LIC Single Premium Endowment Plan: The pros and consLIC Single Premium Endowment Plan, as the name suggests, is a life insurance policy with a single (one-time) premium. It is a participating endowment life insurance policy. Participating means that you participate or get a share of the profits of the insurer (in this case, LIC or Life Insurance Corporation of India). Endowment means that even if you survive the term of the policy, you get a maturity value. How much will you get? Unfortunately, there is no way to know this and is entirely dependent on the profits LIC makes.

The Bonus

Simple Reversionary Bonus and Final Additional Bonus: These are the technical terms to describe the share of profits of LIC that you get under this policy. It is called a bonus but isn’t really one – you are only getting what the policy is designed to give you. The insurer has to declare a ‘simple reversionary bonus’ every financial year which is a share of its profits. The bonus is declared as a percentage of the sum assured. For example, if your cover is Rs 20 lakh, the bonus might be 5% or Rs 1 lakh in FY 2018.

The insurer can also declare a ‘final additional bonus’ at the end of the policy term which is also linked to the profit it makes. This is paid out to you when the policy matures or if you die during the policy term.

Insurance companies are allowed by the regulator to illustrate the money that policyholders will get using 4% and 8% as gross investment rates of return. However, these are standardised numbers that have no relationship with actual past performance.

Death Benefit

Also known as insurance cover or life cover, Death Benefit is the amount paid out to your nominee when you die. In case of the LIC Single Premium Endowment Plan, this is 1-2 times the premium you have paid, as you can deduce from the sample premium table below, provided by LIC.

Taxation

The maturity proceeds of this policy will NOT be exempt from income tax under Section 10(10)(D) if the life cover/sum assured is less than 10 times the annualised premium. As the table below indicates, the 10 times condition is not being met by this policy. In case of the premium contribution, violation of the 10x condition will restrict your tax deduction to just 10% of the premium paid. In other words, paying 1.5 lakh toward this policy in a financial year will only get you a deduction of Rs 15,000 under Section 80C.

Policy Term

10 years to 25 years as per your choice

Age Eligibility

Minimum age is 90 days.

Maximum age is 65 years.

Sample Premiums

These are sample annual premiums per Rs 1,000 of sum assured (life cover). The minimum sum assured is Rs 50,000.

Your Age Premium Term (Years)
10 15 25
10 756.90 640.30 463.10
20 757.60 641.55 465.85
30 757.95 642.60 470.90
40 759.75 647.65 488.35
50 766.05 662.25 527.35
60 777.50 688.60

Other features

Rebates

Choosing a larger sum assured (life insurance cover) will get you a rebate (discount) on the premium you pay. The discount rates are as follows:

Sum Assured Rebate
50,000-95,000 None
100,000 – 195,000 18%
200,000 – 295,000 25%
300,000 and above 30%

Policy Lapse/Surrender

If you surrender the policy in the first year of its existence, you get 70% of your premium back. If you surrender the policy after one year, you get 90% of your premium back. In case of bonuses that have already been declared, you will be given anywhere between 15% to 35% of these if you surrender before maturity depending on the term of your policy and when you surrender it.

In addition, surrendering within 2 years of the commencement of the policy will lead to the tax deduction on the premium paid under 80C being added back to your income in the year of surrender.

Cooling-off period

You can change your mind and return the policy within 15 days of receiving the policy documents. LIC will refund your premium after deducting charges such as proportionate premium for the period covered, medical tests and stamp duty.

RupeeIQ Take:

There is a reason why insurance and investments should not be mixed. Apart from high costs, insurance policies do not make for transparent investments. There is no publicly available past track-record of returns. Unlike Mutual Funds, there is no daily NAV, no benchmark, no Riskometer and no monthly portfolio declaration of the fund. In addition, the low life insurance cover relative to your premium offered by single premium policies greatly reduces the tax benefits given to insurance under Sections 80C and 10(10)(D).

If you want insurance, a term insurance policy will serve your needs best. Such a policy will only pay your nominee when you die and in no other case. You will also be informed in advance, exactly how much will be paid out. In return, the premiums on these term insurance policies are much lower than the premiums on endowment policies such as ‘Single Premium Endowment Plan.’

That said, if you’re interested in the policy, here is the link.

Author
Neil Borate

Neil Borate is Deputy Editor, RupeeIQ. He can be contacted at neil@rupeeiq.com.