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LIC New Jeevan Nidhi (818) Review: Should you invest in this pension plan?

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LIC New Jeevan Nidhi (818) Review: Should you invest in this pension plan?

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LIC New Jeevan Nidhi (Plan 818) is a pension plan from LIC. You invest for a few years. At maturity, you utilize the accumulated funds to purchase an annuity plan. Simple, isn’t it? Let’s find out more about LIC New Jeevan Nidhi and see if it warrants a place in your investment and insurance portfolio.

LIC New Jeevan Nidhi (818) Review: Should you invest in this pension plan?
LIC New Jeevan Nidhi (Plan 818) is a pension plan from LIC. You invest for a few years. At maturity, you utilize the accumulated funds to purchase an annuity plan. Simple, isn’t it?
Let’s find out more about LIC New Jeevan Nidhi and see if it warrants a place in your investment and insurance portfolio.
LIC New Jeevan Nidhi: Key points
  1. Two premium payment options: Single Premium and Regular Premium
  2. As the name suggests, under single premium variant, you need to pay a premium just once. Under regular premium variant, you need to pay the premium every year during the policy term.
  3. Loan Facility is not available
  4. LIC New Jeevan Nidhi (Plan 818): Eligibility and Important Features
    LIC New Jeevan Nidhi (Plan 818): Death Benefits
    If the policyholder dies before the date of vesting (maturity date), the nominee will get the death benefit from the plan.
    If the demise happens within 5 years of policy purchase: The nominee will get Sum Assured + Accrued Guarantee Additions
    If the demise happens after 5 years of policy purchase but before vesting date: The nominee will get Sum Assured + Guaranteed Additions + Vested Simple Reversionary Bonuses + Final Additional Bonus, if any
    LIC New Jeevan Nidhi (Plan 818): How Benefits are paid?
    At the time of vesting (maturity date), you have two options.
    1. You can withdraw up to 1/3rd of the accumulated corpus as lump sum and use the remaining amount to purchase an immediate annuity plan (LIC Jeevan Akshay, LIC Jeevan Shanti)
    2. You can use the entire amount to purchase a deferred annuity plan (LIC Jeevan Shanti). You can’t make any lumpsum withdrawal if you go with this option.
    3. LIC New Jeevan Nidhi (Plan 818): How Corpus is accumulated?
      Your accumulated on the date of vesting (maturity) comprise of the following 4 components.
      1. Sum Assured (You know this upfront)
      2. Guaranteed Additions (You know upfront): These are applicable for the first 5 years and guaranteed at Rs 50 per thousand of Sum Assured every year for the first 5 years.
      3. Simple Reversionary Bonus (Can vary): Applicable from the 6th year till maturity. Announced by LIC year. Expressed per thousand of Sum Assured.
      4. Final Additional Bonus (Luck): Applicable in the year of maturity or demise
      5. Accumulated Corpus at Maturity = Sum Assured + Guaranteed Additions + Vested Simple Reversionary Bonus + Final Additional Bonus, if any
        LIC New Jeevan Nidhi (Plan 818): Tax Benefits
        You get tax benefit up to Rs. 1.5 lakh on investment under Section 80CCC of the Income Tax Act. The benefit under Section 80CCC comes under the overall tax benefit limit of Rs 1.5 lakh under Section 80C.
        Lumpsum withdrawal is exempt from tax at the time of maturity. Since you can’t take out more than 1/3rdas lumpsum under IRDA rules, you can say that lumpsum withdrawal up to 1/3rd of the accumulated corpus is exempt from tax.
        Any income from annuity purchase is taxed in the year of receipt at your marginal tax rate.
        Illustration
        You are 30 years old. You purchase a regular premium variant. You have chosen the vesting age as 60.  Sum Assured of Rs 10 lakh.
        You will have to pay a premium for 30 years.
        Premium for the first year = 32,166 (inclusive of 4.5% GST)
        Premium for the subsequent years = 31,474 (inclusive of 2.25% GST)
        By the time of vesting, your accumulated corpus will comprise of
        1. Sum Assured of Rs 10 lakh
        2. Guaranteed Additions of Rs 2.5 lakh. For each year, you will get Rs 50,000 of guaranteed additions (50 X 10 lacs/1000. That makes it Rs 2.5 lacs in 5 years.
        3. Simple Reversionary Bonus: Assume a value of Rs 50 per Rs 1,000 of Sum Assured (though it can change every year). For each year, you will get a bonus of Rs 50,000. For 25 years (30 years- 5 years), you will accumulate Rs 12.5 lakh.
        4. Final Additional Bonus: This depends on your luck. Assuming a value of Rs 200 in the year of maturity, you will get Rs 2 lakh.
        5. That makes it a total of Rs 27 lakh.
          IRR of 6.1 percent p.a.
          Assume you choose to withdraw 1/3rd as lumpsum and use the remaining amount to purchase an immediate annuity plan.
          You can withdraw Rs 9 lakh tax-free. You use the remaining Rs 18 lacs to purchase an annuity plan. Assuming you choose a variant that gives you 9% p.a. (without return of purchase price), you will get Rs 1.62 lacs per annum for life (or Rs 13,500 per month for life).
          Should you invest in LIC New Jeevan Nidhi?
          For a better assessment of this product, you must break down the product into two parts.
          1. Accumulation phase (before the vesting age)
          2. Withdrawal phase (lumpsum withdrawal and annuity purchase)
          3. We saw in the above illustration that the IRR for 30 years was about 6%. Even with slightly more optimistic assumptions, the returns will be in around this level only. Additionally, these returns are for a 30-year-old. Since there is an insurance angle involved, the returns will be lower for older investors.
            Now, for the accumulation phase, 6% p.a. is clearly bad for a 30-year investment horizon. Remember, annuity purchase is not just limited to LIC New Jeevan Nidhi. You could have invested in a diversified portfolio and use the accumulated money to purchase LIC Jeevan Akshay or LIC Jeevan Shanti. So, there are ways to guarantee you a pension during retirement.
            The withdrawal phase is fine in LIC New Jeevan Nidhi. Just that you can’t tweak around with vesting age and that only 1/3rd can be withdrawn lumpsum.
            Moreover, contrast this with NPS (National Pension Scheme). In my opinion, NPS is a far better product than LIC New Jeevan Nidhi (so long as you are sure that 60 will be your retirement age). Why?
            1. NPS provides greater flexibility in terms of the investment amount. You can invest as much as you want.
            2. You get extra tax benefit under Section 80CCD(1B).
            3. You can take out up to 60% of the accumulated corpus as lumpsum and that too tax-free. You can take only 1/3rd as lumpsum in LIC New Jeevan Nidhi.
            4. NPS is a low-cost product than LIC New Jeevan Nidhi.
            5. You should get better returns over a 30-year period than New Jeevan Nidhi. No guarantee though.
            6. Do note I am not pitching for NPS. NPS has its own set of drawbacks.  At the same time, if I had to choose between NPS and LIC New Jeevan Nidhi, I will go with NPS.
              By the way, you can simply keep putting money in PPF account and use your PPF account to draw pension after retirement.
              There are many options to accumulate funds for retirement. There are many options to earn income during retirement. And these can be mutually exclusive. There is no need to club this accumulation and withdrawal phase as it happens in LIC New Jeevan Nidhi.
              You can get more information about LIC New Jeevan Nidhi from LIC website.
               
              Deepesh Raghaw is a SEBI registered investment advisor and founder of www.PersonalFinancePlan.in. You can read the original article here.
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