The Hindu Business Line : Insurance first, investment later

Insurance is supposed to serve the purpose of protection. But, of late, we have been witnessing a number of insurers pitching products as a combination of investment and insurance.

Single-premium insurance product is one such product where the risk cover is attractive in the first year, but gets diluted in the subsequent years when its profile resembles that of an investment product.

When most of the private insurers are wary of launching single-premium products, LIC has launched another such product and would look to find the patronage that an earlier product that it launched had.

LIC recently launched a single premium product, “Jeevan Nischay”, a closed-ended plan designed exclusively for its policyholders. The minimum condition is that the policyholder should have at least one risk bearing policy and it should have been accepted at standard premium (it implies that person in good health).

Jeevan Nischay is offered to individuals above 18 years of age and the maximum cut-off age is 50 years.

The minimum premium payable is Rs 10,000 and the maximum is Rs 10 lakh. The maximum sum insured is five times the premium paid and it’s restricted to Rs 50 lakh or 50 per cent of the existing policy.

For example, if a person has a risk cover for Rs 50 lakh, the policyholder is allowed to take a single premium policy for Rs 5 lakh and the risk cover will be Rs 25 lakh.

If death occurs in the first year of the policy, the nominee is entitled to receive five times the premium. But if death occurs after the first year, the guaranteed value is paid. For a 10-year plan the guaranteed addition is close to 80 per cent of the policy value (it works out to 6.0 per cent annual returns), 45 per cent for a seven-year term (5.5 per cent) and 30 per cent for a five-year term (5.2 per cent). Jeevan Nischay also indicates loyalty addition if the investment experience is favourable.

The policy is offered in 10-, seven- and five-year terms and policies are issued without conducting medical tests. But the policyholder has to give self declaration of good health.

Comment

The plan is most suitable for high net worth individuals.

Currently postal savings are offering 8 per cent return and the post-tax yield works out to 5.6 per cent.

Even assuming that there is no loyalty addition, policyholder will earn a return of 6 per cent and it is assured in the form of risk cover after first year and it adds value to the investment.

LIC has also indicated that if their investment experience is favourable it will pay Rs 8,935, Rs 5,470 and Rs 3,229 as a loyalty for a investment of Rs 25,000 (for an indicative age of 35) in addition to guaranteed returns at maturity for a 10-, seven- and five-year policies, respectively.

If LIC achieves its investment objective, it translates to 8 per cent tax-free return for a 10-year plan.

Under the circumstance even for investors in lower tax break it makes an attractive investment proposition.

The plan is not so useful for the investor investing below Rs 25,000. For policyholders above 50 years of age, yields are likely to drop by at least 0.5 per cent.

The only risk is that if the interest rates start trending up people in the lower tax bracket (10 per cent) may be at a disadvantage as the policy has indicated its loyalty addition at the time of maturity.

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