Endowment plans were the darling of insurance companies, before ULIPs came into the picture. Over the years they might have lost their top slot but are not out of demand; conservative investors still prefer them for their survival benefits, which are missing in term plans. ‘LIC Jeevan Anand’ is one such popular endowment assurance plan which also comes with whole life benefits.

Product highlights/benefits

• An endowment assurance cum whole-life plan that provides survival benefits in the form of a lump sum at the end of term and also pays an additional sum assured to the nominee on the death of insured till the end of life
• In addition to sum assured, it pays simple reversionary bonuses and terminal bonus, if any

Highlights

It’s a unique endowment plan that offers whole life benefits at a little extra cost Whole life risk cover continues even after the premium paying term is over, till the death of the insured Double accident benefit is available during the premium paying term and thereafter up to age 70

• An additional accidental cover (up to Rs. 5 lakh) is paid as a lump sum on death due to accident, up to the age of 70. No additional premium required.
• Option to get extra protection at a very nominal cost
• Guaranteed surrender value up to 30 per cent of the total premium paid, excluding first-year premium and other riders’ premium after 3 policy years
• Policy available to people in the age group of 18-65 years. Premium paying term is 5-57 years.

Analysis

LIC Jeevan Anand provides the dual benefit of endowment and whole life plans, for a little extra premium. A 30-year-old individual will have to pay an annual premium of Rs. 20,978 for Rs. 5-lakh cover with a term of 25 years. Let’s see what benefits he will receive. LIC Jeevan Anand has a good bonus history since its inception in Feb. 2002. On an average, it has declared an annual bonus of Rs. 46.5 per thousand. For our calculation, we will take the average bonus at Rs. 45 per thousand (refer Table 1). Considering that LIC has distributed Final (Additional) Bonus (FAB) in its other schemes consistently, we assume an FAB of Rs. 550 per thousand in Jeevan Anand (in line with other schemes under similar conditions) at the end of term. As per Table 1, net return in this case comes to 6.60 per cent (approx.). Besides, the policyholder enjoys an accidental benefit of Rs. 5 lakh till the age of 70 and death benefit of Rs. 5 lakh (similar to the initial cover) till the end of his life. If we take into account these benefits, the return (gross of charges) will further increase for the policyholder.

Now take a look at Table 2. It presents endowment plans by other insurers. These plans are cheaper than LIC Jeevan Anand and have similar benefits. But they do not offer the whole life benefit.  Moreover, the bonus rates announced in these products are not at par with LIC Jeevan Anand.

Thus, at the outset, LIC Jeevan Anand looks a little expensive than plain vanilla endowment plans but given the benefits in later years, the additional cost is justified.

Equating with other products

We always advise against mixing insurance with investment. As there are no similar products available in the market, we will compare LIC Jeevan Anand with a combination of a term plan and PPF (based on their benefits). But the term plan will provide cover till the age of 65 only, unlike in Jeevan Anand where whole life benefits continue till the end of the individual’s life. One can also combine a whole life policy with PPF. But again the policyholder will need to pay premium till the end of his/her life. This sets LIC Jeevan Anand apart from other non-ulip policies. Now, let us turn to Table 3 for a comparative analysis between Jeevan Anand and other asset classes. The term plan (SBI Life Shield) has been taken for an individual of 30 years for a period of 25 years for a sum of Rs. 5 lakh at an annual premium of Rs. 1,632. An additional accident cum disability benefit (Royal Sundaram Accident Shield) for Rs. 5 lakh has been taken at Rs. 589 per year. The remaining amount of Rs. 18,757 has been invested in other asset classes for a period of 25 years as mentioned in the table 3.

Tax benefits

• Premium paid up to Rs. 1 lakh is tax exempt under Section 80C.
• Maturity or death proceeds are tax free under Sec 10(10D).

Things to look into

• The additional whole life benefit comes at an inflated price (refer Table 2).
• Reversionary bonus, though announced regularly, is not guaranteed. Moreover, Final Additional Bonus (FAB) is also not guaranteed.

Recommendations

• For whom: Conservative investors willing to put money for a longer period
• Risk: Capital safe, but loyalty benefits are linked to performance of the company in future
• Investment horizon: 5-57 years
• Returns (post tax): Moderate in line with debt funds at different conditions. But unlike debt funds, it provides tax benefits under Sec 80C in addition.
• Beats inflation: No, it won’t be able to beat inflation even in case of a longer term
• Tax bracket: Preferable for all tax brackets
• Alternatives: Whole life plan, PPF plus term plan, mutual fund (through SIPs) plus term plan, etc.

