LIC has launched a fresh life insurance product. LIC Jeevan Utsav (Plan no. 871).
In this post, let’s break down LIC Jeevan Utsav and see how it works.
The good and the bad points, and the returns you can expect. And finally, should you invest?
LIC Jeevan Utsav (Plan 871): Non-linked, Non-Participating Plan
Non-linked means LIC Jeevan Utsav is NOT a ULIP. It is a traditional plan.
Non-participating plan means the returns from LIC Jeevan Utsav are guaranteed. In other words, you will know upfront how much you will get (and when) from the plan. No confusion surrounding bonuses etc.
This also means you can calculate XIRR (or net returns) from this plan before you buy the plan.
Note “Guaranteed returns” does not mean good returns. Can also be poor returns. That’s something we will figure out later in this post.
For more on different types of life insurance products and how you can determine within 2 minutes which plan you are buying, refer to this post.
LIC Jeevan Utsav (Plan 871): Salient Features
- Non-linked and Non-participating plan
- Limited premium payment plan: This means policy term is longer than the premium payment term.
- Whole Life Plan: Policy will run until you are alive. No concept of maturity here. And that the death benefit will certainly be paid.
- Two variants: Regular Income Benefit and Flexi Income Benefit
- Minimum Basic Sum Assured: Rs 5 lacs. No cap on maximum Sum Assured.
- Guaranteed additions during the premium payment term.
- So, in this plan, after the premium payments are over, you get a fixed amount every year for life. After you pass away, the nominee gets the death benefit.
LIC Jeevan Utsav (Plan 871): Death Benefit
In the event of demise during the policy term, the nominee shall get:
Death Benefit = Sum Assured on Death + Accrued Guaranteed Additions
Sum Assured on Death = Higher of (Basic Sum Assured + Accrued Guaranteed Additions, 7 X Annualized Premium )
The death benefit cannot be less than 105% of the total premiums paid.
Now, here is spanner in the works.
Given the formula for Sum Assured on Death (SAD), it is possible that the SAD may not exceed 10 X Annualized premium.
If Sum Assured on Death does not exceed (or equal) 10X Annualized premium, the maturity/survival benefit will not be exempt from tax.
Note that the death benefit will still be exempt from tax.
LIC Jeevan Utsav (Plan 871): Maturity Benefit
Since this is a whole life plan, the policy will run until you are alive.
Hence, no concept of maturity benefit here. Much like a term life insurance plan.
But the policy has survival benefits, as we discuss in the next section.
LIC Jeevan Utsav (Plan 871): Regular Income Variant and Flexi Income Variant
This is about survival benefits.
Under the Regular Income variant, the policyholder gets income equal to 10% of the Basic Sum Assured every year. Until the policy holder passes away.
When does the income start?
As per the following table.
The Flexi Income Variant is not too different. It just offers the option to accumulate these annual payouts. So, you can choose to not receive the payout and let the money be with LIC.
The money that is not withdrawn will accumulate returns (interest) at the rate of 5.5% p.a. until you withdraw.
You can withdraw up to 75% of the accumulated flexi benefit (along with interest) once in a policy year.
Since there is not much difference between the two variants, you can change/specify the option (regular or flexi) until 6 months before the start of the income benefit.
LIC Jeevan Utsav (Plan 871): Guaranteed Additions
Guaranteed additions have no role to play in calculation of survival benefit.
Comes into play only in calculation of death benefit.
Remember Death Benefit = Sum Assured on Death + Accrued Guaranteed Additions
The calculation is quite simple.
Every year, until the end of premium payment term, the policy will accrue Guaranteed additions at the rate of 40 per thousand of Basic Sum Assured.
So, if the basic Sum Assured is Rs 5 lacs and the premium payment term is 10 years, then the policy will accrue 40 X (5 lacs/1,000) = Rs 20,000 worth of guaranteed additions.
Note that these guaranteed additions will accrue only during the premium payment term. Once the premium payment term ends, no further guaranteed additions will accrue.
And this accrued amount will be paid along with Basic Sum Assured will be paid to the nominee when the policy holder expires.
LIC Jeevan Utsav (Plan 871): What are the returns like?
A good part about LIC Jeevan Utsav is that you can calculate the XIRR (net return) from this plan before you invest.
The only assumption you have to make is longevity. How long will you live?
Why? Because the plan ends only on demise of the policyholder.
For returns calculation, let’s assume that age of demise to be 90 years.
I copy the indicative premiums for Basic Sum Assured of Rs 5 lacs for different ages and premium payment terms.
You will straightaway see an issue.
Sum Assured on Death = Higher of (Basic Sum Assured, 7X Annualized premium).
