Expert advice

Mar 15, 2013,16.00 IST

LIC Jeevan Sugam Vs tax-free bonds: What's best for you?

In an interview to CNBC-TV18, personal finance expert, Harshvardhan Roongta of Roongta Securities discussed about Life Insurance Corporation of India's new product Jeevan Sugam.

Below is the verbatim transcript of Roongta's interview with CNBC-TV18.

Q: Life Insurance Corporation of India (LIC) has launched a new product - Jeevan Sugam. We want to ask you what the benefits are of this particular product. What are the drawbacks and would you be recommend investors to go ahead and buy it?

A: If one look at the product and the features, it was launched on February 25 and it will be open only for 45 days. So, it will be closing on April 10-11. The second part is that it is a single premium. One has to pay the premium only once and the maturity is after ten years. So, the money comes back in the year 2023.

Since it is a life insurance product – there needs to be an element of life insurance, which is ten times of the premium that a person pays.

If one sees the positioning of this product by the distribution force then it is an attractive investment proposition, comparable to tax-free bonds and also gives life cover.

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Therefore, to understand the return element and in comparison to tax-free bonds, we have got certain sample premiums for different age groups. So, if we take an 8-year-old, he needs to pay in about an Rs 55,000 and gets Rs 1 lakh at the end of ten years, which is guaranteed. The returns work out to be about 6.14 percent. The same thing for a 25-year-old is about 5.72 percent and for a 35-year-old is a 5.2 percent.

This is the guaranteed portion of the returns that one gets. In addition to this, there is also a probability of getting a loyalty addition at the end of ten years. If that comes by, one will see the returns push up by another 50-100 bps, so combining the returns that one is expected to get.

If the person pays more than Rs 2 lakh as premium then his returns would push up a little further because there is some discount that LIC gives for high premiums.

If we sum it up for a 25-year-old person, if we look at the returns that he is likely to get from this investment, over next 10 years is about 6.75-7 percent, plus a life cover of ten times of the premium that he pays.

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So, a tax-free bond is more superior in terms of returns if one is comparing and looking at only returns element. The tax-free bonds would be far more superior in terms of returns. However, if a person who is below 25 years of age may consider investing into this only because if he needs the tax benefits under 80C and he is looking for some nominal life cover along with it.

So, tax-free bonds probably in terms of returns would be slightly better-off.

Q: I have a couple of objections to a product being sold like this. Just tell me if they are legitimate? Why would one buy life cover for an 8-year-old? Why one buys a life cover. It is because if that person is an earning member of the family, if he ceases to exits the family suffers and therefore it replace. It is not a replacement of an emotional loss. It is a replacement of a financial loss. An 8-year-old is not a source of financial income for the family. So, selling life cover for an 8-year-old somehow seems complete mis-selling to me and secondly at 6.7 percent as well how much is – if one took a term policy and a Public Provident Fund (PPF) would not the gain and the life cover be the same and the gain be more?

A: Absolutely, you are right. As I mentioned, this product is more positioned as an investment opportunity comparable to tax-free bonds and because it is offered by a life insurance company there has to be an element of life insurance, the coverage, which needs to be inbuilt into it.

So, your points are absolutely valid – both your concerns – one that life insurance for an 8-year-old or even for that matter for a 25-year-old, he takes ten times of the cover that he gets, as it he pays only for a ten year period is immaterial. So, the life insurance component added into this is only because as a life insurance company you have to give cover. Second, if you do not have a cover, which is ten times of what you pay then you do not even get that returns as tax-free in your hands.

Therefore, the element of life insurance is only for these two purposes. The second concern, which you said that if one buy a term policy and take a PPF or a tax-free bond for that matter is a more prudent financial planning method. This is an investment product, which has been positioned in comparison to something, which is a tax-free bond and the other investment avenues and LIC has been successful in the past to launch products around this, quarter of the financial year.

Q: Did you go through the fine-print? What was the charge in terms of service charges, mortality charges, would you know even for any particular age group?

A: This product is not a unit-linked policy, so there are no differential. There is no categorically mentioned mortality charge. What an investor needs to look at is that I am paying an X amount, at the end of ten years LIC is promising you that they will give you Rs 1 lakh back if you pay Rs 55,000.

Q: They do not mention service and mortality charges for a product like this? They are not separately mentioned?

A: Absolutely not. They are not separately mentioned and they are not even as a material fact in this investment product. You know what you are paying and you know what you will get at the end of the period. So, whatever LIC does internally is entirely their purview.

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