regarding bonus in conventional insurance plans ie No compounding effect. Bonus declared in conventional policies are for the future date and not for current year/date, therefore, there is no chance of compounding in it. Whenever a policyholder surrenders his/her policy he/she get the discounted value of the bonus for the number of years remaining for the maturity payment.
Dear Pawan,
Most of the times investors or policyholders buy the traditional plans for want of maturity returns, am i right?
Then in that case, let’s say XYZ company declares Rs 40 per Rs 1000 SA as bonus for FY 2015-16, then the bonus for that year is accrued and neither paid to policyholder in that year nor it is re-invested.
Let’s take another long-term savings product like PPF, the interest amount declared in a Fiscal year is accrued and also gets compounded.
Kindly share your views.
Hello Srikanth, thanks for this eye-opener article. I’ve a different questions, in this FY budget, it was declared that first time home borrowers will get additional tax benefit of 50000. How to apply for it and what documents are needed?
Dear Rajesh,
This is a new proposal which has been made in Budget 2016-17. First time Home Buyers can claim an additional Tax deduction of up to Rs 50,000 on home loan interest payments u/s 80EE. The below criteria has to be met for claiming tax deduction under section 80EE.
The home loan should have been sanctioned in FY 2016-17.
Loan amount should be less than Rs 35 Lakh.
The value of the house should not be more than Rs 50 Lakh &
The home buyer should not have any other existing residential house in his name.
Thanks for the reply. All the above criteria is met in my case. But my question is when filing income tax return, how to apply for it? In which field? I file return using cleartax.com
And by the way, this is my first flat purchase, so I need guidance on how I can claim tax benefits for EMI paid. I know there are two components of EMI- 1) Principal 2) Interest. While filing ITR, where to show them? Do you have any article on that?
Dear Rajesh,
Kindly note that this is applicable only from AY 2017-18.
Hi Sreekanth,
A nice article that will surely anger the insurance agents but hopefully an eyeopener for general public.
I want to share a detail on the Simple Reversionary bonus that LIC promises for most plans.
Assume you take LIC Jeevan Anand Plan for 15 years with first annual installment in June 2010. The last installment will be paid in June 2024 and the policy matures in June 2025 when you get your money back.
Every year LIC declares a bonus sometime in August for the previous year ending in March and adds it to the policy only in Jan or Feb next year.
For eg, for the year ending March 2015, bonus is declared in Aug 2015 and accrued to the policy in Jan 2016.
So this way for the above policy, the account will have bonuses accrued from Jan 2012 (for year ending Mar 2011) to Jan 2025. Count the number of bonus years and you only get 14.
You would expect 15 bonus payments for a 15 year policy, but even here LIC cheats the policy holder…
I guess if you buy your policy in Jan of a year, then you may not get any bonus for that year.
Bonus paid is not that rewarding, but its the only returns for such policies on maturity because sum assured is the total of all your premiums paid. But LIC doesn’t seem to be fair in its bonus payments.
Thanks,
Pradeep
Dear Pradeep..Thank you for sharing your views.
Hello Pradeep,
You are right that bonus in LIC is normally declared in the month of August/September. So, this way you have wrongly interpreted that policyholder will get 14 bonuses for 15-year policy term. Whenever a policy is matured for payment in any financial year and the bonus is not declared till that date, then for the last year, LIC adds the interim bonus. Since bonus rates for that financial year not available, LIC give last year bonus rate as interim bonus equal to previous year’s bonus rates. This way a policyholder receives 15 bonus in 15-year term of the policy. In the case of policy maturing from Jan to March they already get the complete bonus, even interim bonus is also not required since the bonus is already declared till the date of maturity of these policies. Please check these details whenever you get any maturity payments in your LIC policy.
Good article…
you should also sugget here what to do?
Dear Arun..Kindly note that in the above post, I have already suggested an article to read : How to get rid off unwanted Life Insurance policies?