Since the Basic Sum Assured is Rs 5 lacs, the minimum death benefit (Sum Assured on Death) is less than 10X Annualized premium for sections highlight in RED.
In these cases, the survival benefit will be taxable.
Hence, with shorter premium payment terms, you may face this tax problem.
If you are interested in this plan, do consider this aspect and choose premium payment term accordingly. Additionally, the Union Budget 2023 made maturity/survival benefit from traditional plans with cumulative annual premium exceeding Rs 5 lacs taxable. Consider this aspect too.
A 30-year-old person buys 12-year premium payment term plan with Basic Sum Assured of Rs 5 lacs.
The premium before taxes shall be Rs 44,275.
The first-year premium incl. of 4.5% GST shall be Rs 46,267.
The premium in the subsequent years incl. of 2.25% GST shall be Rs 45,271.
From the end of the end of 15th policy year, he will get 10% X 5 lacs = Rs 50,000 per annum.
Since we have assumed demise age to be 90 years, this payment will continue for 90 – (30 + 15) +1 = 46 years.
Guaranteed additions will accrue at the rate of 40 * 5 lacs/1000 = Rs 20,000 per annum for 12 years.
That makes it Rs 2.4 lacs.
Death Benefit = Basic Sum Assured + Accrued Guaranteed Additions = Rs 5 lacs + 2.4 lacs = Rs 7.4 lacs
The XIRR for such an investment shall be 5.60% p.a. For demise at the age of 90 years.
If the demise happens at the age of 80 years, the XIRR shall be 5.55%.
You must decide if this is a good enough return for you.
Note: For this very specific case, since the Sum Assured on Death (Rs 5 lacs) is more than 10X annualized premium, the survival benefit shall be exempt from tax.
LIC Jeevan Utsav (Plan no. 871): Should you invest?
I am not allowed to give Black-and-white answers.
Additionally, I have moved away from optimizing investments too much. Now, I have grown to be OK with average investments that allow me to sleep peacefully. And you would have observed this in my writings too.
As investors, we may have different expectations from an investment product. For instance, I may prefer an investment with potentially higher returns (and higher risk) but you may be comfortable with average but stable returns.
After all, personal finance is more personal than finance.
Let’s look at the good points.
A simple product.
From an investor’s point of view, this product is easy to understand and relate to. I pay Rs X per annum for the next 5-16 years. Thereafter, I get Rs Y per annum for life. Then, after demise, the family gets some amount.
Guaranteed. No scope for confusion. Very easy to understand.
Whether I like this product or not OR whether the returns are good or bad, these products usually find appeal among many investors.
I can say this confidently because my clients ask me this question quite often.
I have this habit of trying to optimize things and suggesting complex solutions (not necessarily good). Well, you have free will.
The Not-so-good points
Usual lack of flexibility. You can’t wake up one day and decide to exit this investment. You won’t get much of your investment back if you exit pre-maturely.
The returns, even though guaranteed, seem sub-par for a long-term investment. But that’s just me. Your priorities/expectations may be different.
A few points you must consider
If you are interested in this product, do not ignore the tax angle.
As discussed earlier in this post, not all premium and premium payment term combination may meet the criterion for tax exemption (Minimum Death Benefit >= 10 X Annual Premium). Keep this aspect in mind.
In the example I have considered, the survival benefit is exempt from tax because it meets the criterion. For your case and preferred combination, that may not be the case.
The tax treatment can severely affect your post-tax returns.
The returns from traditional plans also depend on your age. Every else being the same, returns go down with entry age. I showed the returns for a 30-year-old. Your age may be different.
The good part is that you can calculate your XIRR upfront (before even purchasing the product). And decide whether the returns are good enough for you.
Additionally, do not forget about the tax change that happened earlier this year about tax treatment of traditional plans. For the traditional plans bought after March 31, 2023, if the cumulative annual premium exceeds Rs 5 lacs, the maturity/survival benefit proceeds from such plans will be taxable.
Disclaimer: Registration granted by SEBI, membership of BASL, and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors. Investment in securities market is subject to market risks. Read all the related documents carefully before investing.
This post is for education purpose alone and is NOT investment advice. This is not a recommendation to invest or NOT invest in any product. The securities, instruments, or indices quoted are for illustration only and are not recommendatory. My views may be biased, and I may choose not to focus on aspects that you consider important. Your financial goals may be different. You may have a different risk profile. You may be in a different life stage than I am in. Hence, you must NOT base your investment decisions based on my writings. There is no one-size-fits-all solution in investments. What may be a good investment for certain investors may NOT be good for others. And vice versa. Therefore, read and understand the product terms and conditions and consider your risk profile, requirements, and suitability before investing in any investment product or following an investment approach.