Policyholders of the Life Insurance Corporation of India will get 50 basis points more on the corporation's new investment plan, Bima Nivesh 2005, than they received on a similar product introduced last year.
The new, single-premium product will offer a return of 5.5 per cent for a 10-year policy and 5.3 per cent for a 5-year cover. Bima Nivesh 2004 offers 5 per cent on a 10-year policy and 4.8 per cent on a 5-year cover.
Since 2000, when the original single premium policy, Bima Nivesh, came into being, the assured rate of return on this plan has been slipping from a high of 10.5 per cent for a 10-year cover. This is the first time the return will go up.
Bima Nivesh 2005 is awaiting approval from the Insurance Regulatory and Development Authority and is expected to be launched before the close of the financial year.
"We have filed the product with the IRDA. With market interest rates rising, the 50 basis point increase is in line with the growth in returns," LIC executives said.
The returns offered in 2000, however, are not expected to be repeated since at that time fixed deposits were ruling at a 12-13 per cent interest rate. Today, banks are offering about 6 per cent interest on fixed deposits.
LIC is also awaiting approval for its unit-linked pension plan filed earlier this year. The insurance regulator has sought clarity on certain issues.
Despite the removal of tax exemption on this plan, on account of its being a single-premium product, LIC has seen a growth rate of 474 per cent in sales of this product this year.
Between April 2004 and January 2005, LIC mopped up Rs 2,071 crore (Rs 20.71 billion) from the sale of single-premium products, a large portion accounted for by Bima Nivesh 2004. LIC sold single-premium plans worth Rs 360 crore (Rs 3.6 billion) in the corresponding 10-month period last year.
With Bima Nivesh 2005 expected to be introduced before the end of 2004-2005, LIC hopes to push this growth rate further.
Despite the removal of the tax exemption under Section 88 for single-premium plans, policyholders of Bima Nivesh enjoy tax-free returns at the end of the policy period under Section 10(10D). Thus, many individuals who are not in the tax bracket tend to put large sums in this plan.
Meanwhile, exisiting policyholders can expect similar returns on traditional policies in the current financial year, in line with returns last year. This is even as old securities will be maturing this year, which were yielding 12-13 per cent returns.
LIC has over the last couple of years seen returns on its portfolio deteriorate from 10.4 per cent in 2002-03 to 9.57 per cent in 2004-05.
Correspondingly, LIC policyholders have seen returns fall by 10-11 per cent for individual policyholders as the average rate of returns on the investment portfolio stands reduced.
The return on its portfolio would have been lower last year had it not been for LIC's old investments in government securities and increasing investments in the stock market, which helped garner an additional 1 per cent yield.
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