The Money crunch in the system has made insurance and mutual fund companies to formulate more and more innovative products.
Today (16 Feb. 09) LIC (Life Insurance Corporation of India) has launched its new scheme named “Jeevan Varsha” which offers guaranteed return with survival benefit. This plan is launched keeping the success of “Jeevan Aastha “. This money back plan will be available from 16 Feb. 09 to 31 Mar. 09. The term of this policy would be 9 (Nine) and 12 (Twelve) years respectively. One of the most important plus point in this plan in the survival benefit which will give return after every 3 (Three years) which in return will create higher rate of return.
Lets workout “Jeevan Aastha “ in reality,
The Life Insurance Corporation’s (LIC’s) Jeevan Aastha, Religare Aegon’s Life Guaranteed Return Plan and IDBI Fortis’ Bondsurance are some to have hit the market recently.
LIC’s Jeevan Aastha has got the most attention because it has offered 9 percent (Rs 90 per Rs 1,000) and 10 percent (Rs 100 per Rs 1,000) returns for a period of 5 years and 10 years, respectively. “Some investors were in such frenzy that they withdrew from bank fixed deposits to invest in these products,
However, there is a catch in LIC’s return calculations. While other companies have clearly stated that they would give a compounded rate of interest, LIC Jeevan Aastha’s advertisements have put it in rupee terms. What the insurer has not said is that the returns will be based on simple interest.
Let’s look at how this product will work. Jeevan Aastha offers Rs 100 and Rs 90 per Rs 1,000 invested for 10 and 5 years respectively. If a person aged 35 wants a cover of Rs 3 lakh for five years, the one-time premium is Rs 51,930. On death, the family stands to get Rs 3 lakh in the first year. The guaranteed death benefit falls from Rs 3 lakh to Rs 1.09 lakh in the second year and rises marginally to Rs 1.22 lakh in the fifth year.
On survival, the maturity value will be Rs 72,500. So, in effect, the policy-holder makes Rs 20,570 on a premium of Rs 51,930. That means the compounded rate of return is a mere 6.73 percent.For a person, who is 60 years old, the one-time premium is Rs 57,045 and the maturity value is same at Rs 72,500. That effectively works out to 4.83 percent compounded interest.
Compare this with a bank fixed deposit and the numbers are much more impressive. An investment of Rs 51,930 for five year at the rate of 9 percent would give returns of Rs 81,037. That is, Rs 29,107 (Rs 8,537 more than Jeevan Aastha). It’s simply because the interest is compounded. .
From an investment perspective, returns are quite low. Returns of 6-odd percent is worse than what any bank fixed deposit offers. Even Public Provident Fund offers a substantially higher rate at 8 percent.
I have done a mistake with Jeevan Aastha , Not now with Jeevan Varsha again. My learning to this is “Don’t mix Insurance and investment”.
“Investors need to calculate returns from a product properly before putting in their money,”
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