Jeevan Saral Policy Sales Pitch
Jeeval Saral Policy is an endowment policy. An endowment policy is a life insurance contract designed to pay a lump sum after a specified term (on its 'maturity') or on death. Typical maturities are ten, fifteen or twenty years up to a certain age limit. Some policies also pay out in the case of critical illness.
Jeevan Saral Policy includes Loyalty Additions (or Bonuses), meaning that policy holder gets certain percentage of bonus from LIC.
Apart from the above standard pitch, our LIC agent used following sales keywords:
High risk cover, 250 times cover irrespective of age, also include accident benefits. You get money back at maturity. You can close the policy after 10 years. Very good policy, all my NRI clients have bought it.
Jeevan Saral Policy Analysis
Risk cover of 250 times the monthly premium. If your monthly premium is Rs 1,000 then you will get guaranteed benefit of Rs 2.5 lakhs if you don't survive the policy period. If you survive through the policy period (which by the way, most people do), then you don't get this 250 times guaranteed coverage. This is the insurance part of the policy.
Rate of Returns. The returns are not guaranteed. If LIC makes money, then it will share its profits. So, the returns are variable. The chart LIC's website doesn't provide any info on the rate of return on the policy. There are two what-if scenarious -- loyalty bonus at 6% and 10%. We all know that getting returns at 10% without any risks is not so easier to achieve for LIC and they may be constrained on where they can invest to get such high returns.
According to JagoInvestor:
The government of India typically gets 5% profit share and will be decided in the 10th year at the time of loyalty bonus. Even if we say, the government becomes extremely generous and does not take any profit from this plan, then the actual return will get bumped by 5%. That means if 95% gives you 6%, then 100% will give you 6.31%.
Let's do some calculations on the Rate of Return on Jeevan Saral Policy. Let's use the same example as used by LIC.
Age at entry: 35 years
Policy term: 25 years
Mode of premium payment: Yearly
Amount of annual premium: Rs.4704/-
Assumed loyalty-addition: 6%
At 10 years, total premium paid is Rs 47,040. If you surrender the policy, you'll get Rs 50,360. Compounded annualized rate of return is ONLY 0.68%. Disgusting, isn't it. Wait...let's see if we stay longer.
At 15 years, total premium paid is Rs 70,560. If you surrender the policy, you'll get Rs 88,200. Compounded annualized rate of return is ONLY 1.50%.
At 20 years, total premium paid is Rs 94,080. If you surrender the policy, you'll get Rs 1,36,124. Compounded annualized rate of return is ONLY 1.86%.
At 25 years, total premium paid is Rs 117,600. If you surrender the policy, you'll get Rs 2,00,296. Compounded annualized rate of return is ONLY 2.15%.
Granted that above calculation provides absolute returns because you'd be investing in this policy on a yearly basis, and not in one lump-sum. But, still these returns are pale in comparison with fixed deposit or even a savings account, or even with a recurring deposit.
Returns would be negative if you surrender the policy before 10 years because loyalty-addition bonus doesn't start until 10 years.
Lots of people make the mistake of keep pushing through even when they realize that they had made a mistake rather than exiting the policy. The problem is that if you exit before 3 years, all your premiums will be lost. But, if you surrender on or after 3 years, your first year premium is lost and they deduct quite a lot of % of premium from the remaining year's premium. So, it is not even worth investing for 3 years because you end up losing more than if you just made your peace at first year and lost it completely.
Why I think Jeevan Saral Policy is NOT a Good Investment for Me
For me, high risk cover is NOT of any great use. Even if it is of any use, it is not high for the premiums I'm paying. I'd rather pay into a term-life policy that offers me great coverage for very little premiums. (NOTE: My employer in the US offers a group-term life policy that covers me for 4-times my annual salary for a fraction of the money. I already have this for me and my family.
As shown previously, the rate of return on the Jeeval Saral policy is not that great compared to fixed deposit products from any bank.
I did not ask the right questions to the agent about returns.I went with the assumption that almost all people I know including NRIs have insurance policies in India and they keep boasting about how much higher they are insured against.
LAST, BUT NOT THE LEAST, I should NOT have mixed investment with insurance. I already had insurance component covered in the US. I also have a very well diversified portfolio of low-cost index mutual funds in the US. My underlying goal was to diversify into an Indian market. But, jumping into insurance is not a great diversification because of returns.
My Next Plan of Action
I plan on exiting the policy immediately. I've already paid my first year premium in full. But, I know I could recover this money easily. I've already exited the LIC Jeevan Saral Policy and got the full premium back minus the administrative charges. (Update: During my research, I came across Free Look Period Cancellation rule.)
