LIC’s Jeevan Umang whole life policy – Should you buy?

In the recent days, LIC is running a promotion for its whole life policy – Jeevan Umang. Like any promotion, this campaign highlights the various plus points of the policy, In this article, we compare this investment linked product with a separate investment product and show that it helps to not mix insurance and investment.

Highlights of Jeevan Umang

This product is described as a “A non-linked, with-profit, whole life assurance plan”.  The very first line in the description of the policy highlights the fact that the plan offers a combination of ‘protection’ and ‘income’. Most whole life plans have a range of policy periods.

  1. Policy Term (PT) – This is the entire age of the policy. Whole life policies generally run till you are 100 years old. For Jeevan Umang, Policy Term = 100 – Your age at entry.  For a 45 year old, the policy term is 55 years.
  2. Premium Payment Term (PPT) – It is obvious that one won’t pay premium throughout the period. Usually premiums are paid for 15-30 years. For Jeevan Umang, PPT is fixed for one of these values: 15, 20, 25, 30

Protection Benefits

A life insurance should provide a corpus to the family if the policyholder were to die during the term of the policy.  Jeevan Umang adds some bells and whistles on this. The death benefit could be more than the Basic Sum Assured. This can happen due to the addition of annual bonus and additional bonus. Also, the plan guarantees that the death benefit would not be less than 105% of the total premiums paid till date. So after the PPT ends, the death benefit could be more than the Basic Sum Assured even in the absence of any bonus. We would see an example of this in the illustration.

Guaranteed Surrender Value

Once premium has been paid for 3 years, the plan guarantees a surrender value. This is touted as a major benefit of the policy. Frankly, insurance is a long term contract and one should not enter it with the idea of withdrawing after say 5 years. We will ignore this supposed benefit in our analysis.

Survival Benefit

This is clearly a good feature of this plan. After the premium payment term ends, the plan pays a survival benefit every year. This is equal to 20% of the Basic Sum Assured. e.g if the BSA is 5 lac and the PPT is 15 years, the plan pays a sum of Rs 40,000 every year from the 15th year. This continues till the policy ends – on maturity of 100 years or on the death of the policyholder. If one sets up the PPT to end at retirement, this survival benefit could be a part of a pension. This benefit is promoted as such by the agents.

Promo

Review of Jeevan Umang plan

A lot of the reviews of this plan, like other LIC plans, are featured by insurance websites. They obviously would claim that this is a great plan. More balanced reviews can be found in financial blogs. This article is one example: LIC Jeevan Umang – New Whole Life Plan | Features, Illustration & Review

Interestingly, with a set of assumptions, the article calculates the Internal Rate of Return (IRR) to be 5.64%. This is indeed a poor rate of return – even for a tax efficient instrument. However, insurance selles have a habit of highlighting the future cash flows to give an impression that the endowment plan has high returns.

In this article, we would use the illustration provided by LIC itself and compare these two approaches:

  1. Approach A – Jeevan Umang plan for Sum Assured of 5 lac and PPT of 15 years
  2. Approach B – A combination of a pure term plan for 15 years, and investment in a pure play financial product (Equity Linked Savings Scheme or Public Provident Fund)

Jeevan Umang – Illustration

The plan at LIC illustration provides a good amount of insight into the workings of the plan. A snapshot is provided below. Please note the two scenarios of return assumptions. The assumptions are for the entire life of the policy. For a large part of the policy term, the projected death benefit is above 6 lac even in the 4% return scenario.  The benefit is of course higher in the 8% return scenario.

Promo

The survival benefit is paid from the 15th year. This amounts to Rs 40,000 per year and is paid every year when the policy is in force. For brevity, this table is not included below.

LIC's Jeevan Umang whole life policy - Should you buy?
Jeevan Umang – Illustration from LIC

Alternative Approach – Illustration

Promo

For this approach, we use these assumptions:

  • Anmol Jeevan II term insurance for 6 lac for 15 years – this is similar to the guaranteed death benefit for the first approach
  • The annual premium for this plan for a 45 year old male is Rs 5,381
  • The rest of the amount of approximately Rs 33,000 is invested in a financial product in a tax efficient way. The two most suitable choices are ELSS and PPF.

The detailed tables  illustrate the death and survival  benefits from this approach. For the first 15 years, the term policy provides death benefits. In addition, the accumulated corpus provides additional death benefit.

4% Return Scenario

The table below illustrates the death benefit and survival benefit with the assumption that the financial instrument returns 4% post-tax.

