For a 30-year old individual opting for Rs 10 lakh Basic Sum Assured for a policy term of 15 years, the IRR would be 4.02%, which is equivalent to over 5.74% taxable FD interest.
The Life Insurance Corporation (LIC) of India has launched Bima Jyoti – a Non-linked, Non-participating, Individual, Limited Premium Payment, Life Insurance Savings Plan – that offers guaranteed addition at a rate of Rs 50 per thousand (i.e. Rs 5 per 100 or 5 per cent) Basic Sum Assured at the end of each policy year throughout the policy term.
Policy Term & PPT
The Policy Term of the plan varies from 15 to 20 years and the Premium Paying Term (PPT) will be 5 years less than the respective Policy terms. That is for a 15-year policy term, the PPT will be 10 years and for 16-year policy, the PPT will be 11 years and so on.
Sum Assured Limits
The minimum Basic Sum Assured is Rs 1 lakh and multiple of Rs 25,000 thereafter, with no maximum limit.
The minimum age at entry allowed is 90 days (completed) and the maximum age at entry may be 60 years (nearer birthday, while the minimum age at maturity will be 18 years (completed) and the maximum age at maturity will be 75 years (nearer birthday) .
While leading banks now offering Fixed Deposit (FD) rates of around 5-6 per cent per annum, Rs 50 per thousand Basic Sum Assured guaranteed addition would generate higher return and that too tax free, as the calculation will be done on the amount of Basic Sum Assured and not on the amount of premium.
For example, for a 30-year old individual opting for Rs 10 lakh Basic Sum Assured for a policy term of 15 years, the annual premium – to be paid for 10 years – will be Rs 82,545. In this case, the guaranteed addition will be Rs 50,000 per year for 15 years or Rs 7,50,000 on maturity.
The total maturity value will be the total guaranteed addition of Rs 7,50,000 plus the Basic Sum Assured of Rs 10,00,000 (Rs 7,50,000+Rs 10,00,000) or Rs 17,50,000. So, the compounded annual return or the Internal Rate of Return (IRR) – with premium payment of Rs 1,14,959 in the beginning of each year for 10 years and the maturity value of Rs 17,50,000 at the end of 15th year would be 4.02 per cent.
As the return is tax free, it will be equivalent to over 5.74 per cent taxable FD interest for an individual in the 30 per cent tax bracket and 5.02 per cent for an individual in the 20 per cent tax bracket.
Moreover, along with an attractive rate of return, LIC Bima Jyoti also provides life cover.
However, as the guaranteed annual addition remains equal every year and not compounded, the annual compound rate of return or the IRR would reduce with increase in the policy term.
Moreover, as the premium increases with age, the return will be higher with lower entry age of a life assured, while the return will be lower with higher entry age.