Nothing novel in LIC’s latest offering

Aadhaar Stambh and Aadhaar Shila are traditional endowment policies with poor returns

LIC last week launched the Aadhaar Stambh and Aadhaar Shila — both endowment plans. No medicals are required, and no tedious KYC procedure; the only pre-condition being the individual should have an Aadhaar card. Soon, you may have an LIC agent pitching these plans to you. Here is a lowdown to help you decide.

Plan features

Individuals up to 55 can buy these policies. While the maximum term offered is 20 years, the policy matures when the individual turns 70. The maximum sum assured offered is ₹3 lakh and the minimum ₹75,000.

Premium can be paid monthly/quarterly/semi-annually or annually. There will be a rebate of 2 per cent on premium in the yearly mode and 1 per cent in the half yearly mode. You can get a discount on premium if you opt for a sum assured higher than ₹2 lakh — discount of 1.5 per cent for ₹2-2.9 lakh and 2 per cent for ₹3 lakh.

On death of the policy holder, the nominee will be paid the sum assured plus loyalty additions if any.

However, note that there will be no loyalty additions in the first five years. So, if the policy holder dies in the initial five years, his/her nominee will only get the sum assured.

Aadhaar Stambh and Aadhaar Shila are two versions of this plan. The first one is designed specifically for men and the second for women. All features but for the amount paid on the death of the insured is the same in the two plans. In Aadhaar Shila, on death of the policyholder, her nominee will get 110 per cent of the sum assured.

On maturity, that is, in case of the policy holder surviving the term of the policy, he/she will be paid the sum assured plus loyalty additions, if any.

The plan offers accidental death cover rider. If you pay an additional premium, in case of death due to accident, the nominee will get twice the sum assured. While life insurance policies usually lapse after the premium remains unpaid for 30 days, in this endowment plan from LIC, there is a leeway.

If premium for three years is paid and then discontinued, the cover will continue for six months. Similarly, if the premium has been paid for five years continuously and then let to lapse, the cover will continue for two years from the date of last premium payment.

What you should do

LIC’s Aadhaar Stambh (for men) and Aadhaar Shila (for women) are normal endowment plans. While by doing away with medical tests and asking for only your Aadhaar number for a sign-up may make the investment process simpler, but, it is not the optimal choice either as an insurance or as an investment.

The policy offers a maximum sum assured of only ₹3 lakh. This cover for life insurance may suffice people with annual income of ₹25,000-30,000. (The thumb rule is that the life insurance should be for at least 8-10 times the annual income).

If the intention is to target the lower middle-income group, then the question arises whether they can pay the high premiums under the plan. Sample this: For a 30-year-old male, premium for ₹3 lakh cover of Aadhaar Stambh is ₹10,337 a year (without taxes). If he pays the same amount, he can get a pure risk term life insurance in the market for ₹50 lakh. The returns from the policy are not any great either. From the same example above, a 30-year-old male who pays ₹10,333 a year, for a ₹3-lakh policy, will end up paying ₹2,06,500 in 20 years.

The guaranteed maturity amount is ₹3 lakh. He may get some loyalty additions but they are not guaranteed. It depends on the company’s profits and experience in a specific policy. But still, looking at loyalty additions announced in previous years by LIC, you can assume that for a ₹3 lakh sum assured policy, the loyalty addition can at best be ₹30,000-40,000.

So, for an investment of ₹2,06,500 over a period of 20 years, one may get about ₹3,40,000 — an internal rate of return (IRR) of 4.9 per cent.

Such a petite return may not suffice to cover even inflation in the next 20 years. Taking a term life insurance and investing the balance in a mutual fund would do you greater good.

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