Majority of us are still ignorant about the real monitory strength of LIC policies. For many its just a tax saving tool. For a few it is death coverage. For others it serves as a long term investment tool. But a major chunk of policies every year are sold to HNIs. This article would help to unveil some of those reasons.
In order to understand a policy document thoroughly, we need to know some basic definitions.
Unlike other financial investment portfolios, insurance policies are often treated as a contract between the insurer and the customer. Sum Assured (SA) as the term indicates, it is the minimum guaranteed amount of money an insurance company promises in case of an eventuality . Every insurance policy offers a basic sum assured as part of the contractual agreement. In LIC, all other policy calculation s such as premiums, rider premiums, bonuses are calculated based on SA.
In case of life insurance policies, the nominee of the deceased policy holder will be given the sum assured and bonuses. On survival of the policy term the policy holder will be returned the sum assured along with accrued bonuses.
Insurance policies which are termed as “with profit” often declares bonus amounts. It is nothing but the profit shared to the policy holders by the insurer. There are 2 bonuses which are often talked about in LIC plans. They are Simple Reversionary Bonus and Final Additional Bonus.
Simple Reversionary Bonus
This bonus is quite often referred to as reversionary bonus or simply bonus. Usually its value is declared, per thousand rupees, of the sum assured amount. Reversionary bonus gets declared every financial year and adds up to the previously accumulated bonus amount. It becomes part of the total liability of the insurance company. However, this needs to be paid at maturity or death claim. Bonus Information page of LIC’s official website can be used to find out bonus declarations during previous years for multiple plans.
Final Additional Bonus (FAB)
As the name suggests, FAB is an additional bonus. In LIC policies, this bonus become payable only on policies which are lasting for 15 years and more. As the policy term increases, the FAB value becomes almost equal to the premium paid by the customer each year.
For further definition of insurance terminologies like Policy Term, Premium Paying Term & Paid Up Policy; you can check out my blog page.
Guaranteed Monitory Benefits An LIC Policy Can Offer
Let us discuss the policy benefits in detail with the help of 3 simple scenarios.
Say for example, a person aged 25 years is taking New Endowment Plan with Sum Assured 50 lakhs for a period of 20 years.
Let us look some of the case studies
Case 1 : Person is Alive and is 45 Now
LIC has to give him/her a minimum of Fifty Lakhs rupees by the end of 20 years, provided that person has paid all the undue premiums. LIC can not escape from paying, because an insurance policy is a contract signed by the Life Insurance Corporation of India and the person. It can be challenged in the court, if not honored. Usually in this case the person in our example will get, rupees 50 lakhs as Guranteed Sum Assured plus Bonuses at the end of the term; Which is approximately 95,50,000 (Ninty Five Lakhs Fifty Thousand) rupees. So nearly 1 crore will be credited to his/her bank account.
Case 2 : Person died due to any medical illness
LIC has to pay the nominee a minimum guaranteed sum of 50 lakhs as Sum Assured. Say for example this condition happened in just a few months after taking the policy (provided the policy is in force), LIC has to pay the amount, as it is a legal obligation as per the contract.
Nominee will be entitled to get Bonuses, if the premiums are paid for the stipulated period notified by the Life Insurance Corporation of India.
Case 3 : Person is no more due to an accident
In this case LIC has to pay the nominee a minimum guaranteed sum assured of 50 lakhs. On top of that an additional sum of 50 lakhs also might be payable; as most of the policies nowadays are offering Double Accident Benefit (DAB). So if the person has opted for this facility, while taking this plan, their nominee will be paid double sum assured in case of an accidental death of the policy holder. The same is applicable, even if this condition happened in just a few weeks after taking the policy; provided the policy is in force. So a total of rupees 1 Crore is paid by LIC. That is the power of a contract .
Case 3 may also get Bonuses, if the policy holder had paid premiums for the period stipulated by the Life Insurance Corporation.
Tax Benefits that LIC will Offer
Tax exemptions are the unknown benefit Life Insurance Corporation offers to its policy holders. For all the above cases the paid amounts by LIC are TAX FREE! “Tax Freeness” might not be a great thing for us, unless we are struck by the surgical knife of income tax.
80(C) Tax Exemption
During the policy term, the premiums paid for the policy may be Tax Free under section 80(c) of Income Tax Act. As per the prevailing tax rules, we are going to enjoy a reduction of rupees 1.5 lakhs to 2 lakhs from your taxable income.
10(10(D)) Tax Exemption
As a rule of thumb, if we earn 1 lakh rupees from other sources, we are liable to pay 30 thousand rupees as income tax to the government (considering 30% Tax Bracket). So 70 thousand rupees only is our real earning.
The maturity or claim settlement amount received from LIC is 100% Tax Free. So earning of 1 crore rupees is wholly ours. No further tax to be paid! under 10(10(D)) of Income Tax Act 1961. One reason for High Net Income (HNI) persons to invest in LIC is this.
An LIC policy holder is liable to get the Sum Assured and other benefits, even if the Life Insurance Corporation itself is gone out of existence at the time of their claim settlement. This because of the Sovereign Guarantee of the Government of India, every LIC policy is holding.
The preamble of Life Insurance Corporation of India, section 37 says
- Policies to be guaranteed by Central Government – The sums assured by all policies issued by the Corporation including any bonuses declared in respect thereof and, subject to the provisions contained in section 14 the amounts assured by all policies issued by any insurer the liabilities under which have vested in the Corporation under this Act, and all bonuses declared in respect thereof whether before or after the appointed, day shall be guaranteed as to payment in cash by the Central Government.
Similarly section 38 says
- Liquidation of Corporation – No provision of law relating to the winding up of companies or corporations shall apply to the corporation established under this Act, and the Corporation shall not be placed in liquidation save by order of the Central Government and in such manner as that Government may direct.
This is another good reason for HNIs to favor LIC.
Believe It or Not
Some people are scared of both good and evil. Tell them something beneficial, they will not believe. Explain them exaggerated things, chances are there, they may believe. So is the case with LIC investments. Choice is yours.