Monday, September 28, 2009

Happy Life or Bad Insurance?

One more example of how lack of knowledge on part of investors is exploited by insurance companies.

As an example, let us look at Jeevan Anand, an insurance policy by LIC. Jeevan Anand, like many other endowment insurance policies, provides life cover for the term as well as returns at the end of term. It guarantees a certain sum in case of death/ maturity, plus there is a variable component, which depends on number of factors including future investment performance of LIC. For illustration purposes, and as specified by IRDA, LIC has given a table assuming 6% and 10% returns. The statutory warning in the site also says that these assumed rates of return are not guaranteed and they are not upper or lower limits of what the insured might get back.

As given in the illustration at LIC’s website, let us consider a 35 year old male opting for a sum assured of Rs.1,00,000 and premium paying term of 25 years. The annual premium for such a plan is Rs.4,535. As per the plan:
  1. The maturity value of the plan (if the insured survives the life term) assuming a rate of return of 10% is Rs.2,41,000.
  2. In the unfortunate event of death of the insured, the amount payable to the dependent is the sum of guaranteed benefit and variable benefit. For example, if the death occurs at the 21st year, the payable amount will be Rs.2,13,000 (Guaranteed: Rs.1,00,000 + Variable: Rs.1,33,000; assuming a rate of return of 10% again).
Is this a good plan?
To analyze this, let us consider splitting the insurance and investment components so that the total outlay remains constant at Rs.4,535.

For insurance, let us consider Level Term Policy by Max New York Life. For a 35 year old male opting for a sum assured of Rs.2,50,000 and premium paying term of 25 years, the annual premium is Rs.1,407. (I couldn’t get a quote for a sum assured of Rs.1,00,000 or anything less than Rs.2,50,000 as the premiums were lower than that allowed by the insurance company).

For investment let us consider a PPF or FD giving a nominal annual return of 8%. Investment per year is Rs.3,128 (so that the total outlay along with the Level Term Policy remains at Rs.4,535) and we assume that the rate of return remains constant (average of 8%) throughout 25 years. As per this plan:
  1. The maturity value of the plan assuming a rate of return of 8% is Rs.2,46,969.
  2. In the unfortunate event of death of the insured, the amount available to the dependent is sum assured of the Level Term Policy plus the amount available in PPF/ FD. For example, if the death occurs at the 21st year, the payable amount will be Rs.4,04,595 (Level Term Policy: Rs.2,50,000 + PPF/ FD: Rs.1,54,595; assuming a rate of return of 8%).
The illustration for the Level Term Policy + PPF/ FD plan is given here.
Alternatively, click the icon below to view it in Microsoft Excel Web App (need signing in to Widows Live) or download (no signing in required).


Results:
  1. The maturity value for the Level Term Policy + PPF/ FD plan is higher than that for Jeevan Anand. Remember that we have taken only a relatively safe return of 8% in comparison with the “non-guaranteed” 10% of Jeevan Anand. If we assume 10% return for an investment in mutual fund, the maturity value becomes Rs.3,38,393 – a value much higher than that offered by similar returns in Jeevan Anand.
  2. The death benefit for the Level Term Policy + PPF/ FD plan is much higher than that for Jeevan Anand. The death benefit is basically what an insurance policy is for and Jeevan Anand is way back in comparison.
The above is not an attempt to put any insurance plan or the insurance provider in bad light and the policy examples are taken only for analysis. Keep in mind that having insurance and having good insurance are two different things. Insurance companies and agents will push plans that give them profits and it is up to us to understand and choose what is good for us!

Comments are most welcome.

Disclaimer: The views posted in this blog are my own and are based purely on my own way of assessments. Readers are  requested to consult with their financial/ insurance advisers before making any investment/ insurance decision, do their own due diligence and validate factual information.

7 comments:

Srikanth said...

Great analysis, Ganesh. I share your views but with slightly different angle. Visit my blog http://goodfundsadvisor.blogspot.com for more details

Chetan said...

Bhai... Excellent Analysis.

Ganesh said...

Thanks Chetan..

Sanjth said...

Hi Ganesh

You haven't mentioned about whole life coverage in jeevan anand.Even after the maturity you can claim bonus

Thanks
KK

Ganesh said...

Dear Sanjth,
Thank you for your comment.
It is true that Jeevan Anand provides whole life coverage. I am not an insurance advisor nor an LIC plans expert. But i couldn't gather much about the "whole life" benefits from the illustration.

Anyway i assume that the whole life benefit and bonus claim after maturity can be availed only if the lumpsum amount is not fully withdrawn on maturity.

LIC experts can comment/ correct on this.

Regards,
Ganesh

Sanjth said...

Thanks Ganesh

Sanjth said...
This comment has been removed by the author.