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LIC's Bima Nivesh: An attractive product

A N Shanbhag

I had always been a fan of term insurance. It covers the policyholder for a desired number of years against death, accident, disability, et cetera.

It does not have any maturity, paid-up, surrender or loan values. In the case of a contingency, the beneficiary gets the sum assured, but on survival he gets nothing.

I like term insurance even though it is the costliest type of policy. On survival, one gets nothing and that is the reason why term insurance has the lowest premium and the highest cover. This is consistent with the solution - go to insurance companies for life cover and to financial institutions for investment.

LIC did not have such a pure insurance product. It used to mix security with investment and left little option to the buyer.

Thankfully, on January 14, 1999, LIC launched a much better solution than term insurance. It was a single premium (like a fixed deposit) policy, 'Bima Nivesh', which was effectively an investment product with attractive tax-free returns, as much as around 10.08 per cent for a five-year term and 10.21 per cent for 10 years.

Understandably, the cover was quite low. For instance, the five-year policy carried a premium of Rs 964 per Rs 1,000 face value. In the case of death during the term, the amount payable was Rs 1,000 plus the benefits accrued on the policy up to the time of death.

In other words, the cover was as little as Rs 36 and yet was under the umbrella of the best tax-slashing sword, tax rebate under Section 88. The premium payable on the 10-year policy was Rs 902.

In the wake of a falling interest rate regime, the policy became the best investment avenue and also the best tax-saving device. But it did not serve the main purpose of LIC's existence, the life cover.

LIC has now come out with an even better solution - Bima Nivesh Triple Cover. In the case of death, three times the face value will be paid. Naturally, the premium payable would be a little higher because of the infusion of an additional two term-insurance premia (and also the falling interest rates).

Salient features

• Sum assured ranges from Rs 25,000 to Rs 10 lakh (Rs 1 million) in multiples of Rs 5,000
• Single premium per Rs 1,000 sum assured will be Rs 961 for all ages at entry.
• Rebate (which is like a discount) for high premia at the rate of 1 per cent on the premium in excess of Rs 25,000, at the rate of 1.5 per cent in excess of Rs 50,000 and at the rate of 2 per cent in excess of Rs 200,000. This is a little complicated.

Let us compute the actual premium payable for face value of a Rs 10 lakh policy. The single premium thereon is Rs 961,000. The actual premiums are worked out in Table 1.

Thus, for the maximum amount, the premium works out to a little over Rs 943 for Rs 1,000 sum assured.

• Minimum and maximum age at entry: 18 and 50 years respectively.
• Maximum age at maturity: 60 years.
• Medical examination will be required for all the proposals. The previous scheme was non-medical in character.
• No loan is available under this scheme. However, the policy can be assigned to other financial institutions as collateral security.
• There will be 'guaranteed additions' at a compound rate of Rs 60 per thousand sum assured per annum accruing at the end of every policy year during the term of the policy. The meaning of compound rate is that the guaranteed addition for the year will be added to the basic sum assured of the year. The total will be used to compute the guaranteed additions at the end of subsequent years. I interpret this as an assured 6 per cent tax-free compound yield. The actual rate is higher because of loyalty additions and the rebates.

Now, let us compute the rate of return.

Obviously, the returns depend upon the sum assured and varies between 6.42 per cent and 6.62 per cent.

• This is not the end of the story. Over and above this, loyalty addition may be paid on maturity. The rate will depend on LIC's experience with regard to interest, mortality and expenses. The actual rate of return will be a little higher than that indicated above.
• Special Surrender Value is available under this plan after the policy has run at least for one year. If, however, the policy is surrendered within two years of its commencement, as per the current income tax rules, Section 88, relief on contributions paid would not apply.
• Policy purchased in the name of children (or spouse) is eligible for the rebate under Section 88. Similarly, contributions by an HUF out of its own income made in the name of one of its members is also eligible.
• On death during the term, three times the sum assured will be payable. No guaranteed additions and loyalty additions are payable.
• If the policyholder commits suicide (whether sane or insane at the time) before the first year, that makes the policy void. However, a third party's interest acquired in the policy for valuable consideration will be entertained if a notice of acquisition of such interest has been given to the LIC office from which the policy is serviced at least one calendar month prior to death.
• Back-dating of the policy can be done within the same financial year on payment of interest at the rate of 11 per cent per annum. No waiver of interest for back-dating will be allowed. I personally dislike back-dating. The premium is paid to cover the life of the proponent when he is alive. But Bima Nivesh is different. In any case, the cover is quite small and there is a distinct advantage.

Surrender and benefit

One can buy Bima Nivesh, even on March 31, predate it to April 1 of the same financial year, and hold it for only one year and one day. Since the holding period on paper is two years, the tax rebate is not lost.

The old era related with pure endowment policy of earning rebate with a minimum-most lock-in has once again dawned.

But the penalty is quite severe. The surrender value is only 83 per cent of the sum assured and guaranteed addition. The interest payable to LIC for the back-dated period is 11 per cent.

All the same, this strategy may be useful for some of you.

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