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.
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.
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.
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 & ReviewInterestingly, 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:
Approach A – Jeevan Umang plan for Sum Assured of 5 lac and PPT of 15 years
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.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.Jeevan Umang – Illustration from LIC
Alternative Approach – Illustration
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
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
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
….
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.
