POSTED BY February 25, 2009 COMMENTS (19)
ONUpdate : As pointed by Ranjan, there was a mistake in the analysis about the paying term of the policy, I have corrected it now. Please re-read the analysis.
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Today we will talk about the market product “Jeevan Varsha”, If you are a regular reader of this blog, by now you must have gained enough knowledge on how to evaluate a product like this, if not then go ahead and see.
You can see the features in detail here . Mainly there are 2 things .
The policy provides for Guaranteed Addition at the following rates
We will analyse the policy for 12 yrs here . We will talk about two things using an example.
1. Returns from this Policy at the End
2. Can we do better than this policy with same amount of premium [ you know we can 😉 ]
Example : Lets take an example of a person 30 yrs, who takes this policy for Rs 5 Lacs and wants to make yearly payment.
Tenure of Policy : 12 yrs
Tenure of Payments : 9 yrs
Sum Assured (SA) : Rs 5 Lacs
Premium : Rs 78500 (calculated adjusting Mode rebate and High Sum assured Rebate)
Total Annual premium for 30 yrs old for 12 yrs policy = 165.30
Mode Rebate of 2%
High Sum Assured rebate of Rs.5 .
So Total premium = (500000/1000)*(165.3 – 5) * .98 = 78547.0 (So i took it approx 78500 .
In 3rd Year : Rs.50,000 (10% of SA)
In 6th Year : Rs 1,00,000 (20%)
In 9th Year : Rs 1,50,000 (30%)
In 12 Year : Rs 6,20,000 [2,00,000 (40%) + 4,20,000 (70 for per 1000 for 12 yrs , 70 * 12 * 5,00,000/1000 ]
Returns from this Policy at the End
Now how do we calculate the returns from this policy for this person. There are two way (Models) of doing this . One way is that we can just add the amount of money he receives from the policy and see how much total money he gets at the end of 12th year.
The other way is to assume that he is investing his money (which he gets at 3rd , 6th and 9th) year somewhere , so that he can get it at the end of 12th year (this way is a better way of calculating) .
Total Sum received = 50,000 + 1,00,000 + 1,50,000 + 6,20,000
= 9,20,000
Amount received is invested @8% such that he recives it at 12th yr . (for 9 yrs , 6yrs and 3 yrs)
50,000 after 9 yrs : 99950 [ 50,000 * (1.08)^ 9 ] 1,00,000 after 6 yrs : 158687 [ 1,00,000 * (1.08)^ 6 ] 1,50,000 after 9 yrs : 188,957 [ 1,50,000 * (1.08)^ 3 ] 6,20,000 : 6,20,000
Total = 99950 + 158687 + 188,957 + 620000
= 10,67,594
Bonus’s and Loyalty additions are not guaranteed and thats the reason you cant claim it as entitlements. These components are not backed by the sovereign guarantee that extends to the sum assured and guaranteed additions components.
In the (unlikely) event of Company going insolvent, you’ll only be entitled to the sum assured, at the time of death or on maturity, and the guaranteed additions thereon.
Now lets calculate the CAGR return from this policy, We have to use annuity formula for it for 9 yrs and then simple compound interest formula for 3 yrs. The formula would be
A = [ annuity part for 9 yrs] * [compound interest part 3 yrs ]
A = [ P * [{(1+i)^9 – 1 }/i] * (1+i) ] * (1+i)^3, where
A = Total money he accumulated till now .
P = yearly Premium (78,500)
i = CAGR return which we want to find out .
The person we have calculated annuity returns for first 9 yrs (because he is making the payments for 9 yrs), then he does not pay anything for 3 yrs, so we have calculated compound interest for next 3 yrs. It may be a bit complicated to understand i know.
So
The value of i which satisfies this equation is 3.3%, Yes you read correct. But this is not a good way of seeing things, so lets look at Second Model.
>>> (78500 * (1+.033) * ((1+.033)**9 – 1)/.033)*(1+.033)**3
919262
The value of i which satisfies this equation is 5.1% . This is the true representative of returns .
>>> (78500 * (1+.051) * ((1+.051)**9 – 1)/.051)*(1+.051)**3
1060497.7183573653
thanks to “Raja” for correcting my calculation
So lets take the Second model as the standard model for evaluation, So we conclude that returns from this policy would be around 5.1% considering
Consumer is smart enough to invest the proceeds again into some debt product using which he can get 8% returns .
Note that this return is considering there is no Loyalty Additions because they were not assured.
