LIC's New Offering: Lacking "Umang"

An exhaustive 3,200 words is what it's taken India's bellwether Life Insurer LIC to explain the features of their newly launched policy "Jeevan Umang" on their website. And, yet, we'll have thousands of confused yet euphoric retail savers signing up for the plan over the next few weeks, without even a cursory understanding of how it works! No wonder then, that (per current data), less than half of the eager beavers who sign up now will likely go on to pay the 5th year premium - in what is essentially a long-term contract involving a premium payment term ranging from 15 years to 30 years. Of course, they'll incur pretty serious losses in the bargain.

The purpose of this article is to simply illustrate the salient features of the policy while evaluating its efficacy as a savings cum insurance instrument.

First things first - let's aim for a layperson understanding of Jeevan Umang. It's like this - you pay an annual premium for a predefined number of years ranging from 15 to 30 (in multiples of five). In exchange of your annual contribution, a "Sum Assured" is provided to you. Just to give you a ballpark idea for a 35-year-old male, the annual premium for a 15-year payment term, Rs. 50 lakh sum assured policy would be roughly Rs. 4 lakhs per annum.

Your "death benefit" commences immediately (starting at the Sum Assured of Rs. 50 lakhs). Crudely, this means that if you were to die immediately after paying the first premium, your dependant would receive Rs. 50 lakhs. This "death benefit" will go up every year - but by precisely how much, it isn't clear. If history repeats itself, you can expect roughly 4.8 per cent of your sum assured to be added on to your death benefit each year (not compounded, mind you!), meaning that the policy will acquire a death benefit of roughly 84 lakhs by the time you're done paying your premiums.

At this stage, your "returns" will start coming through on an annual basis. This clocks in at 8 per cent of the sum assured; in this case, Rs. 4 lakhs per annum. Your death benefit will stay in force too. And what's more - the returns will continue to come through till you stay alive. If you score a century (per current statistics, there's roughly a 20 per cent chance of that happening), you'll receive the 84 lakhs as maturity benefit, plus a "Final Additional Bonus" that's per LIC's discretion.

Sounds quite cool, right? Admittedly, there are four great allurements associated with this policy. One, the "guaranteed" return of Rs. 4 lakhs per annum. Two, the fact that the policy will pay you annually for as long as you're alive, ergo safeguarding you from the risk of living too long. Three, the fact that there's a death benefit of Rs. 84 lakhs even after you're 75, which is when term policies let go of you (some even earlier). And four, the jackpot at the end of the rainbow if you go on to hit a century. Let's take a closer look at all four.

From a returns standpoint, the annualized returns that you'll earn from this plan if you go on to live till the ripe old age of 90 is really just 4.14 per cent (a simple cash flow table will reveal this). Here's the other shocking truth: assuming that you do go on to score a century, and the Final Additional Bonus is a massive 3X of the basic sum assured, the annualized returns earned would STILL work out to a mere 5.34 per cent per annum. For higher premium paying terms, these numbers work out to even lower. Bottom line: the "returns" from this policy will likely range from 2 per cent per annum to 5.5 per cent per annum over a gargantuan time frame of a not a few years, but a few decades.

What about the lure of a lifelong annual pay out? Sure, it's a valid benefit - but put this in perspective. Saving the same amount (Rs. 4 lakhs per annum) in a higher return instrument like an equity mutual fund SIP for 15 years would likely yield you Rs. 1.67 Crores or so by the time you're 50 (assuming a 12 per cent CAGR). Assuming that you could grow this 1.67 Crore corpus at 8 per cent per annum thereafter, you'd be able to draw Rs. 30,000 per month, INCREASE this monthly pay out at 7 per cent per annum for the next 50 years, and still have (hold your breath!) Rs. 10 crores left over to bequeath upon your grateful heirs when you hit a century. Yes, compounding works in mysterious ways over the long term!

Moving on to the highly relevant death benefit component. While you could always purchase a simple term plan to cover up for the death benefit (peak: Rs. 84 lakhs), what about when you turn 75? By now, you may have realised that it's a moot point. In all likelihood, your accumulated corpus will be 3X to 5X of Jeevan Umang's death benefit by then!

End Note: prima facie, numbers can be misleading. Coupled with the safety of assurances and guarantees and phrases like "whole life", they can cast a spell on even the most seasoned and smart investor. Steer clear of Jeevan Umang and purchase a simple term plan instead. Save the rest in an aggressive equity mutual fund SIP for 15 years, and invest your accumulated corpus conservatively thereafter. Unless, of course, you're happy with a very poor long term return of roughly 4 per cent per annum on your hard-earned money, as long as it's risk-free!