Year 2009 turned out to be a significant year for many reasons. The Indian investor ushered in the year with the country’s economy still reeling under the effects of sub-prime crisis that engulfed global economies and led to the fall of giants like Lehman Brothers. At home front too the signs were not positive. Satyam fraud scandal shocked everyone, putting a question mark on the credibility of the country’s tech services industry. But slowly and steadily, things changed for the better. The government along with the Reserve Bank of India helped with their monetary and fiscal policies. The faith in Satyam was somewhat restored by employing some tough measures, including a gradual leadership change. The result: a major stock price boom. The markets rebounded and touched a new high (for majority of the stocks). However, the benefits did not trickle down to retail investors who suffered major losses due to volatility of markets.

During the year, various investment products performed differently; some assets such as gold touched new highs despite a downturn. In this three-part series, we will pick ten schemes in a product category that have not only survived the year but performed superbly to beat others. In the first article, let us get a rundown on unit-linked investment products, ulips.

Unit-linked Investment Products (Ulips)

Ulips are investment-cum-insurance products that involve high investment costs in terms of premium allocation charges, policy administration charges, fund management charges and other miscellaneous charges. However, investment funds under all ulip products provide returns that are largely unaffected by investment costs. To some extent, fund management charges can mar their performance. The top ten performing ulips across categories (in terms of absolute returns) in the last one year are presented below:

The returns do not represent the overall performance of ulips as there are various costs, as discussed above that can affect the performance in terms of net returns. Also, investors should not get swayed by the one-year return only as there are other factors that help in deciding the best ulip. However, there is a New Year bonanza waiting for all new and existing ulip investors in the form of less total charges. With the new guidelines in place, ulips with a term up to 10 years and more than 10 years will have a total charge of only 3 per cent and 2.25 per cent, respectively.

Birla SunLife Dream Plan is a unit-linked insurance plan (ULIP) that provides the double benefit of higher sum assured and guaranteed maturity benefit at a cost lower than the traditional term plan. In addition, it does not carry any premium allocation charges (PAC), probably the only plan in the market with a no-load structure, albeit there is a 2 per cent PAC on top-up premium.

Product highlights

• A ULIP with a term ranging from 5 to 25 years for an individual between 18 to 60 years of age at entry; the maximum age at maturity is 75 years.
• Option to choose Guaranteed Maturity Benefit (GMB) with an upside potential based on the performance of funds chosen. This assures that you will receive no less than the GMB when the plan matures.

Highlights

This is a good alternative for a traditional term plan, and also carries features of a ULIP This is one of the cheapest ULIPs in the market Though it comes with lots of benefits, the charges are a little higher

• Option to choose Guaranteed Maturity Options (GMO), i.e., 100 per cent, 200 per cent and 300 per cent with three separate maturity amount payout schedules
• A minimum guaranteed return of 3 per cent p.a. on the premium paid less other charges
• Partial withdrawals allowed after 3 policy years; it does not affect the GMB.
• Policy surrender allowed after 3 policy years, with maximum payout up to the fund value at that time
• The cheapest ULIP product, with no premium allocation charges

Investment fund options

• The investor has an option to choose from three investment funds – Protector, Builder and Enhancer – as shown in Table 1.

The premium (minus charges) can be invested in any of the fund options or a combination of all three. The three funds follow a balanced approach to investment, and hence can be an ideal choice for investors with low to medium risk appetite.

Charges you pay

• Premium allocation charge

No premium allocation charge is deducted from your premium, except for the 2 per cent charge that is levied on the top-up premium.

• Fund management charge (FMC)

FMC varies from 1 per cent to 1.25 per cent per year with a maximum cap of 1.5 per cent (Table 1).

• Policy administration charge and mortality charge

Policy administration charges are on the higher side. For example, in case of a 20-year policy with a basic sum assured of Rs. 590, the charges will be Rs. 12.91 for the first three years and Rs. 13.23 for the remaining years, compared to the normal charge of Rs. 2 to Rs. 3. Mortality charge is also high as compared to other ULIP plans.

• Surrender and revival charge

Policy revival charge is Rs. 100, which can go up to Rs. 1,000 at the company’s discretion. A surrender charge will be applicable if the policy is returned in the first 3 policy years.

• Other policy charges

Two fund switches, two partial withdrawals and two premium redirections are allowed free per year at an additional cost of Rs. 100, with a maximum cap of Rs. 500 per additional request.

Incentives

1. Maturity benefit

• Guaranteed maturity amount depending upon GMO along with the fund value is paid at the time of maturity.

