LIC Bima Account Plan 1

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In the tax saving season (Jan-Feb) of 2011, LIC introduced its Bima Account. Like other endowment plans, it is meant to give double benefit: death benefit to family in case of policy holder’s demise, and maturity benefit to policy-holder in case of survival. Here is a brief look at the basic features of the LIC Bima Account Plan 1 (basic):

  • Entry age- 11 to 50 years
  • Maturity age- 18 to 57 years
  • Payment mode- Yearly, Half-yearly, Quarterly, Monthly (ECS)
  • 6% guaranteed interest payable on policy-holder’s account, calculated on a day-to-day basis and credited at the end of the month
  • When a lapsed policy is in revival period, interest earned will be 5%
  • Premium can be topped-up, which is accumulated in a separate account. Top-up amount cannot exceed sum of regular premiums.
  • Sum assured- Annual premium x10 to x20 according to age and other variable factors
  • Loan available after first policy anniversary, from Rs.1000 to 60% of account balance
  • Sum assured can be decreased, with effect from next policy anniversary
  • Non-linked plan (not influenced by market fluctuations)

With its 6% interest claim, LIC seeks to provide an alternative to regular savings accounts which usually provide 4%. However, the variable component of the sum is not immediately clear to the proposer. While the plan provides a versatile source of savings for conservative investors, return on initial investment is less than traditional options like fixed deposits (9% interest).

Let us take a closer look at the drawbacks of this plan:

1.    Policy term is only 5 to 7 years. This means that it cannot function as primary life insurance for a person with a number of dependents.
2.    A large number of deductions. While all charges are transparent as promised, these deductions will eat into your premium and significantly reduce the final amount. Here is a table of all applicable charges:

 

Expense Charge on annual premium

1st year- 27.5%

2nd and 3rd year- 7.5%

Then on- 5%

 

Monthly deducted mortality charge by age on sum assured

20- 0.125%

30- 0.146%

40- 0.257%

50- 0.656%

Monthly deducted service tax on mortality charge

12.36%

 

 

 

Alteration charge

Rs.50

 

 

 

Expense charge for top-up premium

2.5%

 

 

 

 

3.     No guaranteed bonus. Minimum sum assured is 10 times the annual premium. Now if you are paying premiums for 7 years and some of it is deducted in charges, the difference between 10 times considered premium, and 7 times the premium you pay, is not much. The maximum sum assured is 20 times the annual premium for young customers, but this bonus is not guaranteed.

           ICICI PruSavings Suraksha, for example, includes 5% guaranteed benefits for the first 5 years.

4.     Electronic payment only. Although this is not an online plan, monthly payment of premium can be done only through the ECS (Electronic Clearing Service) mode.

Can you go for something else?

Many people have separate pure term plans, at a premium rate as low as Rs.8000 a year for a payout of Rs.1 crore. In comparison, a maximum term policy under LIC Bima ensures a death benefit of Rs.16 lakhs at most, for the same yearly premium. One can maintain anadditionalprovident fund or fixed deposit for long term investment needs. You may look also at offerings from other providers who give guaranteed bonuses ICICI Pru and PNB Metlife. 

Should I go for this?

LIC life insurance has created a wide network of agents and clients, making their products easily accessible. As LIC Bima Account 1 has an affordable minimum premium and a short policy term, it is not a long term commitment. Under favorable conditions, it may prove to be a reliable source of returns in the short run.