It's safe to say that a lot of us are headed for catastrophic savings crises if we keep piling on those low return, low life-cover endowment plans that the Life Insurance behemoth LIC keeps churning out with disturbing frequency. Last year, 72.61 per cent of the 3.67 lakh crore of life insurance premiums paid by Indians went into LIC's kitty, per IRDA's latest report.
The latest recipient of an aggressive chunk of their promotional budget seems to be "New Bima Bachat", a single premium, "non-linked" plan.
Let's break the plan down to its nuts and bolts, and then take an informed call regarding its true efficacy as a financial instrument. But before that, I strongly recommend that you take a quick look at the benefit illustration of the plan on the
LIC website.
NBB has three variants - 9 years, 12 years, and 15 years. The dynamics are fairly easy to understand, possibly adding to its lure: you pay a lump sum today, start receiving 15 per cent of the sum assured as "money back" every three years, and then get back the initial premium paid (plus a loyalty addition) at the end of the tenor. Loyalty Additions start accruing from the sixth year onwards - traditionally, they've ranged from 3-5 per cent of the sum assured for LIC.
As is our modus operandi for evaluating any Life Insurance policy, let's evaluate New Bima Bachat (NBB) from two angles: one, how does it fare as an insurance product and two, how does it fare as an investment or savings product.
NBB as an Insurance ProductAll right, this one's easy; let me illustrate with the 15-year variant. Obviously, a Rs. 1 lakh sum assured is insignificant from a financial planning standpoint - you're no better off with a policy having a death benefit of 1 lakh than you are without one, from a risk transfer standpoint! Assuming a more robust sum assured of Rs. 50 lakh, the one-time premium for NBB for a 35-year-old male would be approximately Rs. 38.84 lakh.
Even considering an unusually high loyalty addition of 5 per cent per annum from the sixth year out, the average death benefit (sum assured plus loyalty addition) works out to Rs. 59.16 lakh for the tenor of the plan.
Does locking in Rs. 38.84 lakh to achieve a death benefit of Rs. 60 lakh or so make sense? Not at all - you could achieve a similar death benefit by paying roughly Rs. 8,000 per year for 15 years, for a simple term plan by LIC itself; a total out of pocket expense of just Rs. 1.2 lakh. I'm sure you'll agree that this is a small price to pay for your family's security. And hey - you'll have Rs. 37.64 lakh left over to invest in growth assets for 15 years. Let's talk about that next.
NBB as an Investment ProductPlugging in the higher-return scenario (a final money back of Rs. 98,680 inclusive of loyalty additions) into a simple spreadsheet yields an annualized rate of return of just 7.03 per cent per annum for NBB. These returns are taxable to boot, because the sum assured doesn't exceed 10X the premium paid.
For an individual who falls into the highest tax bracket, this works out to a post-tax return of 4.92 per cent per annum.
Had you instead taken up a simple term plan (as illustrated previously) and invested the remaining Rs. 37.64 lakh into a moderate risk portfolio growing at 10 per cent per annum after taxes, your fund value would have grown to an impressive Rs. 1.57 crore at the end of year 15.
Long story short, NBB comes up severely short as a long-term investment product. Investors who are committing money to this product merely owing to their risk aversion, need to put inflation into perspective and realize that with NBB, the purchasing power of their capital will get eroded over the years. Inflation Risk is a very real risk too!
End Note: Avoid LIC's New Bima Bachat - it's neither 'Bima' nor 'Bachat'. Combine a simple term plan with a well-diversified portfolio of financial assets such as stocks, bonds, and mutual funds instead.
