Wednesday , September 19 2018

LIC Bima Diamond Plan

LIC Bima Diamond Plan

The name LIC or Life Insurance Corporation of India is synonymous with trust. This state-owned insurance company is India’s oldest and largest insurance company that has excellent track records. The company keeps coming up with new insurance policies every now and then. The wide range of insurance products offered by this company enables it to cater to the needs of millions of Indians.

LIC Bima Diamond Plan

One of the many insurance products offered by the company is Bima Diamond Plan. Just like the plethora of products the company has to office, this plan also has its fair share of advantages and disadvantages that you should know. Just because the plan comes from LIC, it doesn’t mean that you have to trust it blindly. Remember, knowledge is power and knowledge about financial products like insurance policies will help you to prevent unnecessary hassles and stop unwanted investments.

So, before you decide to buy Bima Diamond Plan, read this detailed review and understand it properly to figure out whether this policy is perfect for your needs or not. So, let us begin

What type of plan is Bima Diamond Plan?

You have heard of moneyback policies right? This policy is a classic example of that. It is a moneyback endowment plan. What does that mean? A moneyback plan is where you are guaranteed to get your money back. An endowment plan is where you not only get a coverage for death but also get a savings component, which is paid out in form of sum assured after the maturity of the policy.

What is really interesting about the endowment policies is that the sum assured or the promised money is given back to the policy holder in either of the two scenarios:

  • If the policy holder dies within the policy term, the money is paid out in form of death benefits.
  • In case the policy holder survives the policy term, the money is paid out in lump sum on a specified date.

So either way, the policy holder will get the money. In case the policy holder survives the policy term, the money is paid out in lump sum and this lump sum money can serve towards the fulfillment of number of financial goals like:

  • Marriage of children.
  • Education of children.
  • Covering money expenses after retirement.
  • Buying a home etc.

Now that we know that the Bima Diamond Plan is a moneyback endowment plan, let us proceed further.

What are the salient features of Bima Diamond Plan?

Read carefully. You will find them interesting:

  • The tenure of Bima Diamond Plan is predefined. There are three options that you can choose from. You cannot choose anything apart from that. The three allowed tenures are 16, 20 or 24 years.
  • The duration for paying premium is less than the actual duration or tenure of the policy. For instance, in case one chooses the tenure to be 16 years, the time for which he or she will have to pay the premium is 12 years.
  • The amount of premium money one needs to pay for Bima Diamond is one of highest in industry.
  • The policy gives life coverage for an extended period of time. The extended period is actually half of the original tenure selected. For example, if you select the tenure to be 24 years, the extended life coverage will be applicable for 36 years. This 36 years is composed of 24 years of original tenure and another 12 years of extension. This 12 years is half of the original tenure. Interestingly, during the actually tenure, the life coverage will be the original sum assured. However, for the extended period, that is for next 12 years, the sum assured will be slashed to 50% of the original sum assured.
  • If suddenly you stop paying the premium for this policy, you will continue to get protection or life coverage for a duration of 24 months or 2 years. If you still do not pay the premium within that time, life coverage will no longer be provided.
  • Unlike many endowment policies, the Bima Diamond excludes the feature of revisionary bonuses paid out each year. Though the revisionary bonus is absent, you still get another advantage. There is a component called loyalty addition wherein, you earn a loyalty amount after the insurance policy has attained a certain age.
  • Riders can be added to the policy. The three applicable riders include New Term Assurance, Disability and Accident riders.
  • The maximum sum assured you can ask for in this policy is INR 5 lakhs. You cannot ask for a sum assured higher than that.

What are the pros and cons of Bima Diamond Plan by LIC?

This is important. You need to know the set of advantages you get as well as the set of disadvantages this policy will have. This knowledge will help you make a right decision about whether you really need it or not or rather the policy will be beneficial for you or not. Let us find out the pros and cons of the plan in a tabular format.

