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Life Insurance, in its core essence, implies ensuring financial security to one's loved ones, even after one is gone. And this is why, traditional term plans, that ensure pure insurance at minimal costs, are recommended more than any other schemes available in the country today.

However, in the absence of any survival benefits attached to these plans, they find but a few takers. The premium paid on term plans, though minimal, yield no returns if the policyholder survives the entire term of the policy, which is much against the psyche of Indians who seek return and value for money in every transaction.

It was probably to address this issue of ensuring adequate cover to life and at the same time ensuring decent returns to the policyholder that LIC launched its Jeevan Anand scheme in 2002. With a blend of endowment and whole-life cover, Jeevan Anand caught our attention for its impressive feature of providing cover to life not only during the premium paying term, but even that, until the death of the policyholder.

What was even more impressive about the scheme was the fact that the amount of life cover (sum assured) is payable twice. One, at the end of the premium paying term to the policyholder, and thereafter, upon the death of the policyholder to the nominees.

The illustration briefly explains the features of this plan... Saagar, aged 30 years, subscribes to Jeevan Anand for a period of 25 years for a sum assured of Rs 10 lakh. He will thus pay premiums on this policy till he turns 55. At the end of the policy term, when Saagar is 55-year old, he will get Rs 10 lakh, i.e. the sum assured, by the policy, and the amount of accrued bonuses, accumulated over 25 years.

Now, in case Saagar dies at the age of 75, his nominees will once again get the sum assured of Rs 10 lakh from LIC. But this is not the only feature that we like about Jeevan Anand. If this scheme is paying twice the sum assured, the same is at a cost in terms of high premiums paid by the policy holder per annum. What makes this scheme feasible for the investor is the rate of annual bonuses declared by LIC for this scheme every year, which somewhat compensates for the high premiums paid during the policy term.

During the past three consecutive years, the bonus rates declared by LIC for Jeevan Anand have been Rs 34, Rs 37, Rs 41 and Rs 45 per Rs 1,000 sum assured for policy terms of 10, 15, 20 and 25 years, respectively. Applying these rates to the above illustration, and assuming that LIC will continue to pay similar bonuses for the coming 25 years, Saagar will receive Rs 11.25 lakh as bonus at the end of 25 years along with sum assured of Rs 10 lakh taking the total receipts to Rs 21.25 lakh.

After adjusting for the premiums paid by Saagar, which is approximately Rs 41,206 per annum, or Rs 10.3 lakh during the entire term of 25 years, the net survival benefits come down to Rs 10.95 lakh. So does Jeevan Anand score over the combination of a pure term plan with PPF?

SURVIVAL BENEFIT:

In the above illustration, Saagar invests Rs 41,206 per annum in Jeevan Anand. If instead, the same amount is used to buy a term plan, say LIC's Anmol Jeevan for an annual premium of Rs 3,821 for a sum assured of Rs 10 lakh and the balance Rs 37,385 is invested in Public Provident Fund (PPF) for 25 years, the net gains at the end of 25 years shall be as follows... Being a term plan, Anmol Jeevan has ensured financial security to Saagar's family for Rs 10 lakh for 25 years.

However, as Saagar has survived the term plan, no amount shall be payable by LIC. The total premiums paid by him in this case are less than Rs 1 lakh as against Rs 10.3 lakh in case of Jeevan Anand. For the amount invested in PPF, assuming an interest rate of 8%, compounded annually, for 25 years, the total receipts with Saagar at the end of 25 years, shall be Rs 29.52 lakh against Rs 21.25 lakh in case of Jeevan Anand.

Adjusting for the principal amount invested in PPF over these years and the cost of insurance incurred, the net survival benefits would be Rs 19.22 lakh against the net gains of Rs 10.95 lakh in case of Jeevan Anand. Thus, as far as the survival benefits are concerned, our 'combi-plan' of term insurance with PPF scores well over Jeevan Anand.

DEATH BENEFIT:

But now, if we consider the death benefit of additional Rs 10 lakh, receivable to the nominees of the policyholder, Jeevan Anand moves a notch ahead of our combi-plan as its net receipts will now be Rs 10.95 lakh + Rs 10 lakh = Rs 20.95 lakh. Moreover, as far as the policyholder is concerned, there will always be a psychological contentment that his nominees will be taken care off after he is gone despite his policy having matured.

Jeevan Anand thus definitely scores on this front. However, in case of the death of the policyholder during the policy term, i.e. in the above illustration, if Saagar were to die during the 25 year policy term, his nominees will receive the sum assured of Rs 10 lakh and the amount of accrued bonuses and the policy shall come to an end. There will be no other receipts from LIC in this case and thus in case of such an eventuality, the combi-plan once again scores over Jeevan Anand.

PLANNING JEEVAN ANAND:

Jeevan Anand's feature of covering the risk to life till the death of the policyholder creates scope for some financial planning within the scheme itself. Instead of buying Jeevan Anand for longer tenures of, say 25 years, policyholders can alternatively opt for policy terms of shorter durations, say 10 or 15 years.

So, if the policyholder survives the policy term, he can easily get away with sum assured and bonuses so accrued, ensuring, at the same time, that cover to his life is intact until his death. The only drawback of this planning is the impact of high premiums and lower rate of bonus. For instance, in case of a 15 year Jeevan Anand, for a sum assured of Rs 10 lakh, the premium payable per annum is about Rs 76,292 resulting in total premium outflow of Rs 11.44 lakh by the end of 15 years.

At the end of 15 years, if the policy holder is alive, he will receive the sum assured of Rs 10 lakh + the accrued bonuses which is, in this case, will be calculated at Rs 37 per Rs 1,000 sum assured as against Rs 45 per Rs 1,000 sum assured for a 25 year policy term. The bonus accrued would thus be Rs 5.55 lakh taking the total receipts after 15 years to Rs 15.55 lakh. After adjusting for premiums, the net receipts in the hands of the investor will be Rs 4.11 lakh.

Source:http://economictimes.indiatimes.com/