IRR calculation on LIC, Whole Life endowment policy. Plan-02

POSTED BY Prabuddha Sarkar ON December 26, 2011 6:55 am COMMENTS (11)

Hi,
I have tried to calculate LIC’s – whole life endowment policy-IRR.
All data input are from LIC declared information from LIC website.
Policy : Whole Life Policy Plan Number-2
As per policy document, the policy will cease at 40th policy year with benefits like;
Total benefit= SA (Sum Assured)+ Bonus+FAB(Final Additinal Bonus)
In my case; age=27, premium =~ 12000 p.a., premium paying term=40
SA= 5,00,000. Riders opted( Accident Benefit+ 5 lakhs critical illness)
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

As per Bonus information of LIC website 2010-2011,
bonus for plan-2= 70 per 1000.(same bonus in 2009-2010 also)
FAB per 1000 for a 40years policy = 3550 (It’s true)
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

So when I turn age =67 (after 40 years) believeing that
bonus 70 per 1000 and current rate of FAB;
Total Bonus per year= (5,00,000/1000) X 70= 35000
40 years’ bonus= 35000 X 40= 14,00,000. (14 Lakhs)
40 FAB (assuming current rate) = (5,00,000/1000) X 3550 = 17,75,000
Total benfit= SA+Bonus+FAB= 36,75,000
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

So, I am getting 36.75 lakhs investing 12000 per year for 40 years.
My calculation information are collected from LIC website (www.licindia.in/bonus_info.htm)
Along with a 5 lakhs ciritical illness and 5 lakhs Accident benefit.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Experts what is your view? Am I correct?

kindly Help me calculate IRR on this investments.

11 replies on this article “IRR calculation on LIC, Whole Life endowment policy. Plan-02”

  1. robighosh says:

    how i know and what is the maturity amount of my lic policy number 212088069

    1. Hi robighosh

      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

  2. Dear Prabuddha Sarkar, Please check for the bonus rate as well as FAB rate during 2004-2005, 05-06 & 07-08 & 08-09 & post your findings here. A simple math ‘ll indicate that this 8.33% return is not possible at all. Why? Just add the cost of insurance, cost of administration, fund management & add the LIC’s own profitability, the earnings from it’s own investments & that too from the debt space (as the policy in question ‘ll invest 100% in debt & no Equity), the cut off point ‘ll be some where around 15-16% at least. Do you think that LIC can deploy it’s investments on such high rate continuously for next 40Y?

    Thanks

    Ashal

    Thanks

    Ashal

    1. Prabuddha Sarkar says:

      Yeahh, thats right.
      ~ Thank you.

  3. Ramesh says:

    The FAB changes every few years, depending upon the interest rate scenario. Two-three years ago, it was around 2600-2800.

    Also, the bonus rate changes. In the last few years, it has varied from 68 to 80 for whole life plans.

    Do you really think 40 years hence!? You have to remember that 3550 is for those policies which have remained paid every year for the last 40 years or so. As far as I know, the interest rate in previous years for higher. In future, the interest rate have to go down.

    So, take into consideration all these variables and also inflation.

  4. Prabuddha Sarkar says:

    Thank you~.
    The FAB, at first seemed high for me too!.
    I have quoted from LIC bonus doc, link is here ;
    ( http://www.licindia.in/pages/BONUS_RATES2010_2011.pdf)

    Also let me know your opinion about this product?
    What is a “good” IRR range for insurance products?

    1. Prabuddha – The problem with these plans is that future payout is just an extrapolation based on past data and we will not know the actual returns until most of the annual payouts are known.I mean between year 35 and year40 the overall returns will not vary much but forecasting returns 40 years into the future at this point is a no-no.

      At this point, given that the Annual premium is less than 5% of the Sum Assured the returns from this Insurance plan will be tax free (even under DTC). But in 40 years the Indian political scene/taxation could change a lot and if your final return is taxed then it is a huge loss for you. The 8.33% return will fall to 5.83% for someone in the 30% bracket. However if the amount received is tax-free then the returns actually rival the PPF returns (8.33, tax free, talk about free insurance covers as well). This is the reason I believe the FAB stated in their website should be reduced big time for our calculations. There is no way LIC can return back that much money.

      Ideally mixing Investment with Insurance is akin to drinking and driving. So an Insurance product sold as investment is a NO-NO. Please JUST STAY AWAY.

      A 5 Lac cover comes at a much lower cost if you take a term plan – perhaps for even Rs. 1000 a year! Investing the remaining in the most tax efficient instrument, PPF, is enough to beat the return in this LIC plan. Take a Term Plan ~ 10 times your annual income first. Then invest in Debt instruments like PPF and start SIP in MF. That will build you far more wealth.

      While closing this note I re-read your statement on what the IRR should be for an Insurance product. You dont calculate IRR on a Life Insurance really but I thought I will do a sample calculation. Assume a 30 year old male buys an Insurance cover for 1 Crore paying an annual premium of 15,000. (Some online plans are much lower. I am just taking an average between inexpensive online policies and the regular agent sold term plans). Assume that the person pays premium for all 30 years and dies in the last year. His legal heirs will get 1 Crore. Put this in an Excel. A1 to A30 will be minus 15000. A31 will be 1 crore. Formula = IRR(A1:A31) gives you 16.4% IRR. That I know is a crude form of Insurance IRR but that is really the worst case IRR. (Dying after 15 years is 42% IRR, dying after 5 years is 243% IRR) – compare these with the (already bloated) 8.33% traditional plan return!!

      The purpose of Insurance is to cover risks in life. Ideally people want to take term insurance and then outlive the term (!!!!). Although someone surviving their premium term will result in 0% IRR on one side the potential return is way higher (if you still want to calculate). Again the money saved by not investing in such traditional plans can themselves beat this LIC Plan.

      To summarize:
      1) Stay away from this plan
      2) Get a large Term cover
      3) Invest in PPF+MF combo to build wealth over the long term

      1. Prabuddha Sarkar says:

        @justgrowmymoney:

        Thank you for your thoughts.

        Dear I am kind of risk-shy person, I will not invest in equity, even if I invest I shall invest in MF-debt and NPS-govt-bonds.

        I fully understand what you mean,

        consider this situation;

        1. I like this policy because of “LIC” ~ tag name, factually you are correct. Tell me one simple thing why people buy shares of “berkshire hathaway” ? Dont they understand it has a market risk? They do but still they invest because they believe in “Buffet”. 🙂
        I too kind of mediocre indian believe in LIC unless “berkshire hathaway” let me invest in them. ~~ just joke.~~ Factually you are correct.

        2.Term cover: 20 lacs from ICICI pru iLife+ 30 lacs from LIC amulya jeevan

        3. I regularly invest in PPF (last 2 years @70,000, this year 1lac)., after this FD with onlinesbi.

        1. Hi buddy – i think the long term return on the LIC plan will be lower. Being so risk averse you can just opt for debt funds and roll over the returns year after year – these are atleast tax efficient.

          1. Prabuddha Sarkar says:

            I agree with you, true~.

  5. The FAB seems high for me. But if your calculations are such the IRR can be easily calculated as follows by yourself using Microsoft excel:

    Enter (12000) –> minus 12000 in cells A1 to A40 in an Excel
    In Cell A41 enter 36,75,000 as the final payout
    In A42 input the formula “=IRR(A1:A41)” – voila, the IRR is 8.33%.

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