annuity

Since I’m now on the lookout for ways and means for generating a steady investment income each month, my eyes and ears perk up at the slightest sight and sound of any financial instrument that would let me achieve that. That’s how I got interested in the LIC Jeevan Akshay VI Immediate Annuity Plan. Thought I’d quickly review this plan and see how it stacks up against my “targeted monthly investment income” strategy.

But first, some highly recommended pre-reading — features and benefits of this plan.

Now here’s what I think about this annuity plan –

  • Here’s the most important fact – Keep in mind that you, as the purchaser of this annuity plan, will never get to see your lumpsum money invested in this plan ever again once you’ve handed it over to LIC. You do have an option where your nominee or spouse gets back the lumpsum invested — but that’s only after you’re no more. Personally and financially, I’m still not at that stage where I can just close my eyes and handover a chunk of my money to LIC and forget that I ever had it. It seriously requires a big leap of faith which I might probably cross a few years down the line but certainly not today.

  • This plan is also a bit complicated with seven different flavors for paying out the annuity. The annuity amount varies with each flavor and once you choose an option it can’t be changed even when your personal situation changes (say when you get married and therefore you’d like your spouse to continue to receive the annuity when you’re no more or when you have a child and therefore you’d like to add him/her as a nominee). This lack of flexibility sounds pretty lame to me! Does LIC expect one to get through all of these stages (the minimum age at entry is 30-years) before thinking of buying this policy?

  • If you’re already married but don’t have a kid yet, the option that makes most sense is “#6 — Annuity for life with a provision of 100% of the annuity payable to spouse during his/her lifetime on death of the annuitant.” But remember, when you do have a kid, you can’t go back and opt for Option #7 (see below) which is what you’d typically want to do.

  • If you’re already married and already have a kid, the option that makes most sense is “#7 — Annuity for life with a provision of 100% of the annuity payable to spouse during his/her lifetime on death of annuitant. The purchase price will be returned [to the nominee] on the death of last survivor.”

I then ran the numbers for “example scenarios” for my case and got these results –

Lumpsum investment of Rs 5 lacs (service tax of Rs 15,450 is extra!) with Monthly Payout option –

Image of LIC Jeevan Akshay VI annuity calculation for monthly payout.

That works out to (2,990 x 12)/(515,450) = 6.96% simple interest equivalent.

Lumpsum investment of Rs 5 lacs (service tax of Rs 15,450 is extra!) with Yearly Payout option –

Image of LIC Jeevan Akshay VI annuity calculation for yearly payout.

That works out to (37,350)/(515,450) = 7.25% simple interest equivalent.

Compare that with something much much simpler — one of my Fixed Deposits that’s currently yielding (and will continue to do so for the next two years) 9.18% simple interest equivalent. That’s nearly 2% higher than the annuity!

Since both the annuity plan and the fixed deposit result in taxable income and both are subject to interest rate risk, it’s a direct apple-to-apple comparison. The annuity guarantees a fixed rate which as long as it is lower than the fixed deposit rate is disadvantageous to you. On the other hand, you don’t know what the fixed deposit rate would be say 5-years from today. So it’s a toss between predictability vs. probability.

I then ran some additional calculations to see how the yield would vary across lumpsums invested.

Image of LIC Jeevan Akshay VI yield calculations in Excel.

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Click here to download the LIC Jeevan Akshay VI (Online) Excel spreadsheet for calculating your yield.

Link to image of LIC Jeevan Akshay VI yield curve.

As you can see there’s no big variation. I also didn’t see too much of a difference in yield across the age bracket of 30 — 40-years (when you’d typically expect to be looking at ere).

Finally, to wrap things up, I don’t think I will be opting for this annuity plan right away primarily because it’s a bit inflexible given my current family situation, the yields are on the lower side, and I’m a bit hesitant to send my money into the cloud.

How about you? Do you find this plan advantageous to your situation?

Funny thing is, a few days after I’d registered myself on the portal, an LIC Direct Marketer called me up and his advise to me was that since I was only 32-years old I didn’t need a pension/annuity plan but instead needed a Jeevan Anand policy.

Maybe I should email this link to him.

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