Pros or Advantages of Bima Diamond Plan by LIC
# 1 It may happen that you get into a sudden financial distress which prevent you from making payments towards the policy. Most other policies will simply stop offering life coverage once you stop paying premiums. This isn’t the case here. You continue to get life coverage till two years from the date of stopping the premium payments. You can resume the payments within that time.
# 2 Because the life coverage is provided for an extended period of time, you can actually enjoy insurance coverage up to the age of 76 years. There aren’t may policies around that can match this feature.
# 3 If you want to enhance the death coverage offered to you, you can always do so by taking accident rider and new term assurance. These are essentially beneficial for those who are employed in risk job profiles or live in areas which have statistically higher numbers of accidents.
# 4 If your earnings last for short periods, this is a policy you should go for. Since, you can stop paying premium and still enjoy life coverage, you can resume payments when your earning season begins.
Cons or Disadvantages of Bima Diamon Plan by LIC
# 1 The premium you need to pay for this policy is actually very high. For a sum assured of only INR 5 lakhs, you actually need to keep paying an annual premium of up to INR 46 thousand! That’s too expensive.
# 2 A premium of INR 46 thousands can translate into a sum assured of INR 20 lakhs. A person who is paying that much premium a year will usually not go for a sum assured as tiny as INR 5 lakhs.
# 3 The extended life coverage that is promised actually slashes the sum assured by 50%. Well, that means the sum assured becomes INR 2.5 lakhs. INR 2.5 lakhs after 16 or 20 or 24 years will be like peanuts! That amount will barely last for a few months!
# 4 The sum assured that is given on maturity (that is if the person survives the policy term) will be too less. This policy deducts the payments for period moneyback from the maturity sum assured. So, if you are going for a 20-year policy and you survive the policy term, and the sum assured was originally INR 5 lakhs, the maturity sum assured will stand at INR 2 lakhs after deducting the periodic moneyback payments. INR 2 lakhs after 20 years? A novice in economics can say that it will barely cover monthly expenses for 2 to 3 months.
# 5 In this Bima Diamond Plan, LIC is offering a return rate of 5% to 6%. Go for PPF instead and you will earn higher interest rates!

What is the return rate of Bima Diamond Plan from LIC?

How do you think an endowment policy manages to pay maturity sum assured? Well, simple! The policy takes the premium money and invests it in market, makes profit and then pays back a part of that profit to the policy holder.

So basically, an endowment policy is more like a financial investment wherein you also get to enjoy life coverage.

Now, since endowment policy becomes a financial product which involves investment in market, it is fairly logical to compare the same against other financial products. Any sane person will look into the returns offered by a financial investment.

So, if you really want to get the details of the rate of return that this policy is offering to you, you need to follow a few steps. These steps will involve:

  • Getting the amount of annual premium you need to pay in order to get the sum assured you want.
  • Find out the present value of the total premium you will be paying towards the policy.
  • You need to deduct from first premium you pay, the death cover premium you need to pay.
  • You need to then calculate the investment component’s IRR or Internal Rate of Return.
  • Now you need to ensure that the loyalty addition is factored in and once that is done, you need to recalculate the IRR or Internal Rate of Return.

Let us start with one step at a time.

Step 1: Finding annual premium you need to pay for the death coverage.

For this, we will need to know how much goes in for life coverage and how much money goes in for investment in market. Unfortunately, LIC will not tell you that. So, you have to take a different route for calculating the same.

How do you do that? We need to use a Term Insurance Plan to figure it out! A term insurance gives only and only death coverage. If you die within the term, your nominee will be paid and if you don’t die, you will just lose the money.

Now let us take an example.

Mr. X who is 30 years old goes for Bima Diamond. The sum assured he asked for is 5 lakhs, which is the maximum allowed under this plan. He decided that the tenure of the policy will be 20 years. For this, he actually needs to pay a yearly premium of INR 37,850 (that’s the exact amount you need to pay if you are 30 years old and you are going for Bima Diamond with aforementioned specifications).

For the first 20 years, his sum assured will be 5 lakhs. For the next 10 years (the extended period), the sum assured will be 2.5 lakhs.

So, by opting for Bima Diamond, Mr. X will have the following features at his disposal:

  • Term assurance of INR 5 lakhs for 20 years.
  • Term assurance of INR 2.5 lakhs for next 10 years.
  • He will get a period moneyback of INR 75,000 four times during the tenure during the intervals of 4th year, 8th year, 12th year and 16th year.
  • If Mr. X survives, he will get maturity sum assured of INR (5 lakhs – 4×75000) = INR (5 lakhs – 3 lakhs) = INR 2 lakhs.
  • He will get some loyalty amounts when the policy matures.

Now, there is no term insurance policy with LIC which has a coverage of less than 6 lakhs. So, we opt to take Amulya Jeevan plan.

Let us assume that you opt for Amulya Jeevan and go for a sum assured of 25 lakhs. Divide 25 lakhs by 10 and you get 2.5 lakhs.

Now premium you need to pay for getting a sum assured of 2.5 lakhs for a tenure of 20 years stands at INR 574 in a year.

Similarly if you want 2.5 lakhs sum assured for a tenure of 30 years, you get a yearly premium of INR 582 in a year.

These premiums can be easily calculated using the premium calculator of LIC.

Now, we know that Bima Diamond will allow the maximum sum assured of only 5 lakhs. Mr. X selected the tenure to be 20 years and because of the nature of the policy, he will get an extended coverage till 30 years.

But exactly how much amount is he paying for the death coverage component?

From Amulya Jeevan we see that for total of INR 5 lakhs of coverage for 20 years, one needs to pay annual premium of INR (574 + 582) = INR 1156. After 20 years, the annual premium for INR 2.5 lakh coverage stands at INR 582 only.

