The desire for safe investments, even if with low returns, has meant that insurance companies keep coming up with such products for low-risk investors or policyholders.

LIC came  out with an assured endowment plan – Dhan Vriddhi – last week. It is a non-linked, non-participating, single-premium plan and offers guaranteed additions based on your options and policy terms.

Regarding the simplicity of the product, it is almost like a fixed deposit. But is the insurance plan fit for your investments and long-term goals?

Read our take on Dhan Vriddhi and whether you should plough your money into the endowment product.

What’s the product about

LIC’s Dhan Vriddhi requires you to pay a single premium upfront. And depending on the policy term and option chosen, you will have guaranteed annual additions each year till the policy term, after which you are paid out the sum assured and the additions.

Sum assured on death differs for the two options. Option 1 offers 1.25 times the tabular premium for the chosen sum assured. The second Option, 2, offers ten times the tabular premium for the selected sum assured.

There are three policy terms – 10 years, 15 years and 18 years. But there is a maximum maturity age – the age by which your policy term should be completed – for both options.

For Option 1, it is 78 years (so the maximum entry age for a person wanting to run an 18-year policy term is 60). The maximum maturity age for option 2 is 50 years.

So, for a person aged 40, the maximum policy term under option two would be ten years.

Since there are different slabs of guaranteed annual additions each year based on the policy term, this limitation lowers payouts.

Under Option 1, the guaranteed additions range from ₹60 per thousand a year to ₹70 per thousand a year depending on the basic sum assured for a 10-year policy term. Those figures go to ₹65-75 for the 18-year term.

Move to Option 2 and there is a steep decline in guaranteed additions. So, these are ₹25-35 per thousand a year for a 10-year policy term and ₹30-40 per thousand a year for an 18-year policy period.

The point to note here is that Option 1 maturity proceeds are taxable, but Option 2 payouts are tax-free. Going by Section 10 (10D), the proceeds are taxable if the annual premium paid is more than 10 per cent of the sum assured. Option 1 is taxable as the premium paid is 10 per cent of the sum assured.

How it works

To make the understanding easier, it would be better to illustrate with an example.

Let us take a 40-year-old and evaluate both options. The sum assured is assumed to be ₹10 lakh.

When Option 1 is taken, for a ₹10 lakh sum assured, the premium is ₹8,20,816 (including GST). The sum assured on death is ₹10,01,875.

Taking an 18-year policy would mean ₹75 guaranteed sum addition per thousand sum assured a year. After surviving 18 years, the maturity proceeds would be ₹23.5 lakh – ₹10 lakh plus ₹13.5 lakh guaranteed additions. That translates to a return of 6 per cent (XIRR). But this is taxable. So, post-tax returns would be lower according to the individual tax slab applicable.

Under Option 2, the premium for ₹10 lakh sum assured is ₹9,76,121 (including GST). The death sum assured, according to the LIC website, is ₹9,53,1500.

But if a policyholder survives till maturity, he will receive ₹13,50,000 – ₹10 lakh sum assured plus ₹35 per thousand sum assured guaranteed additions (totalling to ₹3,50,000). From the table, ₹35 per thousand a year is the rate applicable according to the chart for a 10-year policy.

That translated to a return (XIRR) of just 3.29 per cent.

What should investors do?

It is not a good idea to mix investments and insurance while planning for financial goals. Typically, endowment and moneyback policies offer low-risk coverage and returns.

Taking a term insurance cover and investing in mutual funds or even better fixed-income options such as bonds, deposits, and NCDs offering better interest according to individual risk appetites may be a better way to reach your goals.

LIC Dhan Vriddhi offers low returns from both options on offer. Investors may want to skip the plan and look for better alternatives.

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