I'm planning to deposit my second year's full premium into a NRE Term deposit @ 9.25% for 10 year or as much as the bank allows. This will double the money at the end of 10 years and will recover completely the first year premium I've lost with LIC. (Update: I've not exercised this option yet. Last year, I focused my energies in the US stock markets.)
For the remaining years, I'll plan on investing in the US stock market or open NRE Term deposits for the amounts that would have gone in LIC premiums.
What is LIC?
Life Insurance Corporation or LIC of India is the largest insurance group in India. It is fully owned by the Government of India.
Hello there...
ReplyDeleteI read your article and profile with great interest, as your investment and life style is quite similar with mine.
I am a holder of this policy for about 9 years and paying maximum premium and term possible allowed then, and has also done lots of number crunching and meeting with agent, who is also my close buddy, before I agreed and signed contracts. My buddy gave back 30% of my first year premium. Though, unlike yours, my primary goal was life insurance. So, that my mother and siblings get the benefit from that policy, in my absence. Just like yours I’ve got enough coverage from Work/401k/RothIRA and SSA, so my wife and kids are protected financially.
After reading your article and your numbers, I started suspecting my numbers and started thinking that did me not crunched the numbers right?
Now, I tell you where you’re wrong.
As, you described,
1. You knew it is an “Insurance” policy, so any one investing in LIC should know that, if you are not looking for Insurance then, LIC or any insurance company is not the place to invest.
2. You are aware that you’ve not paid lump sum amount, yet you calculated compounded interest against lump sum amount, which is completely inaccurate misleading. When actual ‘Loyalty Addition’ you will range from 4 to 8%.
3. You did mention that it was not good investment for “you”, but you blogged it in a way that it looks like ‘Jeevan Saral’ is scam or avoid it.
The sales pitch given by your agent was right, accurate.
1. It out performs any other fix investment, including RD which is not tax exempt and interest is taxable. Though it doesn’t benefit NRIs, if no other taxable income in India.
2. PPF has maximum limit of Rs.100k which was extended just couple of years back.
3. Best for NRIs, coz, it gives financial protection to your loved ones in India if you are not around and your spouse turn against your close family in India.
You’ve completely misunderstood the features ‘Jeevan Saral’ policy has to offer. Yet, the way you blogged this article to negate the features of this ‘Golden Award’ winner policy.
Another NRI investor…
First off, congrats on saving for your retirement and keeping your family and siblings in mind in your financial planning. Here are a few thoughts in response to your comments.
ReplyDelete(1) Call me naive or financially illiterate, but honestly I totally didn't understand how insurance works in India. You are correct, I should not have gotten the policy knowing that my goal was to grow the money. I've admitted this in my blog post.
(2) I used the lump-sum amount in the CAGR calculation because it makes the calculation simpler. If you don't do use the lump-sum, then you need to figure out the opportunity cost of investing that money elsewhere and calculating returns. I don't know about you, but for me, that money would have simply stayed in a short-term money market or savings account, thus providing me with negligible returns. In my personal case, I'd have had to start for saving that premium each month because I didn't have lump-sum available to invest elsewhere anyway. So, in my case, it doesn't make any difference because I'm not investing the money elsewhere until premium is due each year. Does this make sense?
(3) I'm not able to confirm or deny 4-8% Loyalty Additions. LIC is mum about this as I'm not able to find this on their website. I'm also suspicious that if 4-8% return is so high, why LIC isn't doing a press release each year announcing it, like public companies announce dividends. More PR will bring them more customers, logic would suggest.
(4) BTW, I'm not the first one to raise red flags about this policy. Sites like JagoInvestor and My Journey to the Billionnaire Club have been doing it for some time now. Look at the number of questions people have asked about surrendering the policy and responses. See here and here.
ReplyDelete(5)Through this experience, I learnt one thing and that is you shouldn't mix investment with insurance. You should keep those two things separate. The reason why LIC Jeevan Saral (and many other whole-life, endowment type) is not good is because they promise to return you money at the end of policy period or when you surrender. By returning you money, they compromise on the insurance part as can be seen from the insurance coverage part of the Jeevan Saral. The coverage is ONLY 250 times your monthly premium.
