Before investing, do the calculations properly.
With the stock market remaining choppy, some insurance companies have started introducing guaranteed return products. The Life Insurance Corporation’s (LIC’s) Jeevan Aastha, Religare Aegon’s Life Guaranteed Return Plan and IDBI Fortis’ Bondsurance are some to have hit the market recently.
LIC’s Jeevan Aastha has got the most attention because it has offered 9 per cent (Rs 90 per Rs 1,000) and 10 per cent (Rs 100 per Rs 1,000) returns for a period of 5 years and 10 years, respectively. “Some investors were in such frenzy that they withdrew from bank fixed deposits to invest in these products,” said Rahul Aggarwal, CEO, Optima Insurance Brokers.
Senior officials in LIC said that they have already collected over Rs 3,000 crore and are targeting Rs 25,000 crore.
However, there is a catch in LIC’s return calculations. While other companies have clearly stated that they would give a compounded rate of interest, LIC Jeevan Aastha’s advertisements have put it in rupee terms. What the insurer has not said is that the returns will be based on simple interest.
Let’s look at how this product will work. Jeevan Aastha offers Rs 100 and Rs 90 per Rs 1,000 invested for 10 and five years respectively. If a person aged 35 wants a cover of Rs 3 lakh for five years, the one-time premium is Rs 51,930. On death, the family stands to get Rs 3 lakh in the first year. The guaranteed death benefit falls from Rs 3 lakh to Rs 1.09 lakh in the second year and rises marginally to Rs 1.22 lakh in the fifth year.
On survival, the maturity value will be Rs 72,500. So, in effect, the policy-holder makes Rs 20,570 on a premium of Rs 51,930. That means the compounded rate of return is a mere 6.73 per cent.For a person, who is 60 years old, the one-time premium is Rs 57,045 and the maturity value is same at Rs 72,500. That effectively works out to 4.83 per cent compounded interest. According to senior LIC officials, if one reduces the mortality charge from the premium then, the rate of returns would increase. For a 35-year old, the mortality charges are 2.43 per thousand. That is, a mere Rs 124 for a premium of Rs 51,930. That means, the rate of return would not change very dramatically. Though there is a loyalty addition (LA) to the maturity value, it is a variable.
Compare this with a bank fixed deposit and the numbers are much more impressive. An investment of Rs 51,930 for five year at the rate of 9 per cent would give returns of Rs 81,037. That is, Rs 29,107 (Rs 8,537 more than Jeevan Aastha). It’s simply because the interest is compounded. Another argument that is given is that insurance products are not bought for returns. One buys such products as they provide good risk cover. But in case of Jeevan Aastha, the death benefit is only six times of the premium in the first year, which falls substantially in the later years.
From an investment perspective, returns are quite low. Returns of 6-odd per cent is worse than what any bank fixed deposit offers. Even Public Provident Fund offers a substantially higher rate at 8 per cent.
No wonder, financial planners such as Kartik Jhaveri are quite upset. “Investors need to calculate returns from a product properly before putting in their money,” said Jhaveri.