LIC Bima Bachat (Money-back) Policy Review

When I exited the Jeevan Saral Policy during the LIC’s Free Look Cancellation Period, the LIC agent pitched me another policy trap. He suggested that I should invest the refund from cancellation of Jeevan Saral Policy into LIC’s another great product called Bima Bachat. Bima Bachat policy is also known as a money-back policy or a single premium policy. After my costly mistake of getting a useless Jeevan Saral policy, this time, I was fully prepared and well-educated to avoid another trap. See my Review of Jeevan Saral Policy.

What is LIC Bima Bachat Policy

LIC’s Bima Bachat policy is a single premium money-back policy that gives you money back at regular intervals and at maturation. Bima Bachat policy requires you to pay only one premium. The amount paid for the premium depends on the duration of the policy taken and life insurance is available till the date of maturity.

For a term of 9 years

The policy holder will receive 15% of the sum assured at the end of every 3rd and 6th policy year and 100% of the entire single premium at the end of 9 years.

For a term of 12 years

The policy holder will receive 15% of the sum assured at the end of every 3rd , 6th, and 9th policy year and 100% of the entire single premium at the end of 12 years.

For a term of 15 years

The policy holder will receive 15% of the sum assured at the end of every 3rd , 6th, 9th, and 12th policy year and 100% of the entire single premium at the end of 15 years.

LIC Bima Bachat Rate of Return

Let’s assume that you are taking a policy with the sum assured of Rs. 1 lakh. The table below summarizes the typical premium required for 30 year old policy holder, the 7% discount on the policy premium, money back calculations, and finally and most importantly the rate of return.

Hypothetical Returns on LIC Bima Bachat

A	Policy Period	9	12	15
B	Sum Assured	1,00,000	1,00,000	1,00,000
C	Premium	71,845	77,335	80,610
D	Discount	7%	7%	7%
E	Discounted Premium (B*0.93)	66,815	71,921	74,967
F	Moneyback @15%[(A/3)-1]*[0.15*B]	30,000	45,000	60,000
G	Total Moneyback (E+F)	96,815	1,16,921	1,34,697
H	Compound Annual Growth Rate	4.21%	4.13%	3.98%

LIC also uses the one-time loyalty bonus to entice its customers. From my own research on the Internet, I have found that examples used by LIC to show variable bonuses at 6% and 10% are just examples mandated by IRDA. In reality, LIC bonus is quite smaller that pays 4 to 10 Rs per 1000, which calculates as 0.4% and 1%. For 1 lakh, this amount will calculate to be ONLY Rs 400 to Rs. 1000. Since the amounts are smaller, I have not really used these in the calculations above.

LIC Bima Bachat Insurance Cover

Under this policy, the policy holder is insured for an amount equal to the sum assured. So, in case the policy holder dies before the maturity, the policy holder will receive the sum assured amount. In the example above, if the policy holder dies before the policy matures, he will receive Rs. 1,00,000. In short, you are paying Rs. 66,815 to buy an additional cover of ~Rs 33,000. Mathematically, your sum assured is ONLY 1.5 times the premium you are paying. This is another reason why I do not like this policy. It is not beating the rate of return of a savings account nor is it giving me any good insurance coverage.

NOTE:

This policy is a hybrid of savings account and an insurance policy with a little bit of tax savings component. But, it is not doing any one thing really well. If your goal is to get insurance, then get a term-life insurance. If your goal is to increase your return, then invest in a savings account or fixed deposit in a reputed bank. If your goal is to save money on taxes, then consult a tax professional for alternatives.

 

Alternatives to Bima Bachat

Let’s assume you take your discounted premium from LIC Bima Bachat and deposit it in a Fixed Deposit scheme that gives you 8.75% rate of interest that compounds quarterly.

Hypothetical Returns on SBI Term Deposit

A	Deposit Term	9	12	15
E	Deposit Amount	66,815	71,921	74,967
B	Interest Rate	8.75%	8.75%	8.75%
C	Compounded Interest	78,795	1,31,290	1,99,655
D	Maturity Value	1,45,610	2,03,211	2,74,622
E	Compound Annual Growth Rate	9.04%	9.04%	9.04%

As you can see money increases 2.1 times with a 9 year term deposit; it increases 2.8 times with 12 year term deposit; and finally it increases by 3.66 times with a 15 year term deposit.

If you will not need this money in the near future, then consider investing in the stock market by buying high quality diversified mutual funds. Dividends earned and long-term capital gains (i.e. profits when you sell your shares) is tax free under the current tax laws in India. If you need more convincing, see my post on Why Invest in the Stock Market.

 

Counter-Arguments to LIC Agents

LIC Agents are sales agents on commission. Therefore, they will make every kind of argument to sell you the policy.

The first argument is that you can get a loan of up to 90% sum assured value at 9% interest charges. In my opinion, this is a very weak argument by LIC Agents. My advice to you would be that you if you are going to have to take a loan, then your money shouldn't be locked in LIC policy. At that point, you have bigger problems to solve than investing with LIC. You should keep this money liquid so that you can access this money quickly when you need it. Best way to keep money liquid and still earn some decent interest is to put it in a Fixed Deposit or Term Deposit.

The second argument you hear is that gains earned from LIC are tax-free. This is also not a strong argument, in my opinion. It is true that you can deduct the premium paid for LIC Bima Bachat policy from your taxable income to reduce your tax liability. But, what LIC Agents forget to tell you is that your tax liability is decreased for the first year only being a single premium policy. You are still on the hook for tax payments in subsequent years. Even after paying taxes with Fixed Deposit income, you will come out ahead of LIC's tax free gains on Bima Bachat policy.

 

Conclusion

I would NOT recommend anyone to buy Bima Bachat policy. It does not offer the benefits touted by LIC Agents.