Traditional life insurance plans are opaque, offer low life cover and provide guaranteed poor returns. Insurance companies try to package products in new ways to get investors to invest in these plans.
A traditional life insurance plan, especially a participating plan, is so opaque that it becomes difficult to assess how the investment performance of the insurance company translates into returns for the policyholders. It is a black box. You have to be content with what the insurance company offers you.
The guaranteed low return of such plans is so conveniently shrouded in complex jargon. I do not think there is any other financial product where the benefits of compounding (e.g. simple Reversionary bonuses) are shrewdly undermined.
Keywords like “Bonuses” and “Guaranteed Benefit” only complicate decision making. The plight of an average investor only increases with misaligned incentives for the intermediaries. To be honest, it is not possible for an average investor to deconstruct the plan and understand what he/she is getting into.
As discussed in my post on LIC New Money Back plans, these plans make for excellent sales pitches. As a customer, you are hardly ever offered the true picture. You wouldn’t purchase such plans if you were told the truth.
I have always maintained that traditional life insurance plans are better avoided.
I had done a detailed post on
LIC New Money Back plan-25 years and advised investors to avoid such plans. In this post, I will review another plan from LIC: LIC Jeevan Tarun. About LIC Jeevan Tarun
LIC Jeevan Tarun is a participating non-linked limited premium payment plan and has been structured to help you save for children’s education and marriage.
Interesting (and the worst) part is that life insurance is on the life of your child.
Let’s see if the plan is worth purchasing.
Review: LIC Jeevan Tarun: Salient Features and Conditions Minimum Sum Assured: Rs 75,000 Maximum Sum Assured: No limit Minimum Age at entry: 90 days (for your child) Maximum Age at entry: 12 years Age at the time of maturity: 25 years Policy Term: 25 minus Age at Entry Premium Payment Term: 20 minus Age at Entry
If your child’s age is 4 at the time of purchase, you will have to pay the premium for 16 more years and the plan will mature 21 years later (after your child turns 25).
LIC Jeevan Tarun: Death Benefit
Life cover is on the life of your child.
Death benefit depends on the date of commencement of risk. Any reasonable person would assume that risk will commence when you purchase the plan. Unfortunately, that’s not the case with Jeevan Tarun.
Under Jeevan Tarun, life cover commences once your child turns 8 or two years from the purchase of the policy, whichever is earlier.
If the policyholder (the child) dies before the date of commencement of risk, LIC will simply return the premiums paid (excluding any premium paid for the riders). LIC will not pay the Sum Assured.
If the policyholder (the child) passes away after the date of commencement of risk, you will get 125% of Sum Assured + Vested Reversionary Bonus + Final Additional Bonus, if any
There is an option to purchase Premium Waiver Benefit Rider. If you purchase this rider, all the future premiums will be waived off in the event of your demise (proposer’s demise). I wouldn’t pay too much attention to this aspect because you could have simply purchased a term plan on your life. Proceeds from that term plan could have provided for premium installments even after your demise.
There are many ways in which survival benefits are paid. You can choose one of the four options.
LIC Jeevan Tarun: Survival/Maturity Benefit
In Option 4, the insurance company will pay 15% of Sum Assured every year after completion of 20 years of age (on the policy anniversary following the child turning 20 years) for 5 years. Remaining 25% shall be paid at plan maturity.
In addition, your child will get Vested Simple Reversionary Bonus and Final Additional Bonus (FAB), if any, at the time of maturity.
As discussed in the post on
New Money Back plan, simple reversionary bonuses are announced every year while the Final Additional Bonus is applicable only in the year of demise or maturity.
FAB depends partly on your luck. If no FAB is announced in the year of maturity/death, you get nothing (as FAB).
Let’s look at the issues with LIC Jeevan Tarun.
Issue 1: Life Insurance is on the life of your child
Life insurance is on the life of your child.
Could anything be more stupid?
Don’t you purchase life insurance to ensure that your children’s needs are taken care of if something were to happen to you? If something were to happen to you while Jeevan Tarun was in force, there shall be no payout from the insurance company. Why? Because life insurance is on the life of your child (and not your life).
Jeevan Tarun will pay up if the most unfortunate were to happen to your kid. What parent will buy such a plan? Such plans do not serve any purpose.
In my opinion, the concept of purchasing life insurance on the life of a child is flawed.
Forget about the poor returns, this alone is a good enough reason to avoid this plan.
LIC Jeevan Tarun simply does not make sense.
By the way, by having life cover on the life of the child ( instead of the parent), the returns from the plans may be slightly higher as compared to other traditional plans. This is because the impact of the mortality charges will be lower.
Issue 2: You get guaranteed poor returns with LIC Jeevan Tarun
This is best explained with the help of an example.I pick up Option 4, where 15% of Sum Assured is paid from 20
th till 24 th year (age) and 25% of the Sum Assured is paid at Maturity (25 years). The age of the child is 4.
You can see the returns range from 6-7% p.a. Of course, the result may change for different assumed values of Simple Reversionary Bonus and Final Additional Bonus.
Such a low return of 6-7% over the long term does not look attractive.
How does it fare?
PPF gives 7.9% p.a. at present. Had you invested the premium amount for your child’s education in PPF, you would have ended up with a much higher amount.
I ignore the life insurance part because the life cover is on the life of the child (and not your life). Therefore, life cover simply does not serve any purpose. After all, you had purchased Jeevan Tarun to provide for your kid’s education and marriage.
PersonalFinance Plan Take
LIC New Money Back plan-25 years was a poor plan. However, LIC Jeevan Tarun borders on stupidity. Such plans simply do not make sense.
If you are planning for your children’s education and marriage, you must always purchase life insurance on your life (and not your children’s life). This will ensure that your children’s future is taken care of even if you were not around.
This is where LIC Jeevan Tarun fails completely. Purchasing life cover on the life of your children does not serve any purpose.
We have already seen that the returns are likely to be quite low.
Hence, Jeevan Tarun provides meaningless life cover (for your children) and is simply not a good investment product.
There is no reason why you should think about purchasing LIC Jeevan Tarun. Strictly avoided.
Child insurance plans make for an excellent sales pitch. No parent wants to make compromises when it comes to child education. And guilt can easily take over if you say No to such a plan. Do not fall for emotional sales pitches. There is no need to feel guilty turning away an intermediary (who is trying to sell you LIC Jeevan Tarun).
Purchase a pure term plan. If you do not trust private insurers, purchase e-term plan from LIC. And invest the surplus in other long term investment products such as mutual funds, PPF, Sukanya Samriddhi Scheme, etc.
Note: LIC is not the only insurance company which offers such products. Many private insurers offer such products too. I chose to review LIC Jeevan Tarun because it is a very popular plan.
Deepesh Raghaw is a SEBI registered investment advisor and founder of www.PersonalFinancePlan.in. You can read the original article here. Read all his columns