Total payment in 12 yrs was 12 * 79,000 = 9.48 lacs and at the end of 12 yrs he gets
9.2 Lacs (First model , 50k , 1 lacs , 1.5 lacs and 6.2 lacs, not reinvestment)
OR
11.78 Lacs (If proceeds are reinvested)
Some policy lovers would argue i am not considering Insurance and tax benefit part.
Regarding Tax benefit : We will compare this product with PPF, Mutual funds and Term Insurance and they also have 80C benefit with them, so tax benefit is something common with all, so there is nothing special with this policy regarding Tax benefits. For Insurance I will cover it in next part which we will discuss.
Can we do better than this policy with same amount of premium
The sum Assured is 5 lacs, so if a person dies before 3 yrs, he gets 5 lacs, if he dies after 3rd yr, he will also get the Guaranteed additions. So the maximum a person can get by dying is in 12 yr, in that case he will get 9,20,000 (50k, 1 lacs, 1.5 lacs, 2 lacs + 4.2 lacs GA, No loyalty additions in this case).
So lets be graceful and say that this person will get 9.2 lacs in case he dies.
The first thing to note here is Insurance cover, I don’t know what will happen to the family of this person if they get 9.2 lacs as Insurance money. If a person has the ability to pay 78,500 per Annam as premium, a wild guess for his Insurance cover is around 30-35 lacs at least. So the Insurance cover is not enough
So a person who pays 78,500 per year, can divide his 78,500 yearly payment into two parts, For insurance and Investment separately. You know what i would suggest, its simple Term Insurance and Investment in PPF or MF’s
Read Importance of Insurance (Term Insurance)
Read about Mutual funds and how to choose them
Let us first take care of his Insurance part, though he is covered of max 9.2 lacs just for 12 yrs, we are not that uncaring in nature to under-insure him, we understand importance of Insurance and his Family needs and the tenure of cover should be 25-30 yrs, not just 12 yrs, His Insurance requirement is around 30-40 lacs and we will provide it anyhow, even if the investments are to be compromised .
So we will try to provide him 35 lacs cover for 30 yrs.
Term Insurance of 35 lacs for 30 yrs : Rs 9,600 (Aegon Religare)
So he is left with 68,900 (78,500 – 9,600), for his investments. If he invests this in PPF (though there is limit of 70,000, lets assume he can do it). he will get around 14.12 lacs (annuity formula) at the end of 12th year.
He can then take out 1.73 lacs out of this to fund for his Insurance premium for next 18 yrs left, still the amount left would be better than the Jeevan Varsha. The other alternative is to keep the money in some Fixed Deposit and keep using the interest amount to fund Insurance premium for next 18 yrs.
There can be other ways of doing it, but the main point is that we have done better than Jeevan Varsha in all respects.
This investor can also use balanced funds for investments.
Term Insurance of 35 lacs for 30 yrs : Rs 9,600 (Aegon Religare)
He can invest 68,900 yearly (5741 per month) left in Equity Diversified Mutual funds using SIP every money month in max 3-4 mutual funds.
He should expect to get around 12% compounded returns over 12 yrs , and your money should grow to 18.5 lacs (12% is again not guaranteed , its not based on Historical returns )
We have seen the policy from a broad level and see its main components, we have not seen small details, because they are not significant enough to change the views anyways. We have seen how its too complicated and provides returns which are less than what you can easily get in PPF.
Term Insurance + (MF or PPF) is a great combination, its easy to understand .The main this is to first Insurance your self Sufficiently and then think about investments.
That’s what i had to say for the day, don’t forget to recommend this blog to others so that they can also benefit. Also be sure to follow me on twitter here in case you are on twitter.
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Disclaimer : The views on this article are my personal. All the things discussed on this article are for learning purpose only. This blog will not be responsible for your investment decisions. There may be some mistakes while calculations, so please do your own calculations for taking any decisions. thanks
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Hi, You can use XIRR formula in MS-Excel to calculate the returns.. It is more apt for calculating the returns..
Yes
Sir . I have jeevan vatsha for 9 years. How much will I get at the end of 9 years.
Hi Bendang
The best answer you can get only from the agent you invested through or just contact the company. The thing is your case is a bit personalised and other than company, no one can give accurate information
Manish
Hi, came across this page today only through Google search.
One thing all of you missed is the Guaranteed Return must be calculated on the MATURITY SUM ASSURED – MSA in short and not simply on the sum assured.
The MSA for Jeevan Varsha is only 1/6 * Sum Assured ie one sixth of the sum assured. Returns will be much lower whichever way you work out IRR or XIRR.
Can you please let me know the exact calculation . I will make the change !
@Raja
Awesome !!
Manish
Manish :
1. Glad to see you incorporated the correction
2. Your formula for computing IRR is correct. Since payments are made at the start of the year. We have to use the annuity-due formula. I stand corrected.
