Investing in LIC’s Bima Bachat – Good tax saving scheme on one time premium payment

LIC’s Bima Bhachat – Good tax saving and investment Insurance plan

Life Insurance Corporation of India

Life Insurance Corporation of India (Photo credit: Wikipedia)

I have come across a good tax saving product from LIC, Bima Bachat, even though the insurance coverage is not very high. It is available in 9/12/15 years terms. Minimum entry age is 15 years completed and maximum is 65 years next birth day (and maximum age on maturity should be 75 next birth day. ie. 65 year old can join only for the 9 year scheme.).

This product Bima Bachat -Table 175- gives 15 % of Sum Assured (S.A.) once in every three years as survival benefit. On maturity, initial amount invested plus Loyalty Addition (L.A.) is returned. This translates to 22.37 % returns in every three years ( 15000/67058 * 100) or 7.5 % every year (tax free). This compares well with even bank fixed deposits which are taxable.. Reinvesting the above mentioned money received in the same scheme for another 12/9 year period or bank deposits will boost the returns by another two to three percentage making a total of minimum 9.5 % per year. This makes the scheme one of the best investment product with best tax saving option.

The above mentioned 15 % of sum assured payment once in three years and maturity amount is guaranteed and written on policy document and on lic’s official web site. Final year Loyalty addition is guaranteed in policy document (but amount is not written. It will vary from year to year and the given amount of 8000 by me below is only for illustration.)

To illustrate, a 35 year old pays Rs. 67058 (68271 for a 45 year old; returns remains the same for any age. only premium changes for age) for one lack Sum Assured for 15 years. He or She gets 15000/- every three years (15 % of sum assured). On maturity, Loyalty Addition of Rs 8000 is received (Assuming 80 Rs per thousand of sum asured for 15 year policy(normally LIC give 70-95 rupees per 1000 rupees of sum assured for plans of 15 year term) and Initial Amount invested (Rs 67058) is returned.

Assuming one is in the 10 % tax bracket (2 lack plus to upto 5 lacks annual income), at the time of investment, one saves Rs 8717 as 10 % of premium amount as tax (6705 + Edcuation Cess @2% plus Additional Education Cess @1% =2012). On 3rd/6th/9th/12th year one’s saving comes to Rs 15450 as tax (15000 + 3 surcharge on tax). Finally the maturity amount (ie the amount paid initially) Rs 67058 is tax free. Also the Loyalty addition of Rs 8000 is tax free.

If one is in the 20 % tax bracket ( 5 lack plus to upto 10 lacks annual income ), 20 % tax plus 3 % surcharge on tax is saved.

If one is in the highest 30 % tax bracket ( 10 lack plus annual income), 30 tax plus 3 % surcharge on tax is saved.

Income Tax Benefit : For Single Premium policies, 10 % of premium paid (for policies issued from April 1, 2012 onwards OR 20 % of premium paid for policies issued in between 1st day of April, 2003 and April 1, 2012 ) is exempted from tax under Section 80 C and payments received in every three years and on maturity are exempted from tax under Section 10 (10D). Please consult your tax adviser for latest and correct information. The writer is not liable for any action the reader takes, based on the information provided above.

In case of death of the policyholder, the 15 % already paid once in every 3 three years, will not be deducted from the Sum assured amount payable.

Note : Please consult your financial adviser before investing in any financial product(s). The opinion given above is purely my personal view and should not be considered as an expert advise.

Go on a tour of Manali on the foothills of Himalayas and escape from the hassle and bustle of city life.

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Indian Financial Services Sector

Indian Financial Secror – Insurance, Capital Markets, Equity, Banking

Today I thought of writing about the financial services sector in India. I have worked in developing software for Non Banking Finance Companies (N.B.F.C.), Private Finance companies, Chitt companies. I have some exposure to Insurance and equity markets as an investor and agent.

Financial Services sector is currently down for nearly the last four years after booming for 6 years. Many a reforms have been carried out by regulatory bodies like I.R.D.A.(Insurance), S.E.B.I. (capital market), R.B.I. (Financial Sector in general and Banking in Particular), Monopolies and Restrictive Trade Practices Commission (MRTPC) which fined heavily the real estate/housing majors, The Association of Mutual Funds in India (AMFI), Govt. of India etc.