• A guaranteed return of 3 per cent per annum on net premium is applicable.

2. Death benefit

The nominee will receive basic sum assured, enhanced sum assured plus the higher of Fund Value and Guaranteed Fund Value.

3. The plan offers discounts at higher guaranteed maturity benefit amounts based on different bands.

Performance

Let us find out how this plan fares from its cost-benefit analysis, which is based on certain assumptions. For a 26-year-old male individual with the guaranteed maturity benefit (GMB) of Rs. 75,000, guaranteed maturity option of 300 per cent on GMB and enhanced sum assured of Rs. 50 lakh for a period of 25 years, the net return (gross of mortality charges) comes to 4.25 per cent and 8.24 per cent at an assumed growth rate of 6 per cent and 10 per cent, respectively. These returns are well above the minimum return prescribed by the regulator (i.e., 2.25 per cent for a policy with maturity period of more than 10 years). However, if we exclude the mortality charges, the net return will be negative.

• Table 2 sums up the performance of the three funds as on Sept. 30, 2009.

• In Enhancer fund, 28.44 per cent investment is made in equities. Out of this investment, 25.40 per cent, 13.21 per cent and 11.17 per cent go to banking, oil & gas and capital goods, respectively as the top 3 sectors.
• All three funds (Protector, Builder and Enhancer) have cash allocation, including money market instruments, in the ratio of 18.98 per cent to 11.20 per cent to 17.38 per cent, which may prove to be a boon for the funds in months to come as the market may see some correction in the near term.
• However, the average maturity of debt holdings is 5.14 to 6.72 years which can be fatal in the near term as the market can see unwinding of the monetary policies which will shoot up debt yields, leading to devaluation of the portfolio. Higher the interest rate, lower will be the average duration and debt value, and vice versa.

Equating with other products

A comparative analysis of BSLI Dream Plan with other investment products (Table 3) throws up some interesting facts.

• In case of Dream Plan, for a 30-year-old male individual opting for a GMB of Rs. 75,000 (100 per cent GMO) with an enhanced sum assurance of Rs. 50 lakh, the annual premium comes to Rs. 13,378 for 20 years with a maturity benefit of Rs. 1.82 lakh. The total premium paid in a span of 20 years exceeds the maturity benefit at both assumed interest level of 6 per cent and 10 per cent, thus, giving a net negative return. It happens because most of the premium amount goes in providing insurance cover of Rs 50 lakh. But if he invests in a combination product of PPF and a normal term plan for the same insurance cover of Rs. 50 lakh, his annual premium comes to Rs. 5,200 and the return is 3.39 per cent.
• In BSLI Premium Back Term Plan, the same benefits come at an annual premium of Rs. 42,422 with a maturity benefit of Rs. 8.4 lakh. But the net return is zero.

Tax benefits

• Premium payable under BSLI Dream Plan up to Rs. 1 lakh is eligible for tax benefits under Section 80C.
• Maturity or death proceeds are tax free under Sec 10(10D).

Things to look into

• The plan is preferably for an individual looking for an enhanced basic sum assured.
• The policy administration charge and mortality charge are exorbitantly high.
• Opting for riders will further reduce your return as units will be reduced in proportion to cover the monthly rider premium charge.

Recommendations

• For whom – Conservative investors willing to put money for a longer period
• Risk – Safe capital; maturity benefits linked to market returns
• Investment horizon – 5-25 years
• Returns – More in comparison to customised investment product providing same benefit
• Beats inflation – No, it won’t be able to beat inflation at an assumed growth rate of 6 per cent
• Tax bracket – Preferable for all tax brackets
• Alternatives – Term plan with the return of premium option, PPF with term plan

Summing it up

BSLI Dream Plan is ideal for those who are looking for an enhanced sum assured with moderate maturity benefits (in case of 100 per cent GMO). The other GMOs, i.e., 200 per cent and 300 per cent provide increased maturity benefits but come with high policy administration charges and mortality charges. In our opinion, the overheads are abrupt and the guaranteed 3 per cent return also does not look exciting enough. Moreover, investors can lose the trivial 3 per cent return if premiums are not paid in time.

Being a disciplined investor pays off in the long run. For example, those investing in equity mutual funds through Systematic Investment Plans (SIPs) or debt instruments such as post office or bank deposits through recurring plans reap richer benefits in the form of higher growth and returns. However, maturity benefits in these plans remain limited to the returns assumed and to the total instalments paid in case of the unfortunate event of death. ‘LIC Jeevan Saral’ – an innovative offering by Life Insurance Corporation of India – takes care of this point. The endowment assurance plan provides not only financial protection in terms of death benefit throughout the term but also long-term capital growth. One of the unique features of the scheme is it provides risk coverage to the extent of 250 times the monthly premium. No wonder, it helped LIC win the Golden Peacock Innovative Product/Service Award 2009.

