You will make a capital loss over 9 years!
Life Insurance Corporation of India has launched a new product, Bima Account, which offers liquidity, flexibility, transparent fees and guaranteed returns. But its performance must be among the worst, because you will suffer a capital loss for more than nine years.
Can a guaranteed return of 6% per year put you in a situation where you are making a loss over nine years? Yes, if you buy the newly launched variable insurance plan (VIP) products by LIC Bima-I and II Account.
Advertisements for these products are all over the print media. LIC runs full-page ads in The India time and other publications. According to the announcement, the product guarantees returns of at least 6% per year. Unfortunately, the ads cover up the more toxic aspects of the product.
While a 6% per year guarantee is prominently advertised, there is no mention of the astronomical fees and the simple fact that 6% per year is on the investment, net of all costs! The astronomical charges are 27.5% the first year, 7.5% the second and third years and 5% each year thereafter, of the premium paid.
The premium you pay for 10 to 15 years (policy term) of the Bima Account-II will be balanced in nine years, even with a guarantee of 6% per year for a 45-year-old insured opting for insurance of 20 times the annualized premium. What could save the day for Bima accounts is a big LIC bonus.
At this time, LIC is not prepared to comment on the bonus factor. The bonus will only be granted if the policyholder pays the premium for the term of the policy, even if the lock-in period is only three years. Remember that while low returns are “guaranteed”, the bonus is not.
If you have to depend on a bonus to outperform the breakeven point in nine years, you are taking an investment risk. The irony is that these plans are aimed at conservative investors. The products in the Bima account are obviously programmed to attract naïve clients during tax saving season – the same clients who are in a hurry to invest up to Rs1 lakh in a financial instrument to obtain tax savings of C80. Thanks to LIC’s powerful network, which gives it a presence in every corner of the country, it will make money, but at what cost to customers?
There are much better plans than Bima accounts. Like the traditional ICICI Prulife GSIP plan which gives guaranteed real returns of 5% on your investment rather than the surreal guaranteed returns of 6% of LIC’s Bima accounts. In addition, GSIP will also give a bonus. A cautious investor looking for 80C savings would do better to put money into the PPF or open a five-year tax-efficient FD offering interest of up to 9.25% per annum. (IDBI Bank offers this rate today). As such, funds in LIC’s Bima account cannot be withdrawn during the three-year lock-up period, even if you stop paying the premiums. The need for insurance can be met by a term plan.
It took a long time for the Insurance Regulatory and Development Authority (IRDA) to ban the Universal Life Insurance Plan (ULP) which was renamed the Variable Insurance Plan (VIP). How did he remove this product and the advertising? Will IRDA be caught taking a nap this time too?
Bima Accounts offer you the possibility of reducing the insured amount during the term of the contract, subject to a minimum limit. When the sum insured is reduced, this change will take effect from the policy anniversary following the date of the request. Premiums can be paid regularly on an annual, semi-annual, quarterly or monthly basis (via ECS mode only) over the term of the contract. The minimum premium is Rs 600 per month via the ECS mode for the Bima I account, while it is Rs 1,250 per month under the Bima II account. The minimum annual premium for the Bima I account is Rs 7,000 and Rs 15,000 for the Bima II account. The term of the policy for the Bima I Account varies from five to seven years, while it varies from 10 to 15 years for the Bima II Account.
It is possible to pay additional (complementary) premiums without increasing the risk coverage, up to the total of the basic premiums paid under the policy. A loan facility is also available immediately after the first anniversary of the contract.
If the premiums are not paid within the grace period, the policy will become a paid-up policy. The policyholder has the option of reactivating the released contract within 12 months from the date of the first unpaid premium. During the replenishment period, life coverage will cease and no mortality charge will be deducted. The policyholder’s account balance during the recovery period will earn a guaranteed interest rate of 5% per annum without debiting any expenses. When the policy is taken over, the guaranteed interest rate on the policyholder’s account will again be 6% per year from the date of the takeover.
The sum insured under the Bima I Account ranges from a minimum of 10 times the annualized premium to a maximum of 20 times the annualized premium until the age of 35, 14 times the annualized premium between 36 and 45 years and 10 times the annualized premium for those aged 46 to 50.