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Thursday, 19 February 2009

Split Term Cover

Dear Friends, Many a times I & several others had advised to opt split Term Covers. But a common person is not able to understand the logic & benefit offered by split Term Covers. Here I’m discussing the benefit of split Term Cover with the prem. Illustrations of LIC’s Anmol Jeevan Term Plan. 

Let’s assume a normal healthy male aged 30 years wants to take term cover of 60L as per his financial liabilities for next 25 years. The different prem. Quotes (service Tax included in the prem.) are given below. 

 

Table – 1 for LIC Anmol Jeevan Plan

Cover amount

Term

Premium

6000000

25

22928

1500000

25

5732

1500000

20

4841

1500000

15

4217

1500000

10

3846

Split Cover Total Prem.

18636

 

 Now from Table -1,

If the person opts a single cover of 60L Rs. for next 25 years, the prem. Outgo is 22928 Rs. Now imagine the situation after 8-10 years, He thinks there is no need for such high cover & a lower cover of say 40-45L is sufficient. But he can’t do anything bcoz if he opts to stop his current single cover of 60L Rs. the prem. For new cover of 40-45L ‘ll be higher for remaining period as he is taking the cover at later age. If he opts to remain with the single cover, he is paying prem. For the cover he doesn’t require.

Now for split covers of 15L each for 25, 20, 15 & 10 years the total prem. Outgo is18636 Rs. only. On a first hand there is an immediate saving of appx. 4300 Rs. per annum & the best part is after 8-10 years the person in question can simply stop his 10Y 15L policy as per his changed cover requirement. Already he is paying less prem. Every year for split cover than a single cover & after stopping the 10 year policy. There ‘ll be additional saving of 3846 Rs. These saving amounts can be invested for better investment. The same thing can be done to other policies also one by one after passing of some more years. 

 On a concluding note, it’s finally the choice of the person what he wants. The major flip side or should I say negative side of this strategy of split cover is, in case the financial liabilities increase (normally Fin. Liabs. Decreased, but in extra ordinary cases it may increase also), There ‘ll be shortage of cover & the person ‘ll have to take more cover as per his changed liabilities. 

Jeevan Varsha - New Guaranteed Return Money Back Plan from LIC

Dear friends, There is a new money back product on offer from LIC with GTD. Returns. The plan is open for purchase from 16th February, 2009 to 31st March, 2009.  The prem. paid are eligible for Section 80C Tax benefits as well as money back & maturity amounts are also Tax free underSection  10 (10) (D). Here is the plan scan for benefit of all of you.

ELIGIBILITY CONDITIONS

Minimum Entry Age: 15 years (completed)

Maximum Entry Age: 66 years (Nearest Birthday) for 9 years term policy, 63 years (Nearest Birthday) for 12 years term policy

Policy Term : 9 years & 12 years

Premium Paying Term: 9 years

Maximum Maturity Age: 75years (Nearest Birthday)

Minimum Sum Assured: Rs. 75,000/- for monthly ECS mode               : Rs. 50,000/- for other modes

Maximum Sum Assured: No limit 

PREMIUM PAYMENT MODES: Yearly, Half-Yearly, Quarterly, Monthly (by ECS mode only).

Survival Benefits:

For 9 Years Policy Term

15% of the Sum Assured is payable at the end of 3 years.

25% of the Sum Assured is payable at the end of 6 years.

60% of the Sum Assured is payable together with Guaranteed Additions, and Loyalty Addition, if any, at the end of 9 years.

For 12 Years Policy Term

10% of the Sum Assured is payable at the end of 3 years.

20% of the Sum Assured is payable at the end of 6 years.

30% of the Sum Assured is payable at the end of 9 years

40% of the Sum Assured is payable together with Guaranteed Additions, and Loyalty Addition, if any, at the end of 12 years.

Death Benefit:

In case of death of the life assured during the policy term, the full sum assured is payable irrespective of the survival benefits paid earlier.

On death during the policy term excluding last policy year: Sum Assured with accrued Guaranteed Additions

On death during last policy year: Sum Assured with accrued Guaranteed Additions along with Loyalty Addition, if any.

Guaranteed Addition :

The policy provides for Guaranteed Addition at the following rates:

Rs. 65 per thousand Sum Assured per year for a policy of 9 years term.

Rs. 70 per thousand Sum Assured per year for a policy of 12 years term.

I calculated the return generated by this policy for a healthy male aged 30 years & sum assured of 10L Rs. with annual prem. Mode (to get highest rebate on tabular prem. Thru annual prem. Mode & high sum assured) for both term 9 & 12 years. For 9Y policy the prem. is 153909 Rs. per annum & for 12Y policy the prem. is 157094 Rs. per annum. Now plz. Go thru the following calculation. Here I had assumed the money back received from the policy ‘ll be reinvested till maturity of policy to earn post tax return of 8%.

1. 9Y Term

A. Total prem. paid over the policy term = 1385181 Rs.

B. 1st M/B (Money Back) after 3Y = 150000

C. Value of B at policy maturity (after remaining 6Y) = 238031

D.  2nd M/B after 6Y = 250000

E. Value of D at policy maturity = 314928

F. Final M/B at policy maturity = 600000

G. Gtd. Addition @ 65 Rs. per annum per 1000 SA = 585000

H. Loyality addition (not Gtd.) = 50000

I. Total Maturity amount =  C+E+F+G+H = 1788000 Rs. appx.

For an annual prem. of 1.54L Rs. The I above (maturity amount) is @ 5% rate of return only.

2. 12Y Term

A. Total prem. paid over the policy term = 1413846 Rs.

B. 1st M/B after 3Y = 100000

C. Value of B at policy maturity (after remaining 6Y) = 199900

D.  2nd M/B after 6Y = 200000

E. Value of D at policy maturity = 317374

F. 3rd M/B after 9Y = 300000

G. Value of F at policy maturity = 377913

H. Final M/B at policy maturity = 400000

I. Gtd. Addition @ 70 Rs. per annum per 1000 SA = 840000

J. Loyality addition (not Gtd.) = 75000

K. Total Maturity amount =  C+E+G+H+I+J = 2210000 Rs. appx.

For an annual prem. of 1.57L Rs. The K above (maturity amount) is @ 5.62% rate of return only.

 

Conclusion –  From the above calculation, everyone can see itself that the returns generated by this policy r not that much impressive as it looks on first glance. For lower Sum assured say 1L or 2L Rs. & for higher age the returns ‘ll be even lower. Also there is no guarantee of Loyality addition which I had considered in my calculation.

Plz. Don’t fall in the trap of gtd. Returns offered by this policy. It’s making wealth for LIC & it’s agents only, not for U, the Policy Holder.