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 —
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 —
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.
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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.
No point in getting into a debate with a LIC agent. I have found most of them to be so emotionally charged that they aren’t ready to listen to any argument against LIC (or any of its policies). As per them LIC is the only genuine insurance company, all other companies are a conspiracy by MNCs to collect money from investors and will runaway any moment :)
Nice comparison. Very well written article.
Informative. However, I fail to see the connect.(ERE and plan)
As I see it, the interest rates are low currently and there is a possibility that they may go up. From that view point and also from the historical FD rates, i feel that 7.29% is lower as return compared to long term FD, specialy when income tax is applicable on both annuity and FD.
Also, managed fund/instrument will generally give lower yield compared to actively managed one due to management charges/commissions.
Great job, amazing review.
For investment horizon of more than 10 years, SIP’s in MF is the way to go…
You can easily expect returns in the range of 12% – 15%.
I guess “brainwashing” must form a good part of the Agent-training curriculum. He he he… :-)
There seems to be some rumor about Jeevan Anand doing the rounds these days. Apparently, Jeevan Anand would be phased out by the end of the month (I’m hearing this from the past two months though). So, LIC Agents don’t want us to miss this “once in a lifetime golden investment opportunity.”
I recently went to a shop to buy some coffee powder and guess what, the shop owner is an LIC Agent too. His bulletin board was full of Jeevan Anand news clippings.
A good post in itself in my opinion.
While in ERE, you’d be looking to extract the maximum possible monthly income from your investment portfolio. So, with everything else being equal, this LIC annuity is pretty lame on the returns front.
But here, and as mentioned in my previous comment, my main objective is to get the maximum monthly income out of my investment. So, my investment horizon is seldom greater than 2-years.
Really nice article vinay…you should email this link.