LIC has recently (On 23rd June 2023) launched a single premium and guaranteed endowment policy called LIC Dhan Vriddhi (Plan No. 869). Dhan Vriddhi is a non-linked, non-participating, individual savings plan.
This new plan has been positioned as an investment option for a steady growth, with Guaranteed additions. As per LIC, Dhan Vriddhi Policy aims to provide guaranteed lumpsum amount on the date of maturity for the surviving life assured.
In this post, let us understand – What is a Single Premium Life Insurance Plan? What are the key features of LIC Dhan Vriddhi Policy? What are the expected investment returns of Dhan Vridhi life insurance plan? Should you invest in LIC New Plan Dhan Vriddhi for long term? Is this policy really a Dhan Vriddhi plan (or) can turn out to be a Dhan Kshaya (loss) plan for the investor?
What is a Sinlge Premium Life Insurance Plan?
It is the insurance policy where you pay insurance only in the first year (single payment) but continue to enjoy the life cover and other plan related benefits (bonus or guaranteed additions) throughout the term of the policy.
Key Features of LIC Dhan Vriddhi Plan
- Single Premium Life Insurance Plan
- Options to choose the Policy Term and the Death Cover (Basic Sum Assured)
- Death Benefit under this policy :
- Death benefit payable, on death of the life assured during the policy term after the date of commencement of risk but before the date of maturity, shall be “Sum Assured on Death” along with accrued Guaranteed Additions. “Sum Assured on Death” shall depend on the option chosen by the policyholder as below:
- Option 1 : 1.25 times of Premium (exclusive of GST) for the chosen Basic Sum Assured
- Option 2 : 10 times of Tabular Premium ((exclusive of GST) for the chosen Basic Sum Assured
- Guaranteed Additions throughout the Policy term
- Maturity Benefit : On Life Assured surviving the stipulated Date of Maturity, “Basic Sum Assured” along with accrued Guaranteed Additions shall be payable.
- Higher Guaranteed Additions for policies with higher Basic Sum Assured
- Lumpsum Benefit on Death or Maturity
- Option to take Death Benefit in Instalment and Settlement Option on Maturity
- Option to choose riders i.e. LIC’s Accidental Death & Disability Benefit Rider and LIC’s New Term Assurance Rider
Let us understand ‘how LIC Dhan Vriddhi plan‘ works with a simple pictorial illustration as below;
Let’s consider an example under Option 1;
Policy holder’s current age is 30 years (male), buys this policy for Sum Assured of Rs 10 Lakh (Basic Sum Assured) and pays single premium amount of Rs 8,96,715. Please note that Single Premium without GST Rs 8,58,100 is considered for death benefit calculation. The policy term is for 15 years.
- In case, policy holder expires during the policy term, death benefit ie Sum Assured on death plus accumulated guaranteed additions (GA) is payable to his nominee.
- Sum Assured on death under option-1 is : 1.25 times of premium paid (without GST). So, it is Rs 10,72,625 (1.25* 858100)
- Guaranteed Additions payable under this policy are, Rs 75 per year per Rs 1,000 basic sum assured (refer to guaranteed additions table). So, the total accumulated GA is Rs 11,25,000
- Death benefit = Sum Assured on Death + accumulated GA (as on date of death of the policyholder)
- Maturity Benefit = Basic Sum Assured + total accumulated GA till policy term = Rs 10,00,000 + Rs 11,25,000
Let’s consider an example under Option 2;
Policy holder’s current age is 30 years (male), buys this policy for Sum Assured of Rs 10 Lakh (Basic Sum Assured) and pays single premium amount of Rs 8,05,434. Please note that Single Premium without GST Rs 7,70,750 is considered for death benefit calculation. The policy term is for 15 years.
- In case, policy holder expires during the policy term, death benefit ie Sum Assured on death plus accumulated guaranteed additions (GA) is payable to his nominee.
- Sum Assured on death under option-2 is : 10 times of premium paid (without GST). So, it is Rs 77,07,500 (10* 770750)
- Guaranteed Additions payable under this policy are, Rs 40 per year per Rs 1,000 basic sum assured (refer to guaranteed additions table). So, the total accumulated GA on maturity of policy is Rs 6,00,000
- Death benefit = Sum Assured on Death + accumulated GA (as on date of death of the policyholder)
- Maturity Benefit = Basic Sum Assured + total accumulated GA till policy term = Rs 10,00,000 + Rs 6,00,000
Calculation of Returns under LIC Dhan Vriddhi Plan Option 1
As mentioned, Dhan Vriddhi life insurance plan has been positioned as a savings plan with a guaranteed growth. So, let’s try to calculate the expected rate of return on maturity under option-1. Can your investments really get you VRIDDHI (growth) ? (or) Does your investments result in KSHAYA i.e., LOSS?
As illustrated above, the expected returns on maturity can be around 5.92%. So, a guaranteed return of 6% over a period of 115 years looks nice? Let’s rethink!
The maturity proceeds can be subject to income tax;
- We need to check if the Sum Assured on death is atleast 10 times of Premium paid? Under option-1 of this plan, it is not, it is just 1.25 times. Hence, the maturity proceeds are subject to income tax as per your slab rate.
- Also, an individual will have to pay tax on the maturity amount of life insurance policies where the aggregate annual premium exceeds ₹5 lakh, for the polciies issued on or after 1st April, 2023.
- Hence, the maturity proceeds under this scenario are subject to income tax.
Let’s assume you are in 20% tax bracket and calculate the expected rate of post-tax return.
Post-tax returns = Pre-Tax returns * { (100-Tax Rate) / 100 }
5.92% * { (100-20) / 100 } = 4.736%.
The pre-tax returns from your investment was 5.92%. But after paying the taxes, the post-tax returns are 4.736%, which is much lower than your presumed return.
What about inflation rate? Do we need to factor in that as well in our calculations? Besides the tax rate the other deduction that you need to consider while calculating the real rate of return is ‘Inflation
Inflation adjusted & Post Tax returns = { [( 1+ post tax return ) / ( 1+inflation rate )] – 1 } * 100
{[(1+0.04736) / (1+.06)] – 1} * 100 = -1.19%
Oh my god! Your expected returns on maturity can be NEGATIVE! Your investments under this plan may not lead to VRIDDHI but can actually result in KSHAYA.
Calculation of Returns under LIC Dhan Vriddhi Plan Option 2
Let’s now calculate the expected returns under option 2 of Dhan Vriddhi policy;
Under this scenario, though the sum assured on death is 10 times of premium paid, the total premium paid is above Rs 5 lakh. Hence, the maturity amount is subject to income tax. So, let’s calculate real rate of return on 4.68%. It falls to -2.12%. So, your investments under option-2 of this plan can also result in KSHAYA only.
Now that you have an idea about the possible expected returns on maturity, I believe you can take an informed decision, to buy or not to buy LIC’s Dhan Vriddhi policy. Kindly share your views on low-yielding traditional life insurance polices like these. Do you prefer investing in them for long term?
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(Post first published on : 15-Jul-2023)