Step 2: We need to find present value of all premiums that go towards death coverage

In step 1, we say that premium for INR 2.5 lakhs of term insurance comes to 574 and 582 respectively for 20 and 30 years. However, in case of Bima Diamond, Mr. X needs to pay premium only for 12 years. So, the premiums cannot be directly compared. For this, we need the present value of premiums paid towards death coverage.

You can use several online calculators at achieve this. However, we already did that and it stands that:

  • For a term plan of 20 years and sum assured of INR 2.5 lakhs, the present value stands at INR 6,507.
  • For a term plan of 30 years and sum assured of INR 2.5 lakhs, the present value stands at INR 7,727.

So, the total expense for getting the death coverage will stand at INR (6507 + 7727) = INR 14,234.

Step 3: Deducting the premium for death coverage from first premium paid

Here we are only simplifying things and hence we make this deduction from the first premium only while keeping the subsequent premiums for Bima Diamond at its level of INR 37,850.

The deduction gives us: INR (37850 – 14234) = INR 23,616.

Okay, so INR 23,616 is the amount of the premium which goes for investment.

Step 4: Calculate internal rate of return

There is a formula provided by LIC. We simply use it and we find that the internal rate of return is actually 1.60%

For the purpose of this calculation, we had to use the amount INR 23,616, which is basically the investment component.

So, LIC is giving a return of only 1.6%! Isn’t that surprising?

However, LIC says that if someone pays premium for 10 years straight, he or she become eligible for loyalty additions.

Step 5: Including loyalty addition for calculating IRR

LIC has not clearly mentioned the loyalty addition amount. However, the Jeevan Saral policy of LIC currently gives loyalty addition of INR 300 for every Rs 1000 of sum assured. If we simply assume that Bima Diamond will give the exact same loyalty addition rate, the loyalty amount at end of policy tenure will stand at INR 1.5 lakhs.

If we add this INR 1.5 lakhs to the IRR calculation, the IRR now stands at 4.35%. This will not be the final value though because the loyalty addition will definitely change if the sum assured changes.

Step 6: Factoring in the tax benefits.

This is an additional step. We know that investing in an insurance plan will allow space for tax benefits under Income Tax Act’s Section 80C.

So, we should not exclude this. 80C allows tax benefits up to 1.5 lakhs a year. However, if components like home loan principal, tuition fees and EPF comes in, the tax benefits from insurance investments may cease to exist. So, keep that in mind.

Now, let us take a look at the table below:

Rate of loyalty addition IRR IRR required for tax deductions at 10% tax slab IRR required for tax deductions at 20% tax slab IRR required for tax deductions at 30% tax slab
No loyalty addition at all 1.60% 3.08% 4.92% 7.26%
Loyalty addition at rate of INR 100 for every INR 1000 of sum assured 2.65% 4.12% 5.91% 8.19%
Loyalty addition at rate of INR 200 for every INR 1000 of sum assured 3.56% 5% 6.75% 9%
Loyalty addition at rate of INR 300 for every INR 1000 of sum assured 4.35% 5.77% 7.5% 9.71%

Of course, you don’t fall under taxation even if loyalty addition is 300 rupees for every 1000 rupees of sum assured and you fall under the lowest tax slab.

This is good!


Should you go for LIC Bima Diamond?

The answer to this question is STRICTLY NO! The rate of return is way too low. You can make way more money by investing in mutual funds or other investment avenues. In case you want a life coverage, all you have to do is go for a simple plan that gives you death coverage. You really don’t need to mix insurance and investment in a single product. It will only lead to losses.

In fact, LIC has this track record of offering extremely low rate of returns for all its endowment plans. The problem is that LIC agents will kind of leech on to you and nearly force you to buy an endowment plan. The reason is very simple! The higher the insurance amount you pay, the higher the commission they earn. Traditionally, endowment plans always have high premium requirements and it makes really no sense to go for endowment plans.

In case of Bima Diamond, it is the worst because it has highest premium requirement of all endowment plans from LIC and it has ridiculously low returns. The only thing is that the loyalty addition will not attract taxes provided you do not have any additional investments that already enjoy 80C benefits. If you have investments enjoying 80C benefits, the loyalty additions will attract taxes, making the plan even more worse!

So, if you are looking for insurance and investment at the same time, here is a quick advise for you – for a simple term plan and invest somewhere else like Mutual Funds or PPF or Kisan Vikas Patra or something similar, which will provide you way better returns! Investing in Bima Diamond will be pure foolishness! Be wise, not a fool!

Other Articles

Check Also

Your Credit Score Will Impact Your Home Loan EMI Cost

Your Credit Score Will Impact Your Home Loan EMI Cost

Your Credit Score Will Impact Your Home Loan EMI Cost Your credit score is about …

Leave a Reply

Your email address will not be published. Required fields are marked *