There are a large number of companies operating in this sector. It has become highly competitive and selling agents commission has come down drastically over the last few years.

Due to the strict vigil of the regulatory agencies, the investment cost has come down and one can hope that the returns gets improve over the years.

For those who invest in equity shares, the Annual Account Maintenance charges for demat accounts has been abolished a couple of months back for small investors who investment does not exceed INR 50000.

In the Insurance sector, the number of ULIP schemes, which has created a bad name for the sector, mainly due to mis-selling by agents with or without the the knowledge of the organization they represented , many were withdrawn or made close ended so that no fresh money is invested into these loss making schemes. The main mis-selling point was that it was sold as a short term product, whereas ULIP’s are for long term investors. It should not sold for the purpose of insurance as insurance component is not high in these products

In the Mutual Fund sector, AMFI’s recommendations has resulted in entry and exit load structure getting revamped. This has benefited the customers.

RBI’s enforcement of base rate linked interest rate on loans has resulted in better terms for the Banking customers. Also savings bank interest rates are now calculated on the daily closing balance (credited once in six months in case of most banks) compared to the previous system calculating interest on the least amount in the account between 10th and the last day of the month.

To summarize, these measures and the competition may lead to better investment climate..

Need for Insurance and Details of Some of the Life Insurance Products

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What is Life Insurance?

Life Insurance Corporation of India

Life Insurance Corporation of India (Photo credit: Wikipedia)

Life Insurance is a contract between two parties to pay the agreed sum to a person (or his/her nominee/legal heir) on happening of the  event insured against.

Why this article?

I have found many agents mis-selling life insurance products. Many people take policies and later found them not suitable for their needs. I have studied some of these products and thought it will better if I share those with you.

What is the need for Life Insurance? 

First and foremost reason is uncertainty in one’s life. There can be unforeseen accident, disease resulting in loss of job, situations resulting in long term treatment, death etc.  Life insurance helps mitigate the suffering to a large extent in these situations. In case of death, sum assured is paid immediately on submitting claim forms.  In case of permanent disability, future premiums are waived in many policies. Some products will pay you a portion of the sum assured yearly. Also Sum assured with bonus/loyalty addition is returned at maturity. Those who have opted for critical illness/premium waiver/accident rider gets big relief with those options.

Other benefits of taking a life insurance policy include savings, tax benefits etc.

Another major reason could be that no court of law can attach a person’s insurance amount thus making sure that at least the insurance money is safe and will reach the needy.  All other savings/investments/assets may be attached in case one is in debt.

Life insurance policies offer a different kind of liquidity which many are unaware. Other than the nomination which becomes effective only in case of death of the insured person during the term of the policy, there is a facility called ‘assignment’. The policy can be assigned to any party including unrelated third parties. Only requirement is that you need to inform to the insurance company about the party details and reasons in writing. There after all benefits payable gets transferred to the assigned party.

What are the different riders available?

Critical illness rider/Premium waiver rider available with life insurance policies helps in paying future premiums in case of agreed disease/death . This comes at a minor extra cost to most the of insurance products.

Another rider is Accident Benefit option available at INR 0.50 – 1.oo per thousand of sum assured. In some of the products it is inbuilt.

Some useful Products

I will write about term insurance in this article.

Term Insurance

Term insurance is a product where sum assured is payable only in case of death. If one survives to the end of the term no benefit is paid. It is as simple as that.

The advantage of term insurance lies in its low premium. INR 1 million (10 lacks Rupees) term insurance for a 40 year old person costs 5000-10000 per year only (depending on the insurance company one chooses) for a term of 25 years. The same 1 million INR endowment or ULIP or any other product would cost 30000 – 40000 minimum per year for a similar term.

One can take a term insurance for insurance needs and invest balance amount thus saved on taking a similar sum assured endowment policy on gold/real estate/ fixed deposit with banks/pot office/mutual funds etc. Thus one gets his/her life covered through term insurance and a much better amount than joining an endowment scheme through investments in gold/real estate/bank fixed deposit etc.

I will continue with some other life insurance products later in my next article.