Product highlights/benefits
• An endowment assurance plan that provides death benefit up to 250 times the monthly premium plus loyalty additions, if any
• Flexibility to choose premium amount which will in turn decide maturity sum assured
• Minimum monthly premium of Rs. 250 and Rs. 400 for entry age up to 49 years and 50 years and above, respectively. There is no cap on upper investment limit.
• Option to add Death Accident Benefit rider at a very nominal cost
• Loyalty additions if the policy is in force for a minimum of 10 policy years along with guaranteed maturity benefits
• No surrender penalty after 5 policy years; partial withdrawals allowed
• Premiums are payable yearly, half-yearly, quarterly, or monthly.

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Analysis
LIC Jeevan Saral is a unique investment option which cushions one’s investments against the dual risks of death and volatile market conditions and at the same time provides much-needed liquidity. Let us see how this works for a 35-year-old individual.
Suppose the person buys LIC Jeevan Saral policy for an annual premium of Rs. 4,704 for 25 years, with his basic sum assured coming to Rs. 1 lakh. His guaranteed maturity benefit as per LIC benefit illustration will be Rs. 1,35,296, which will further increase to Rs. 2,00,296 and Rs. 3,46,296 if we include loyalty additions and guaranteed maturity benefit at a projected investment rate of return (PIRR) of 6 per cent and 10 per cent, respectively. The net yields at different projected levels are presented in Table 1.

The net yields under LIC Jeevan Saral at the PIRR of 6 per cent and 10 per cent come to 4.16 per cent and 8.05 per cent, respectively.

Equating with other products
Apart from insurance cover, ‘Jeevan Saral’ provides tax benefits and liquidity, so we will compare it with products like recurring deposits (RDs) by post office/banks or PPF (periodic investments) that offer similar benefits. Table 2 depicts how LIC Jeevan Saral and recurring deposits fare against each other.

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Now, we will turn to Table 3 which analyses the performance of two products, RDs and PPF, in comparison with Jeevan Saral. Here, we have assumed that PPF and RD investments continued for 25 years, i.e., returns reinvested throughout the term.

• In case of Jeevan Saral, a 25-year old with an annual investment of Rs. 4,704 at a projected growth rate of 10 per cent (which may or may not be achievable) will earn a net yield of 8.05 per cent, higher than RD (5.94 per cent) and PPF (8.00 per cent).
• In case of RDs, we have considered investors in the tax bracket of 20 per cent. The returns may come down or go up for those in the 30 per cent or 10 per cent tax bracket.
• For PPF investments, the tax-free return comes to 8 per cent. Nevertheless in terms of death benefit, with its inbuilt risk cover Jeevan Saral scores over the other two.
• If the same individual buys a term plan at a premium of Rs. 4,704 for a period of 25 years, he would get an insurance cover of Rs. 16 lakh. But note that there won’t be any maturity benefit, but only death benefit of Rs. 16 lakh.

Tax benefits
• Premium payable for Jeevan Saral and PPF is eligible for tax benefits under Section 80C.
• Maturity proceeds of Jeevan Saral are tax free under Section 10(10D).
• Investments in RDs are not eligible for tax benefits.

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Things to look into
• Returns in LIC Jeevan Saral as shown in Table 3 are calculated at a projected growth rate of 6 per cent and 10 per cent, which may or may not be achievable.
• Loyalty additions or bonuses are not guaranteed.
• RDs or PPF investments do not provide risk cover.

Recommendations
• For whom: Conservative investors willing to put money for a longer period
• Risk: Capital safe, but loyalty benefits linked to market returns
• Investment horizon: 5 -25 years
• Returns: Moderate in line with FDs/PPF at different conditions
• Beats inflation: No, it won’t be able to beat inflation at assumed growth rate of 6 per cent
• Tax bracket: Preferable for all tax brackets
• Alternatives: Recurring deposits, PPF (periodic investments), mutual funds (SIPs)

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Summing it up
LIC Jeevan Saral will always remain in demand considering that periodic investment schemes have never been out of fashion for small investors. The other draws would be LIC’s proven track record of paying out loyalty bonuses and the decent net return at a projected rate of return of 6 per cent besides the risk cover. However, those looking for a guaranteed return can choose RD or PPF along with a term plan which will provide risk cover at a very nominal premium.

