Millions of Indians invest in traditional life insurance policies like LIC New Jeevan Anand, combining life cover with long-term savings. However, a recent analysis by personal finance expert Nikhil Jha raises a critical question: does the maturity payout truly justify locking in funds for decades?
The Numbers Behind a 25-Year Policy
Jha examined a specific LIC New Jeevan Anand policy with a basic sum assured of ₹5 lakh over a 25-year term. The policyholder paid annual premiums of ₹21,400, accumulating a total investment of ₹5.35 lakh over the policy's duration. At maturity, the policy paid out approximately ₹11.5 lakh, comprising the basic sum assured and accumulated bonuses.
While this maturity amount is more than double the total premiums paid, Jha's calculation of the Internal Rate of Return (IRR) tells a different story. He found the annualized return to be a modest 5.47%. This figure highlights the importance of evaluating annualised returns rather than focusing solely on the final lump sum, as premiums are paid over many years, not as a single upfront investment.
Why Maturity Payouts Can Be Misleading
LIC New Jeevan Anand is a participating, non-linked plan that offers both life insurance and savings, with bonuses declared by the insurer. The maturity benefit includes the basic sum assured, vested simple reversionary bonuses, and potentially a final additional bonus. While the basic sum assured is fixed, the bonuses depend on LIC's declarations and policy conditions, which can fluctuate.
Jha emphasizes that judging an insurance policy solely by its projected maturity benefit can be misleading. The actual return needs to account for the time value of money, considering when each premium was paid and when the benefit was received. He also noted that while the policy offers a death benefit even after maturity, the life cover might be insufficient for individuals with significant financial obligations like home loans or dependent children.
Considering Alternatives: Term Insurance and Mutual Funds
For many investors, an alternative strategy could offer better returns and more adequate life cover. Jha suggests comparing traditional insurance policies with a combination of a pure term insurance plan (for sufficient life cover) and systematic investments in mutual funds (for wealth creation).
Such a comparison should factor in the cost of adequate life coverage, potential investment returns, market risks, taxation implications, and the timing of cash flows. While mutual fund returns are market-linked and not guaranteed, they generally offer the potential for higher growth over the long term compared to the conservative returns of traditional plans.
Ultimately, Jha's central message for policyholders is to calculate the eXtended Internal Rate of Return (XIRR) for all premiums paid and benefits received. This provides a more accurate and meaningful assessment of the real returns on their investment, enabling informed financial decisions before buying, surrendering, or continuing a policy.