I woke up this morning to a WhatsApp message from a friend. A terse “Let me know your comments” was added to a PDF of LIC Jeevan Umang and its benefit illustration.
“OK. Here it comes…again.”
I sit down, open the PDF on my computer and start reading through the information. If I decide to take all the information presented as a layman, LIC Jeevan Umang looks like a fantastic proposition.
Here are the key highlights of the plan as offered to my friend.
- Current Age – 29 years
- Policy Term – 71 years (that is till age 100 as is expected for Whole life policies)
- Sum Assured – Rs. 1 crore
- Premium payment term: 15 years
- Year 1 premium: 818,695
- Premium Years 2 to 15: Rs. 801,067
- Assured 8% return on Sum Assured from year 15, that is, Rs. 8 lakh per year till maturity / death
The big pitch of this plan is that the interest rates the world over are reducing significantly (currently 1 to 2%). As India develops further, the interest rates are going to get lower here as well. Hence, why not lock in the assured return of 8% now?
Now, tell me, doesn’t this sound great?
Let’s look at the reality of LIC Jeevan Umang
I am not sure if you have noticed the catch here. The guaranteed return is calculated on the Sum Assured and not the value of the policy during the year.
In the same illustration my friend shared, using assumed growth rates of 8%, the policy gets a cash value of Rs. 1.82 crores in Year 15 (the last year of premium payment). The Sum Assured is Rs. 1 crore only.
You are going to get 8% of 1 crore and NOT 1.82 crore.
As cash values grows in the future, the income payout remains the same at Rs. 8 lakhs a year. It doesn’t increase based on inflation.
Let’s cover this 1.82 crore value a little more.
All insurance companies including LIC use assumptions of 4% and 8% rates to show you 2 scenarios of maturity calculations.
Note, these are only assumptions. The reality is likely to be different. It always is.
So, will the 1.82 crore cash value actually happen? Very unlikely.
Actually, you need to hit LIC back with the same reasoning it uses as the sales pitch.
If interest rates are going to drop the world over, as also in India in the future, how on earth are they going to get a 4% or 8% IRR on their policies?
Let’s take some history into account.
In the past decade or so, similar traditional policies have delivered lower than 5% returns. This happened when the market interest rates were closer to 8% to 10% (even more).
Just imagine what the numbers will look like based the current scenario where interest rates are hovering around 5%. Frankly, even a 2% return on LIC Jeevan Umang plan is doubtful.
But then there is the great Loot India Corporation at work. It shows you all these nice big numbers and signs up for such policies based on them. When the time comes to count your chickens, there are hardly any left.
LIC Jeevan Umang is not here give you joy. It is tapping into your Umang / Joy today and robbing your of it.