LIC’s Jeevan Azad: Should you buy a traditional endowment policy with assured returns?

LIC's Jeevan Azad is high on safety, but low on returns

Many life insurance agents have been frantically reaching out to customers, exhorting them to buy traditional endowment products before March 31.

The reason? A Budget 2023’s proposal which eliminates the tax advantage that traditional, non-linked policies enjoy. Currently, maturity proceeds from such life insurance policies are completely tax-free under Section 10 (10D), provided the death benefit element is at least 10 times the annual premium.

However, April 1 on, income earned on such policies will be subject to tax, if their aggregate annual premiums exceed Rs 5 lakh.

Also read: Beware! Insurance agents pushing high-premium policies before March 31 to escape tax

How it works 

The latest product from insurance behemoth Life Insurance Corporation of India, Jeevan Azad, falls in this category. It is a non-participating, non-linked guaranteed endowment policy, a category the insurance giant is increasingly focusing on. The product comes with limited premium-paying terms and offers guaranteed returns at maturity.

Put simply, the base sum assured mentioned in your policy will be the amount you will receive at maturity. The minimum sum assured under the product is Rs 2 lakh while the maximum is Rs 5 lakh. You have the option of receiving the sum assured at one go on maturity or in instalments over five years.

In case of the policyholder’s death, the nominees or dependents will get an amount that is the higher of the basic sum assured of seven times the annual premiums paid. It will be at least 105 percent of the total premiums paid until the date of death.

Policyholders can select the instalment option for death benefit too – the amount will be paid out to their dependents after death over five years in monthly, quarterly, half-yearly or annual instalments.

Also read: Four classic insurance traps you must avoid

High on safety, low on returns 

As per the plan’s sales brochure, a 30-year-old individual choosing a basic sum assured of Rs 2 lakh, with a policy tenure of 18 years and premium-paying term of 10 years, will have to pay an annual premium of Rs 12,083, excluding GST.

After paying a cumulative premium of Rs 1,20,830 over 10 years, the policyholder will get Rs 2 lakh after 18 years, at maturity. This works out to an internal rate of return of 3.76 percent.

“The minimum guaranteed surrender value and maturity benefit are known in advance. IRR, though, depends on many factors like the age of the policyholder, mode of application and terms of policy. The product is simple to understand. However, I do not see the product as beneficial for policyholders as there are several other better return-yielding investment alternatives,” says Pankaj Mathpal, Founder, Optima Money Managers.

For instance, if assured returns is what you seek, you can look at government securities. “Yields on government bonds or target maturity funds will be higher,” says Preeti Zende, a SEBI-registered investment advisor and Founder of  Apnadhan Financial Services.

Also read: Top five tax saving investments for last minute tax planning

Loan against life insurance policy 

Like in the case of other policies, you can take a loan against this policy for up to 90 percent of the surrender value. You can do so after having paid at least two full-year premiums. This condition also applies for surrendering the policy – that is, terminating the policy before the end of the original tenure. Premiums paid will be eligible for tax deductions up to Rs 1.5 lakh under Section 80C.

Optional covers 

You can buy the standard accidental death and disability and accident benefit riders as also the premium waiver option. These covers hand out a lump sum on the policyholders’ death from accidents. The disability rider also pays a lump sum to make good the income loss that the policyholder may have to face due to any disability caused by accidents.

Ascertain the suitability  

Traditionally, the LIC brand and low-risk appetite have ensured such products’ popularity. So, the product could appeal to certain sections of investors, such as the risk-averse and high net-worth individuals, looking at tax-free maturity proceeds.

“Individuals who want to buy a low death cover or are not eligible for a term life insurance plan and have a lower risk appetite may consider buying it. However, prospective buyers must understand that returns are very low and the surrender value will be lower than the premiums they would have paid until then, should they need to surrender the policy before maturity,” says Mathpal.

It is best to evaluate your insurance and investment needs separately. “Do not be lured by agents’ sales pitches. Be firm on buying term insurance for protecting your family financially and look at mutual funds for making investments,” says Zende.

What works: The product’s USPs—guaranteed returns and tax-free maturity proceeds—will appeal to risk-averse individuals looking to maximise tax benefits under Section 80C as also tax-free returns at maturity.

What doesn’t: Low internal rate of return of under 4 percent is a huge negative

Moneycontrol’s take

The low internal rate of return of around 4 percent is a dampener. Moreover, life insurance policies entail recurring premium payment commitment and failure to pay premiums on time will lead to policy lapse. Mid-term surrender of the policy will mean losing out on a large chunk of premiums paid until then.

Instead, you can invest in more remunerative and flexible products such as equity and debt-oriented mutual funds or even public provident fund (PPF) and voluntary provident fund (VPF) for your long-term goals.