(6) In your case, if your goal is insurance coverage, then why not go for a simple term life policy plan. You will get a much higher coverage and will cover your loved ones adequately. According to this article, the Rs. lakh coverage will cost you approximately only Rs. 8000 in annual premium, thus giving you a cover of 3600 times your monthly premium. The same 25 lakh coverage will cost you Rs 1 lakh in annual premium with Jeevan Saral policy. (Please know these are rough back of the napkin calculations. But, you get the picture.) For this higher coverage, the trade-off for you would be that you will not get any money back if you survive. See this link.
(7) The money you save in premiums with the term-life policy, you can invest the rest in savings account for your loved ones. Plus, they are liquid and will earn a decent interest.
(8)One last point, you said that your agent friend returned you 30% of the first year premium paid. He probably did not pay you out of his pocket, but from the commission he got on your policy. Think about it this way, if he is able to return you this much, he probably going to recover from the remaining year's commissions. If LIC is paying such a high commission rate and on top of this they have administrative costs, it makes you really wonder how (if at all) are they able to beat market returns of recurring deposits or fixed deposit schemes, while still providing you with a high insurance coverage. This is why I feel, agents sometimes mislead customers by showing brochures with hypothetical scenarios which are far from reality.
ReplyDelete(9) Since you have paid 9 years into this policy, you should stay the course and complete at least 10 years. At the end of the 10 year, perhaps you should ask how much would you get back if you were to surrender the policy. You would get a good idea of your returns then.
(10) In my own personal case, I've cancelled the policy during free look cancellation. I ended up losing 10% of the premium paid. I'm giving the remaining money to my parents to invest in the savings account.
Hope I've addressed your concerns.
Sir,u have opened my eyes by escalating the truth behind JEEVEN SARAL,
ReplyDeletei am planning to buy it shortly but after reading ur veiws,i have cancelled my plan and decide to buy term plan for insurance and searching other instruments for investment.
Thanks a lot..
As far as I know, the Jeevan Saral Policy loyalty addition was 250 for 10 years and 300 for 11+ years in 2012 per lakh. So, the return was only 3%.
ReplyDeleteThanks for your kind words. Term insurance is the best form of insurance as it is cheaper and gives you higher coverage than policies (like Jeevan Saral) that give you money back. AND, invest remaining money in savings, recurring deposits, or in mutual funds. There is a company called fundsindia.com that simplifies the mutual fund investment process. I recently helped my parents open an account through them. The process with them is quite simpler than others. Thanks for your comments.
ReplyDeletePintu thanks for commenting. Per my calculations, the returns are NOT 2.5%, but are much much lower 0.025%, which is negligible. Just to be clear, I'm talking about ROI per YEAR. Here are my calculations.
ReplyDeleteLet's say somebody invests Rs. 10,000 per year for 10 years. So, total investment is Rs. 1 lakh. Per your comments, after 10 years, the person will get Rs. 250. This calculates to be 2.5% return for 10 years. If you divide this by 10, you will get 0.025% per year return, which is nothing, and doesn't even keep up with the inflation.
Granted my calculations are on the full sum of 1 lakhs and does not take into account small installments. But, my point is that your 1 lakh invested over 10 years isn't earning much. The returns are not as high as LIC agents make them out to be.
Again thanks for commenting on this blog. Your comments clarifies that 6%-10% advertised returns on LIC Jeevan Saral is simply not true in real life.
[...] recently posted my costly (but educational) experience about LIC’s Jeevan Saral Policy. After having purchased this policy, I realized that this policy is not suitable for my needs.I am [...]
ReplyDelete[...] you have read my previous post on LIC’s Jeevan Saral Policy Review, you must have noticed that I made a mistake in getting the policy during my recent trip to India. [...]
ReplyDeleteIts very informative. i have related question. I have jeevan saral policy, do we need to declare this in FBAR?
ReplyDeleteTechnically, yes, if you're able to control the policy through your signature and it is in your name.
DeleteThe answer is yes if the policy is in your name because the Jeevan Saral policy will give you cash when it matures.
ReplyDeleteHi I am ketan chaudhary,28 years.I have jivan saral policy since may 2011. I pay 12010 rs premium yearly.it is for 20 term and table 165.so how much I will get on maturity.please advice me.
ReplyDeleteHi I am ketan chaudhary,28 years.I have jivan saral policy since may 2011. I pay 12010 rs premium yearly.it is for 20 term and table 165.so how much I will get on maturity.please advice me.
ReplyDeleteKetan, sorry I've lost track of this blog. You should be able to calculate this from the the LIC website. Just don't use the examples LIC uses for loyalty bonus and profit shared.
ReplyDeleteSir, lic result kab ayega.
ReplyDelete