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Most women have come a long way. In the life that they lead, in the careers that they follow, in the responsibility they shoulder, in the roles that they play, both in the world, and as part of the family. But, when it comes to the basics of finance, women seem to be on a slow stride.
It is quite natural to find women leaving the nuances of investment and finance to the men in their lives – their father or husband.
But personal finance and investment is not as complex as it seems. There are a few basic principles that every woman should have knowledge of, a few important points that will make their life much easier.

Absolute ground rule basics

1. Income should always exceed expenses: This is the most basic of all principles. Also, Expenses = Income – Savings. So how one should begin. You must be having your income and expense statement ready with you, now make one more column for savings. And, keep this before your expense column. Take a percentage of your income as savings (anything between 10 per cent and 50 per cent) and arrive at the amount left over to spend (your expenses, both essential and luxury/lifestyle). By following this rule, you will always be in surplus and have some money left over for the proverbial ‘rainy day’.

An addiction that is good – Savings!

2. Save at least 10 per cent of every hundred rupees you earn – not too difficult, is it? However, the rule here is to increase the figure as much as you can. If you can make it 20 per cent or 25 per cent, even better. Anything over this, just great!

A ‘must have’ for future uncertainties

3. Keep an emergency fund: This is an age-old rule, but gained prominence due to the recent recession. To help one tide over an unforeseen incident like downsizing, retrenchment, pay cut or even an illness or accident, an emergency fund is an absolute essential for everyone. Keep aside at least 3-6 months of your expenses as an emergency fund. If you have a cash reserve, you will not have to dip into your savings or liquidate your long-term investments.

4. Spend on health insurance, general insurance and personal accident insurance: Yes, spend on insurance. And, not just on you, but your family too. This will actually translate into savings due to tax deductions (on premium paid) and help you lead a happier and healthier life, without worry or stress of any emergencies that you may face in life.

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It’s all about ‘credit’ and ‘debit’

5. Pay off all debts on time: a) Ensure you do not miss on paying any loan instalments. If you can, prepay loans and move out of the debt cycle. Use every extra income flow to pay off debts before giving in to luxurious indulges. b) Pay up your credit card bills on or before due date. This industry thrives on the extremely high rates of interest they charge for unpaid credit. Do not fall into this trap. If you have to make a choice in paying off debt, pay off credit card dues before other debts. You will be saved from the compounding effect of high interest rates.

6. Ask for lower limits on credit cards: Request your issuing bank to give you a lower credit limit. This way, you will not be tempted to spend more. Draw a self-imposed line for credit card spends. Do not spend more than the percentage you have set on your card. You will avoid reckless purchases and end up contributing more towards your savings kitty.

Some fundas on investing

7. Difference between saving and investing: Saving should be a regular habit, but investing should be done only when one is debt free. Paying interest on debt (especially, if it is in the higher end of 18 per cent +) will not be cost effective if your investments do not earn a higher rate of return.

8. Don’t even bother to time the market: Do not track the market for a good time to invest. Investing should be done systematically and with a disciplined approach. Regular investing in value stocks or a mutual fund, by way of a Systematic Investment Plan (SIP), will ensure you decent returns in the long run.

9. If you don’t understand an investment product, avoid it. You should understand where your money is going and the inherent risks of the investment.

10. Make a financial plan: Approach a financial planner to chalk out a plan for you. Then, stick to it. Invest as per the plan, monitor the plan and change it as required. It’s a good way to make additions to your savings nest.

Think about retirement – Now

11. Make a retirement plan: Most financial planners are of the opinion that you should start planning for retirement as soon as you start working. When you start young, the effect of compounding works wonderfully and you can build up a tidy sum for your retirement. So, if you have not yet planned for your retirement, do it now.

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12. Do not cash out your Employees’ Provident Fund (EPF) when you switch jobs: Remember the main reason for the PF? It’s a cash booty that you should get when you need it most, i.e., after retirement. Your PF amount earns interest, which is currently tax free. If you cash out your PF, you are most likely to spend the amount or give in to the desire of investing for quick profits. Just let the amount be. In fact, it is advisable to ask your company to cut 10 per cent more from your salary towards your provident fund as a voluntary contribution. The amount will add up to quite a sum and contribute to your retirement planning funds.

The final word
Being financially savvy is not a tough job. Follow a few simple rules, plan and execute. Read and learn all you can on this subject. And, you will have soon built a strong financial foundation for your family and yourself.

More articles:
1. Do you pay high charges on your credit card?
2. How to prepay a personal loan
3. 6 tips for smarter insurance planning
4. How should women handle their money?