Just yesterday, a happy family beamed at me from a quintessential LIC hoarding. As it turned out, it was an advertisement for LIC's "Jeevan Labh" - a typical endowment insurance plan by the Life Insurance bellwether, that has a premium paying period that is shorter than the policy duration. I decided to get back and pore through the policy brochure to assess whether our readers should partake. This is a condensed version of the analysis that followed, along with a final word of advice.
To take an informed decision on Jeevan Labh, let's evaluate it separately as an insurance (risk transfer) tool and as an investment or savings avenue.
How does Jeevan Labh fare as an insurance policy?As a cut-and-dried endowment plan, the policy was bound to come up short from the standpoint of providing life cover. On the death of the policyholder, the "Sum Assured" plus accrued bonuses are due to be paid out. Taking the example of a 30-year old healthy male, the cost of a miniscule sum assured of Rs. 2 lakh for the 16 year/10 year variant, works out to Rs. 17,741 for the first year - after factoring in the service tax of 3.75 per cent (conveniently omitted from the illustration in the policy brochure and relegated unceremoniously to the "fine print" section).
Throwing in a Simple Reversionary Bonus of Rs. 40 per Rs. 1,000 of sum assured (this has ranged from Rs. 38 to Rs. 48 recently), the actual death benefit goes up by Rs. 8,000 per annum. Even after 10 years, the death benefit would be Rs. 2.8 lakhs - not factoring in any additional terminal bonuses.
In effect, you'll be shelling out nearly Rs. 20,000 per annum to achieve a death benefit that will, over the policy term, go from Rs. 2 lakh to Rs. 3.28 lakh.
With as little as Rs. 8,000 per annum, the same individual could achieve a much meatier life cover of Rs. 1 crore or more.
How does Jeevan Labh fare as an investment?Carrying on from the previous example, the annualized returns earned from the 16/10 variant of Jeevan Labh for a 30-year old male works out to 4.9% after factoring in service tax. Upon crunching the number for the 25/21 variant, the annualized returns worked out to 5.8%. The surrender values are poor (NIL for the first two years), designed to lock you into the payment cycle for the entire duration of the policy.
All in all, Jeevan Labh solves no real problem for an investor. As an insurance policy, it's expensive. As an investment, it fares worse than debt funds. Steer clear of it - buy term insurance to bulk up your life cover (In fact, LIC's is the best - with the best claim settlement ratio). Invest the rest in a portfolio of Mutual Funds instead.
End Note: LIC invests the bulk of its corpus in fixed income instruments. With rates falling across the board, we'll most likely see the "returns" from these endowment plans taking a beating this year. Exercise caution and consult a conflict-free Financial Planner before you get stuck into one.
