A Policy Injurious To Health
During his budget speech, Mr. Chidambaram announced a new Sec. 80CCC wherein contribution out of taxable income during a financial year upto Rs 10,000 to a new pension plan, Jeevan Suraksha of LIC, would be exempt from income tax. As the details were not clear at that time, he gave a typical example which appeared so insipid I thought I had made a mistake somewhere.
Now that LIC has launched Jeevan Suraksha, I am distressed more than ever before. The plan appears to be a close cousin of the new Employees' Pension Scheme, which was opposed by most trade unions. The scheme was designed by the Congress when in power and I strongly feel that every opposition party, including the UF if they were in the opposition, would have resisted this move to gobble up Rs 9,000 crore of the workers but the bill was presented in the UFs budget session and with Congress backing, was passed.
The scheme: The EPS provides for 50 per cent of the pension to the surviving spouse and 25 per cent to two children upto the age of 25. Thereafter, the capital is gobbled up by EPS. In Jeevan Suraksha, it seems the capital will be swallowed by LIC after the pensioner's death. There is an option for the spouse to get 50 per cent of the pension, but at a cost. No cognisance of children is taken by LIC, as in the case of EPS. The following are its salient features :
Life Cover: Policies are available with or without life cover. Jeevan Suraksha uses the words life cover uniquely. Policies taken with life cover give 50 per cent pension to the spouse until his/her death. However, this involves a cost. Life cover has nothing to do with the death of the policy holder if he dies before the deferment period. In fact, there is a severe penalty imposed on him if he is silly enough to choose to die during this period.
Eligibility: Min./max. age of entry 30/60 years; min./max. vesting age 55/70; min./ max. term 5/35; min. annuity Rs 250 p.m;. min. instalment: Rs 1,800 per year, payable annually, half-yearly, quarterly or monthly.
Benefits on vesting date: At vesting age, annuitant gets a life annuity payable monthly, in arrears based on notional cash option available on vesting date.(See table) The post maturity pension works out at 1.09 per cent p.m. for all the options. This is equal to a nominal rate of 13.08 per cent p.a., paid monthly or 13.89 annualised. Sorry! The entire amount is swallowed by LIC after the annuitant's death. Policy with life cover gives the pension, at a reduced rate of 50 per cent to the spouse on whose death LIC swallows the capital.
Benefits on the vesting date: These must be used at least six month before the vesting date.(i) Choice of annuities guaranteed for 5, 10 or 15 years and life thereafter. Or Joint life and last survivor annuity where annuity is payable to survivor. (ii) Buyer can take 25 per cent of the notional cash option in lumpsum and balance as per chosen option. Those who choose the scheme must opt for this commutation facility, because, firstly, the commutation is tax-free under the new section 10(10Aiii); also, the pension is given at a ridiculous rate of 1.09 per cent on the capital, that is, a nominal 13.08 p.a. (=1.09X12) and 13.89 annualised.
Benefits (?) during the deferment period: Now for the worst provisions. A. For policies with life cover: (i) On annuitants death, spouse gets at least 50 per cent of normal pension for life which the buyer would have been entitled to, had he survived upto vesting age. (ii) If spouse is not alive, nominees get proportionate notional cash option in lumpsum. B. For policies without life cover: Death within (i) 3 years, return of premia (ii)between 4th & 6th year, ditto with 8 per cent interest p.a.(iii) after 6th year, return of premia at 9 per cent p.a.
Medical Examination: Proposal with life cover: A separate non-medical limit of Rs 2 lakh allowed upto entry age of 40. Else, a medical is a must at customer's cost as is age proof.
Analysis: Take Mr. Chidambarams example, where a person of 30 enters Jeevan Suraksha for 30 years and begins getting the pension thereafter. Rs 250 invested at the nominal rate of 0.85 per cent p.m., i.e., 10.20 per cent p.a. (=0.85x12) has a maturity value (MV) of Rs 5,83,544 after 30 years. At this stage, 25 per cent of it, Rs 1,45,886, can be commuted minus tax liability. It is sheer foolhardiness not to opt for commutation. But then the pension payable reduces proportionately. The pension, after commutation or otherwise, is fully taxable, works out at 1.09 per cent per month i.e., 13.08 p.a. (=1.09x12). Sorry again. LIC swallows the capital on the pensioners death.
Incidentally, Rs 250 contributed for 30 years at the nominal rate of 1 per cent per month (12 p.a.) will have a MV of Rs 8.74 lakh!! Taking the commuted value of Rs 1 lakh, the pension at 1 per cent p.m. would be Rs 7,740. Moreover, on the annuitants death, the heirs can collect the capital of Rs 7.74 lakh. When the investor can earn more than 12 per cent by investing in PSU bonds or liquid growth schemes of MFs, and arrange for a pension by monthly partial withdrawals, I wonder who will opt for Jeevan Suraksha. Yes, there is no tax concession on contribution to MFs/bonds, but is it worthwhile opting forthe same?
Tax concession: Contributions by an individual (and not HUF) from taxable income to Jeevan Suraksha attracts deduction of amount paid (excluding interest/ bonus accrued or credited to the assessee's account) upto Rs 10,000 us 80CCC. Rebate u/s 88 is not available. If the assessee/ nominee surrenders the annuity before maturity, the surrender value is taxable in the recipients hand in the year of the receipt. The pension received by the assessee or his nominee is fully taxable.
If an assessee in the 40 per cent tax bracket joins the plan with a contribution of Rs 250 per month, his actual out-of-pocket contribution is Rs 150. The rest comes from tax savings. If the outgo is Rs 150 for 30 years and the rate is 1 per cent per month, the MV is Rs 5.24 lakh. Needless to say persons in the lower tax bracket will lose more. Also an investor can invest this amount how he likes and, importantly, the money can be collected by the heirs or nominee.
While postponing the decision on freeing the insurance sector the FM has hit on `Jeevan Suraksha' and expects GIC to offer `Jan Arogya'. Thankfully, he has advised LIC and GIC to adopt modern information technology and LIC to review the premium structure which has remained frozen since April 1980, despite the marked decline in the mortality rate.
To sum, this scheme is most harmful to the financial health of the policy holder. It would appear that the returns are as poor, if not poorer, as in the case of EPS. I hope to God that I am wrong.