LIC Dhan Varsha (Plan 866): Review

LIC Dhan Varsha: Single Premium. Guaranteed LOW Returns. Long Maturity. Stay away.

Any new plan from LIC is just old wine in a new bottle. Even before I write and finish return calculations, I know that returns will be poor. And I will ask you to stay away. LIC Dhan Varsha is no different.

No offence to LIC. LIC is one of the most trustworthy brands in India. Everything else being the same, If I had to buy an insurance plan, I would prefer to buy from LIC rather than private insurers like HDFC Life or ICICI Prudential. It is the nature of the product. Such plans, even from private insurers, are poor investment products.

What is LIC Dhan Varsha?

The first page on the brochure says this about LIC Dhan Varsha.

Invest once, enjoy guaranteed maturity with life cover.

This itself tells you a lot about the plan.

1. Invest once means Single Premium
2. Guaranteed maturity: indicates the plan is a non-participating plan since only such plans provide guaranteed returns.

If you are planning to buy an investment and insurance combo product and are not sure what you are buying, do read this post. Or if you prefer to read Twitter threads, you can check out this Twitter thread.

LIC Dhan Varsha (Plan 866): Salient Features

1. Non-linked, Non-participating Life Insurance Plan
2. Non-linked means it is not a ULIP
3. Non-participating means the returns are guaranteed. You know upfront how much you will earn from this plan.
4. Policy Term: 10 years or 15 years
5. Guaranteed additions
6. Minimum Age at entry: 3 years for 15 years policy term, 8 years for 10 year policy term.
7. Settlement option: You can opt to receive maturity benefit in installments. But this is usually a poor choice.

For more on LIC Dhan Varsha, suggest you visit the product page on LIC website.

Along with single premium LIC Dhan Varsha, LIC had also launched a regular premium non-participating plan, LIC Dhan Sanchay (Plan 865). You can read the LIC Dhan Varsha review here.

Two Sum Assured (on Death) options

You can choose the Sum Assured as a multiple of the Single Premium.

2 options.

1. Option 1: 1.25 times Single Premium: Better pre-tax returns but the maturity proceeds will be taxable. You must pay tax on (Maturity amount – Single Premium paid) as per your tax slab. Maximum age at entry: 60 years
2. Option 2: 10 times Single Premium: Inferior returns but the maturity proceeds are tax-exempt. Maximum age at entry: 40 years for policy term of 10 years. 35 years for policy term of 15 years.

Maturity proceeds of life insurance plans are exempt from tax only if the Sum Assured is at least 10 times single/annual premium. This is not the case in Option 1. Sum Assured is only 1.25 times single premium.

LIC Dhan Varsha (Plan 866): Death Benefit

Death Benefit = Sum Assured on Death + Accrued Guaranteed Additions

Sum Assured on Death depends on the variant chosen.

Option 1: 1.25 times Single Premium

Option 2: 10 times Single Premium

The Single premium depends on the

1. Entry age
2. Policy term
3. Option chosen
4. Basic Sum Assured

Note that Basic Sum Assured is different from Sum Assured on Death. Basic Sum Assured comes into picture while calculating Guaranteed Additions. We shall look at the calculation of guaranteed additions later in the post.

LIC Dhan Varsha (Plan 866): Maturity amount calculation

Maturity amount = Basic Sum Assured + Accrued Guaranteed Additions

You chose the Basic Sum Assured at the time of policy purchase. And this determines your single premium. As mentioned above, Basic Sum Assured is different from Sum Assured on Death. Basic SA is not linked to Option 1 and Option 2. Basic SA is used to calculate the guaranteed additions and hence the maturity amount.

Guaranteed additions get added to your policy at the end of each policy year and are paid out at the time of maturity/demise. Depends on the Basic Sum Assured and the policy term.

LIC Dhan Varsha (Plan 866): Benefit Illustration 1

I reproduce an example from the product brochure.

1. Entry age = 30 years
2. Policy Term: 15 years
3. Option 1: 1.25 times Single Premium
4. Basic Sum Assured: Rs 10 lacs
5. Single premium (before GST) = Rs 8,86,750 (as shared in the brochure based on tabular premium)
6. Single Premium (after 4.5% GST) = 8.86 lacs X (1+4.5%) = Rs 9.26 lacs
7. Sum Assured on Death = 1.25 X Single Premium = Rs 11.08 lacs

Guaranteed Addition for Basic SA of Rs 10 lacs and Policy tenure of 15 years =  Rs 75/ Rs 1000 of Sum Assured for Option 1

GA per year = Rs 75 X Rs (10 lacs/1,000) = Rs 75,000

GA for 15 years = Rs 75,000 X 15 = Rs 11.25 lacs

Maturity amount = Basic Sum Assured + Accrued Guaranteed Additions

= Rs 10 lacs + Rs 11.25 lacs = Rs 21.25 lacs

So, you invested Rs 9.26 lacs and got back Rs 21.25 lacs after 15 years, that is an IRR of 5.7% p.a.

And even this amount is taxable.

LIC Dhan Varsha (Plan 866): Benefit Illustration 2

I reproduce an example from the product brochure.

1. Entry age = 30 years
2. Policy Term: 15 years
3. Option 2: 10 times Single Premium
4. Basic Sum Assured: Rs 10 lacs
5. Single premium (before GST) = Rs 7,98,700 (as shared in the brochure based on tabular premium)
6. Single Premium (after 4.5% GST) = 7.98 lacs X (1+4.5%) = Rs 8.34 lacs
7. Sum Assured on Death = 10 X Single Premium = 79.87 lacs

Guaranteed Addition for Basic SA of Rs 10 lacs and Policy tenure of 15 years =  Rs 40/ Rs 1000 of Sum Assured for Option 1

Total GA = Rs 40 X (10 lacs/1,000) X 15 years = Rs 6 lacs

Maturity Amount = Basic SA + Accrued Guaranteed Additions = 10 lacs + 6 lacs = 16 lacs

You invested Rs 8.34 lacs. Get 16 lacs after maturity.

IRR of 4.43%

But this amount is tax-free.

The pre-tax returns are lower than Option 1 because Option 2 offers you a higher life cover. Thus, higher cost incurred for life cover.

Points to Note

1. The premium goes up with age. Expected.
2. Everything else being the same, a younger investor will earn better returns than an old investor. A 30-year-old investor (at the time of purchase) will earn better returns than a 40-year-old. Why?
3. The maturity amount will be the same for both the investors. Why? Because the Basic Sum Assured is the same. Policy term is same. And the guaranteed additions depend on only these two variables. Thus, Guaranteed Additions will be the same too.
4. Since Maturity amount = Basic Sum Assured + Accrued Guaranteed additions, both the investors will get the same maturity amount.
5. The only difference will be in Single premium. For the same basic Sum Assured, a 30-year-old investor will pay a lower premium than a 40-year-old investor.
6. So, the 30-year-old pays a lower premium and gets the same maturity amount. Thus, better net returns than a 40-year-old.

This is common across all traditional plans and ULIPs. The returns depend on your entry age.

LIC Dhan Varsha: Should you invest?

The best thing about LIC Dhan Varsha is that it is very simple.

You invest once and get back your money with returns after 10/15 years. Much like a bank FD.

But the returns are too low for a long duration investment product. In addition, the plan has usual issues of a traditional plan. Lack of flexibility. Heavy exit penalties.

I would stay away.

What would you do?

Source/Additional Links

LIC Dhan Varsha: Product Brochure

LIC Dhan Varsha: Policy wordings