LIC to relaunch Bima Nivesh with 5% return

The Life Insurance Corporation of India (LIC) has revised the rate of return on its most popular single premium plan "" Bima Nivesh "" for the fifth time.

Christened Bima Nivesh 2004, the plan will open on Monday, May 17, offering a lower guaranteed rate of return of 4.5 per cent.

As LIC will charge a premium of Rs 976 per Rs 1,000 sum assured, the effective rate of return works out to five per cent.

LIC was forced to bring down the returns on its single premium plan from the earlier assured six per cent annual return.

This is a fall-out of yields on 10-year paper having fallen to 5.18 per cent against over six per cent two years back. LIC closed down the last Bima Nivesh plan on March 31.

Even at an effective yield of five per cent, LIC is offering the highest rate of return on single premium policies today.

Speaking to Business Standard LIC chief actuary G N Agarwal said while investors are assured of five per cent annual returns, they could get about 50 to 100 basis points more in terms of loyalty bonus paid at the end of the period.

Bima Nivesh 2004, like the earlier Bima Nivesh plans, offers policyholders a choice of a five year and a 10-year investment period with an insurance cover.

LIC's current yield on its investment portfolio stands at about 6.5 per cent. With this, the corporation is confident that it will be able to give policyholders a higher rate of return in terms of loyalty additions.

Realignment of guaranteed rate of return is in keeping with the fall in yields on government paper.

Bima Nivesh used to offer as high a rate of return of well over 10 per cent, which fell to 8.4 to 9.5 per cent in 2001 for the five to 10 year bonds. While it might seem that the cut has been quite harsh on policyholders, this should be in light with the 500 basis point fall in yields on government securities.

Even as LIC has reduced its rates on Bima Nivesh products, it has thus far been able to mop up interest. This is even as the product no longer allows for any tax exemption under section 88 of the Income Tax Act.

"Underwriting conditions have been relaxed and this allows larger-sized policies to be issued. Many policyholders do not look solely at the tax angle and buy such products for better wealth management as they also afford a life cover," said Agarwal.