 

4% scenario
End Of Year Contribution Sum Assured (A) Survival Withdrawal Projected corpus (B) Projected death benefit (A+B)
1 33,341 6,00,000 0 33,959 6,33,959
2 33,341 6,00,000 0 69,302 6,69,302
3 33,341 6,00,000 0 1,06,084 7,06,084
4 33,341 6,00,000 0 1,44,365 7,44,365
5 33,341 6,00,000 0 1,84,206 7,84,206
6 33,341 6,00,000 0 2,25,670 8,25,670
7 33,341 6,00,000 0 2,68,823 8,68,823
8 33,341 6,00,000 0 3,13,735 9,13,735
9 33,341 6,00,000 0 3,60,476 9,60,476
10 33,341 6,00,000 0 4,09,121 10,09,121
11 33,341 6,00,000 0 4,59,749 10,59,749
12 33,341 6,00,000 0 5,12,439 11,12,439
13 33,341 6,00,000 0 5,67,275 11,67,275
14 33,341 6,00,000 0 6,24,346 12,24,346
15 33,341 6,00,000 40,000 6,43,742 12,43,742
16 0 0 40,000 6,29,969 6,29,969
17 0 0 40,000 6,15,635 6,15,635
18 0 0 40,000 6,00,717 6,00,717
19 0 0 40,000 5,85,191 5,85,191
20 0 0 40,000 5,69,032 5,69,032
21 0 0 40,000 5,52,216 5,52,216
22 0 0 40,000 5,34,714 5,34,714
23 0 0 40,000 5,16,499 5,16,499
24 0 0 40,000 4,97,542 4,97,542
25 0 0 40,000 4,77,813 4,77,813
26 0 0 40,000 4,57,279 4,57,279
27 0 0 40,000 4,35,910 4,35,910
28 0 0 40,000 4,13,669 4,13,669
29 0 0 40,000 3,90,523 3,90,523
30 0 0 40,000 3,66,433 3,66,433
31 0 0 40,000 3,41,362 3,41,362
32 0 0 40,000 3,15,270 3,15,270
33 0 0 40,000 2,88,115 2,88,115
34 0 0 40,000 2,59,853 2,59,853
35 0 0 40,000 2,30,440 2,30,440
36 0 0 40,000 1,99,828 1,99,828
37 0 0 40,000 1,67,969 1,67,969
38 0 0 40,000 1,34,813 1,34,813
39 0 0 40,000 1,00,305 1,00,305
40 0 0 40,000 64,392 64,392
41 0 0 40,000 27,015 27,015
42 0 0 40,000 -11,884 -11,884
43 0 0 40,000 -52,368 -52,368
44 0 0 40,000 -94,502 -94,502
45 0 0 40,000 -1,38,352 -1,38,352

As can be seen, the death benefit is higher than Jeevan Umange for the initial years. However, the withdrawal of the survival benefit reduces the corpus after about 20 years and the corpus dries up after about 40 years. Clearly, if you are a very conservative investor and can generate 4 or 5% returns, you are better off buying the Jeevan Umang policy.

8% Return scenario

Promo

Equity Linked Savings Scheme (ELSS) are very comparable to life insurance in terms of tax treatment. The contributions and accumulations are exempt from tax. There is a 10% tax on long term capital gains. For this analysis, we assume a post-tax return of 8%. This is a conservative assumption – almost all ELSS funds can generate much higher returns in the long term.

The table below illustrates the death benefit and survival benefit with the assumption that the ELSS fund returns 8% post-tax. It is clear that this approach is way, way better than Jeevan Umang. For every policy year, the projected death benefit is much higher than the projections for Jeevan Umang.

