Last year, India's Life Insurance behemoth LIC launched a new plan called "LIC Bima Diamond". Their policy brochure describes it as "a non-linked, with-profit, limited premium payment money back life insurance plan". If that's enough jargon to make your head spin, do yourself a favour and do not go through the 12-page policy brochure that spews insurance terminology like there's no tomorrow, presumably leaving the would-be investor flummoxed enough to say "if it's this complicated, it MUST be great!"
Fortunately, this rather simplistic review will scrape away all the layers of complicated insurance lingo and allow you to take an informed decision on LIC Bima Diamond. Do note that the plan is available for subscription until 31st August 2017 (to mark LIC's diamond jubilee, hence the creative name).
How to evaluate an Insurance ProductOver the years, I've developed a simple and robust process of evaluating Life Insurance products: namely, the "two-question" approach. In other words, the best way to assess any Life Insurance product is to trawl through its policy document in search of answers to two rather simple questions:
1. How does it fare as an investment?
2. How does it fare as an insurance policy?
Since Life Insurance wasn't meant to be an investment in the first place, it's perfectly acceptable (even preferable) if a policy scores 0 on 10 on the first question and 10 on 10 in the second. Unfortunately, we Indians tend to buy Life Insurance for all the wrong reasons; therefore, the need to evaluate a policy in light of its long-term returns becomes necessary.
How does LIC Bima Diamond fare as an investment?All right, so would you like the short answer or the long one? The short answer is: dreadful. Now for the slightly longer evaluation.
Under this policy, you pay a fixed premium each year in lieu of a fixed "sum assured" that can range from Rs. 1 lakh to Rs. 5 lakh. The policy paying term is shorter than the actual policy term, although this serves no real purpose from an investment standpoint, as we'll soon see. The three options available are policy terms of 16, 20 and 25 years, with premium paying terms of 10, 12 and 15 years respectively.
Per LIC's policy brochure, a 30-year-old needs to pay Rs. 7,570 per year for 12 years for the 20-year version (Rs. 90,840 in total) in lieu of a sum-assured of Rs. 1 lakh. The policyholder will receive cash flows in the 4th, 12th, 16th and 20th year. No prizes for guessing that the total sum of these cash flows is… hold your breath… Rs. 1 lakh!
In addition to the above guaranteed cash flows, one is eligible for a "loyalty addition" at the end of the term. Even assuming a high loyalty addition of Rs. 50,000 (50 per cent of basic sum assured), the annualized return on the policy for the hapless 30-year-old works out to a miserly 5.84 per cent per annum. Without the "loyalty addition", the annualized return works out to 1.32 per cent per annum. The other options are largely the same, returns-wise.
How does LIC Bima Diamond fare as an insurance policy?If you'd like to know how much your dependants would receive as a pay-out in case of an unfortunate eventuality, there's a fairly complex formula in place. This reads as follows:
1. In case of death of the life assured before the date of maturity:During first five years: "Sum Assured on Death" shall be payable.
After completion of five policy years but before the date of maturity: "Sum Assured on Death" and Loyalty Addition, if any, shall be payable.
Where "Sum Assured on Death" is defined as the highest of
" 10 times of annualised premium; or
" Sum Assured on Maturity as defined in 1. c) below; or
" Absolute amount assured to be paid on death, i.e. Basic Sum Assured. The death benefit shall not be less than 105 per cent of all the premiums paid as on date of death. Premiums referred above shall not include any taxes, extra amount chargeable under the policy due to underwriting decision and rider premiums, if any.
2. In case of death during the Extended Cover Period: An amount equal to 50 per cent of Basic Sum Assured shall be payable.
If you found the above stated to be utterly confounding, you're not alone. Fortunately, I'm going to present you with the unscrambled end-result: the death benefit is likely to range between 75 per cent and 95 per cent of your basic sum assured, depending upon a host of variables. For the 30-year-old paying Rs. 7,570 per year for a basic sum assured of Rs. 1 lakh, the death benefit will most probably work out to somewhere between Rs. 75,000 and Rs. 95,000.
By paying an annual premium of Rs. 7,570, most healthy 30-year olds could achieve a term life cover of Rs. 75-90 lakhs or thereabouts! To top it off, the basic sum assured is capped at Rs. 5 lakhs, implying that the maximum death benefit achievable using LIC Bima Diamond is approximately Rs. 4.75 lakhs: an inconsequential sum at a hefty price.
As selling points, LIC has cleverly strapped on a couple of nugatory features to Bima Diamond, namely, "extended cover" and "auto cover" respectively. The "extended cover" feature, as the name suggests, extends half of the already miniscule death benefit for a period equal to half the policy term. The "auto cover" feature is really an extended grace period ranging from six months to two years; why this feature is being touted as a "liquidity enhancement" feature on the brochure remains a mystery.
End NoteLIC Bima Diamond fares abysmally as both an investment and an insurance policy. Ask yourself, would you be happy with a 5.84 per cent annualised return for 20 years, and an unpredictable maximum death benefit of up to Rs 5 lakh? Smart investors will be doing their personal finances a favour by giving this "not-so-shiny" diamond a wide berth! Fortunately, you won't have a choice after 31st August.
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