LIC agents are forwarding messages on WhatsApp hailing their latest, most popular product with the promise of a lifetime of ‘shanti’ or peace – LIC Jeevan Shanti. Not just that, they are at your door, on calls too telling you about the next best thing after sliced bread.
The proposal is that as soon as you buy LIC Jeevan Shanti, you start to get a guaranteed 6.5% return every year, life long.
If you defer this income by 10 years, you will get 12.83% return, guaranteed. If you defer by 20 years, you will get 19.83% return, every year. Eye popping numbers indeed!
That’s become the reason for a number for WA forwards to investment advisors too. Investors are dying to get into LIC Jeevan Shanti. Hold on!
What the LIC guys conveniently forget to tell you is that, the 20% return is a result of all the returns that you did not get in the first 20 years.
They also don’t tell you, at 6% to 8% inflation, the return is all about protecting the value of your money, not growth.
Finally, all your annuity income is taxable at your marginal tax rate. It is not tax free like most other maturity receipts from insurance policies.
LIC Jeevan Shanti – What is it about?
LIC Jeevan Shanti is an annuity plan. Basically, you purchase it today at a single premium and LIC will give you back a predetermined fixed income every month/year, for life.
Unlike many other small savings products, an annuity offers a lifelong guarantee of the income.
So, if you invest Rs. 10 lakh now for an immediate annuity income, you will get Rs. 65,600 every year till you live.
You have certain choices to make when you buy this annuity plan:
a) You can choose for a return of purchase price (this reduces the annuity amount a bit).
b) You can take it on a joint holder basis (say, with your spouse or a financial dependent). The annuity continues as long as one of the holders survives.
c) You can choose to start the annuity immediately or after a certain number of years (deferred).
Apart from that you can surrender the policy anytime after 3 months, if you have opted for return of purchase price option, that is, on death, the nominee will receive the original investment. Surrender charges may be applicable.
The case for not buying the LIC Jeevan Shanti plan
While everyone wants to queue up to take this guaranteed return policy, here are reasons that you should not do it.
If you are employed with an active income, you shouldn’t be going for this. You are, in fact, at an accumulation stage of your investments, where you need to allow your money to work harder.
Why would you start getting income from your investments now and put it under the tax axe? It could be worse. The additional income may increase your tax slab and make you cough up more taxes.
If you are retired already, you should check if there is a shortfall in income that you need to provide for. If there is enough income through rental, pension, dividend, why would you deliberately create this additional tax instance?
You say, “But I can defer my annuity till 20 years, when I retire? Then I will get 20% return.”
That’s bogus my friend. You are not taking into account the returns for the 20 years (that you will not get in those years). It is all accumulated and offered to you at a later date. By my calculations, the annualised rate will be around 5%, taxable.
Reminder: The silent tax, inflation will continue to reduce the purchasing power of your money.
Instead, why wouldn’t you let your money work harder for the next 20 years and then take up an annuity, that is, if you need to?
“What if I don’t get this rate then?”
Fair point. This means that inflation would have reduced and interest rates would have aligned accordingly. The lower rate can work too for you. Of course, you have the time to invest your money for growth, till you need an annuity.
Who should consider taking an annuity with LIC Jeevan Shanti?
Simple, where the laws force you to take an annuity, you can consider LIC Jeevan Shanti plan.
So, if you have a NPS maturity, you can take the cumpulsory 40% maturity amount into an annuity via LIC Jeevan Shanti.
If you are eligible for QROPS from UK (if you worked there), you can transfer the same back to India and get an annuity through LIC Jeevan Shanti.
If there is any other investment that needs a commitment to an annuity product, you may still consider it.
As an exception from the above, if you are at a stage, where the long term certainty of the regular income is more important, then LIC Jeevan Shanti is an option for you.
Why the confusion in the first place?
Well, random transactions and investments have long been an issue with most investor portfolios. We just want to rush to invest without considering how it affects our cash flows, taxes or future goals.
If you have a financial and investment plan, decisions like these are easier. If you don’t, then start praying since there are many more products coming to prey on you.