8% scenario
End Of Year Contribution Sum Assured (A) Survival Withdrawal Projected corpus (B) Projected death benefit (A+B)
1 33,341 6,00,000 0 34,591 6,34,591
2 33,341 6,00,000 0 72,053 6,72,053
3 33,341 6,00,000 0 1,12,625 7,12,625
4 33,341 6,00,000 0 1,56,564 7,56,564
5 33,341 6,00,000 0 2,04,149 8,04,149
6 33,341 6,00,000 0 2,55,685 8,55,685
7 33,341 6,00,000 0 3,11,497 9,11,497
8 33,341 6,00,000 0 3,71,943 9,71,943
9 33,341 6,00,000 0 4,37,405 10,37,405
10 33,341 6,00,000 0 5,08,300 11,08,300
11 33,341 6,00,000 0 5,85,080 11,85,080
12 33,341 6,00,000 0 6,68,233 12,68,233
13 33,341 6,00,000 0 7,58,287 13,58,287
14 33,341 6,00,000 0 8,55,815 14,55,815
15 33,341 6,00,000 40,000 9,21,438 15,21,438
16 0 0 40,000 9,57,917 9,57,917
17 0 0 40,000 9,97,424 9,97,424
18 0 0 40,000 10,40,210 10,40,210
19 0 0 40,000 10,86,547 10,86,547
20 0 0 40,000 11,36,729 11,36,729
21 0 0 40,000 11,91,077 11,91,077
22 0 0 40,000 12,49,936 12,49,936
23 0 0 40,000 13,13,680 13,13,680
24 0 0 40,000 13,82,715 13,82,715
25 0 0 40,000 14,57,480 14,57,480
26 0 0 40,000 15,38,450 15,38,450
27 0 0 40,000 16,26,140 16,26,140
28 0 0 40,000 17,21,109 17,21,109
29 0 0 40,000 18,23,960 18,23,960
30 0 0 40,000 19,35,348 19,35,348
31 0 0 40,000 20,55,981 20,55,981
32 0 0 40,000 21,86,627 21,86,627
33 0 0 40,000 23,28,116 23,28,116
34 0 0 40,000 24,81,348 24,81,348
35 0 0 40,000 26,47,299 26,47,299
…. 0 40,000 28,27,023 28,27,023
45 0 0 40,000 52,88,269 52,88,269

Promo

Best of everything Scenario

Arguments could be made that ELSS are market products and are not suitable for all investors. Let us consider Public Provident Fund (PPF). Like life insurance, this fully exempt from tax. The minimum term of PPF is 15 years and it can be extended for a block of 5 years. The interest rates are aligned to the Gilt yields. Though there has been a downward trend, the rates are still more than 7%. To be on the conservative side, we have assumed a rate of 7% through the term.  This instrument is suitable for conservative investors too. Still, this approach provides much better returns than the 8% return scenario in Jeevan Umang.

7% scenario
End Of Year Contribution Sum Assured (A) Survival Withdrawal Projected corpus (B) Projected death benefit (A+B)
1 33,341 6,00,000 0 34,432 6,34,432
2 33,341 6,00,000 0 71,353 6,71,353
3 33,341 6,00,000 0 1,10,942 7,10,942
4 33,341 6,00,000 0 1,53,394 7,53,394
5 33,341 6,00,000 0 1,98,915 7,98,915
6 33,341 6,00,000 0 2,47,726 8,47,726
7 33,341 6,00,000 0 3,00,066 9,00,066
8 33,341 6,00,000 0 3,56,190 9,56,190
9 33,341 6,00,000 0 4,16,370 10,16,370
10 33,341 6,00,000 0 4,80,902 10,80,902
11 33,341 6,00,000 0 5,50,098 11,50,098
12 33,341 6,00,000 0 6,24,296 12,24,296
13 33,341 6,00,000 0 7,03,858 13,03,858
14 33,341 6,00,000 0 7,89,172 13,89,172
15 33,341 6,00,000 40,000 8,40,653 14,40,653
16 0 0 40,000 8,61,424 8,61,424
17 0 0 40,000 8,83,697 8,83,697
18 0 0 40,000 9,07,579 9,07,579
19 0 0 40,000 9,33,188 9,33,188
20 0 0 40,000 9,60,648 9,60,648
21 0 0 40,000 9,90,094 9,90,094
22 0 0 40,000 10,21,668 10,21,668
23 0 0 40,000 10,55,524 10,55,524
24 0 0 40,000 10,91,828 10,91,828
25 0 0 40,000 11,30,756 11,30,756
26 0 0 40,000 11,72,499 11,72,499
27 0 0 40,000 12,17,259 12,17,259
28 0 0 40,000 12,65,255 12,65,255
29 0 0 40,000 13,16,720 13,16,720
30 0 0 40,000 13,71,906 13,71,906
….

Promo

Note: Partial withdrawals are more restricted in PPF. For ease of analysis, we ignore this small constraint.

Conclusion

Jeevan Umang whole life plan has some good features. However, we have shown that an approach that does not mix insurance and investment provides much better returns, and flexibility, than an endowment insurance product. This is the case even for conservative investors who would prefer government backed instruments.

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *