Beware Of The Latest LIC Related SMS Doing The Rounds These Days!
“LIC most awaited plan, save Rs. 5000 per month in LIC for 16 Yrs & Get Rs. 35 Lac Guranted (sic.) (Tax Free) + insurance + 80C Rebate. T&C apply”
I received this SMS late last evening, along with the contact details of an LIC agent. My interest was instantly piqued, as the verbatim implication of this text was a fantastic, guaranteed annualised return of 14% over a 16-year period! I would be paying up Rs. 9.6 Lakhs for 16 years and receiving 35 Lakhs in 16 years – without taking any risks at all! Intrigued, I decided to call the LIC agent whose number was provided in the text.
Pleasantries exchanged, I got right down to business. It didn’t take me very long to realise that a key piece of information had been eliminated from this communication – that this was a ‘limited premium payment term’ plan, and although I’d have to pay the premium of Rs. 5,000 per month, I’d actually receive the maturity amount after the 25th year, that is – 9 years later. As it turns out, this “most awaited plan” has been around for nearly 2 years already and is a plain vanilla, traditional endowment plan.
If you’re thinking – “9 years isn’t quite so bad for a maturity value of 35 lakhs”, here are two interesting facts. One, the hitherto impressive annualised return of 14% plummets to roughly 7.35% as a result of the wait. Factor in the 4.5% GST you’d be incurring on your premium amounts, and you now have an annualised return that’s closer to 7%. The dynamics of compounding can be interesting indeed! No wonder Einstein said that “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn't … pays it.”. Two, the 35 Lakh maturity value isn’t guaranteed, but rather – a best case guess based on LIC’s past bonus rates, which are impossible to predict in the future.
The sliver of life cover (ranging from around 12 lakhs when you need it the most, to around 35 lakhs when you need it the least!) does precious little to make this plan a value creating one. A simple, cheap term plan could more than cover for this gap at less than Rs. 3,000 per year or Rs. 250 per month.
If you were to run a SIP in an equity mutual fund for 16 years and leave it to grow for a further 9 years, you’ll most likely end up with a corpus of 80 Lakhs at the end of 25 years (assuming a reasonable long-term return expectation of 12% per annum). Agreed, the LTCG would be a bit of a dampener, but your post-tax returns (assuming that LTCG would still be around two and a half decades hence!) would still be twice your ‘guaranteed’ returns from the LIC plan.
Investors are advised caution – beneath the veneer of the “guarantees” and the “bonuses”, most of these traditional plans are losing propositions that do not grow your savings at an optimal pace. To make matters worse, their exit options are punishingly abysmal! Steer clear and save yourself a great deal of heartache in the future.