3. To compute the IRR to decimals, I got 5.176% that gave 10,67,544.
4. Worthless policy.
Raja
Thanks for your follow up comments .
@Raja
1. Yes I know its not the correct way , I have mentioned that already in the post . It was just to keep things simple . you know people dont like complex things 🙂
Regarding everything else . you were correct , I made a mistake . I have corrected it now .
However , check your IRR once , I dont think the rate of return would be calculated by just plain IRR formula , see what i have done .
Thanks a ton .
manish
Manish,
First let me compliment you. I like your blogs.
1. Only the second model is correct to compute the IRR. By simply adding all payments received ( model 1) in different years, you are trying to make it simple for your readers. But it is incorrect and You know that already. We come to read your blog for accurate analysis not approximate analysis. Pls remove it.
2. check your calc.
At 9th year, 30% is received that is Rs.1,50,000.
you indicated your calculation as below.
1,50,000 after 9 yrs : 299,850 [ 1,50,000 * (1.08)^ 3 ]
It should be
1,50,000 after 3 yrs : 188,957 [ 1,50,000 * (1.08)^ 3 ]
4. So, the total comes to Rs.10,67,594. ( even a smaller number).
5.IRR comes to 5.9%. FVIFA(78547,8%,9) which is compounded at the same rate for next 3 years.
Rajnish , you should take into conseration how much premium you have already paid and for how many years . If you have already paid premium for good amount of time than the best thing would be to go with it , other wise you will suffer good loss.
Financial planning is very broad term , you have to identify your goals and cash flows and risk appetite and then in discipline manner you have to follow it .
You can go through my earliar articles to understand more things .
Manish
excellent blog.very informative.after going through your blog i starts thinking about my investment. as you said insurance and investment should not be mixed. but i already did and want to get it cancelled . i have bima gold lic money back for 20 years.and bharti axa life insurance growth plan.both these i will get cancelled and planning to reinvest in lic term insurance and ppf account for long terms. please suggest and help me for my financial planning. i am 27 year old guy working in government organisation DRDO and having 40000+ salary. please suggest me. i can invest upto 10000 pm. your suggestion will be highly appriciated. thank you .rajnish kumar
Ranjan , The reason i have not highlighted the tax benefit part , as its common to this product and the comparable products i have discussed . 80C benefits are with all the products i am discussing on this article , so its not a special benefit when it comes to Jeevan Varsha . Thats the reason i have not covered it . May be i should write one-two lines from next time , just for mentioning .
Manish
Ranjan
Point 1 : You are correct , I overlooked that . I will make the corrections .
Point 2 : I am not sure how you got the premium of 76865 . As per LIC website i calculated it this way .
Total Annual premium for 30 yrs old for 12 yrs policy = 165.30
Mode Rebate of 2%
High Sum Assured rebate of Rs 5 .
So Total premium = (500000/1000)*(165.3 – 5) * .98 = 78547.0 (So i took it approx 79000 .
Was it supposed to be calculated any other way , let me know .
Point 3 : May be it comes around 6% after adding Loyalty bonus. I have not calculated Loyalty bonus in my calculations though they are not guaranteed , but paid every year , from company side there is a possibility that Loyalty bonus is not paid , so i consider it as risk of not getting it . though there is a track record of loyalty bonus payments .
Point 4 : If you see the article , i have covered both aspects of Policy (investment + Insurance) . See the end of article with Heading “
Can we do better than this policy with same amount of premium” .
Anyways , I appreciate your review and thanks for pointing out the mistakes .
Manish
Manish,
There are a few discrepancies that I would like to point out.
1. The payment term is 9 years and not 12 as you have assumed.
2. The premium for Rs 5 lacs is Rs 76865 and not Rs 79000.
3. Therefore the CAGR works out to around 6% (including the loyalty additions that LIC has declared in the past for other policies)
4. The product also has the insurance cover and the tax benefits. So only talking about the product from an investment point of view may not be correct.
I wanted to point this out so that you may not be accused of misleading investors.
Thanks Rai and Yogesh
@Rai , yes its safe to rely on Private Insurance companies, because actually you are relying on the regulatory body IRDA which take care of all the measures related to the customers .
The only care you have to take from your side is to see the claim rate and quality of service from the company . Other wise all are same ..
Dont be too choosy with company , take good product which suits your requirement and leave everything to god (IRDA)
Manish
Brilliant explaination.
Keep up the good work.
Regards
Yogesh Tiwari
Good analysis Manish, I have one question though. IS it safe to rely on Private insurances companies for such long term and high worth of policy
-RAI