Truth about these ads: 8% Guaranteed Returns, LIC Scheme closing soon!

Are those ads that claim "8% Guaranteed Returns; LIC Scheme closing soon!" really true? Here is what you will really get if you buy those!

Truth about these ads 8% Guaranteed LIC Returns Scheme closing soon

Published: November 21, 2019 at 11:20 am

Last Updated on

You may have seen advertisements on social media that claim, “8 % Guaranteed Return from LIC, Schemes closing soon!” What is the actual product here? Do you really get 8% returns from such products? In this article, SEBI Registered Investment Advisor, Chandan Singh Padiyar explains the truth about these products and why one should not invest.

Chandan is a familiar name and face on FB group, Asan Ideas for Wealth (AIFW). You can learn more about his journey here: Fee-only Advisor Journey: Chandan Singh Padiyar finds Inner Peace. Chandan is part of the freefincal list of fee-only advisors and also Fee-only India an association of fee-only advisors. If you wish to work with Chandan for your financial plan, you can get in touch via his website: padiyars.

8% LIC Returns second type of ad circulated

As there is a popular idiom ‘The Devil is in the detail’ let us investigate the truth behind ads such as these, What is the reality of 8 % guaranteed? The following is the illustration from LIC Jeevan Umang Plan No. 845 which provides 8 % guaranteed benefit.

Jeevan Umang is a non-linked, with-profit, whole life assurance plan. As an example, a premium of Rs. 40 per year (excluding service tax) for age 20 to age 45 (25-year term) will result in a basic sum assured of Rs. 1000.

This is known as a guaranteed maturity benefit. Bonuses which are not guaranteed will be added from time to time but these are based on the sum assured. Past bonuses will not be considered.

LIC Jeevan Umang Plan No. 845 illustration
LIC Jeevan Umang Plan No. 845 illustration

Since we are trying to investigate about the 8 % mystery let us not get into other details, so here is the IRR (internal rate of return) summary to find the actual returns.

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Guaranteed Part

Sr. No.  Premium  Returns
001       (38,722)                      –
002       (38,722)                      –
003       (38,722)                      –
004       (38,722)                      –
005       (38,722)                      –
006       (38,722)                      –
007       (38,722)                      –
008       (38,722)                      –
009       (38,722)                      –
010       (38,722)                      –
011       (38,722)                      –
012       (38,722)                      –
013       (38,722)                      –
014       (38,722)                      –
015       (38,722)                      –
016        40,000           40,000
017        40,000           40,000
018        40,000           40,000
019        40,000           40,000
020        40,000           40,000
021        40,000           40,000
022        40,000           40,000
023        40,000           40,000
024        40,000           40,000
025        40,000           40,000
026        40,000           40,000
027        40,000           40,000
028        40,000           40,000
029        40,000           40,000
030        40,000           40,000
031        40,000           40,000
032        40,000           40,000
033        40,000           40,000
034        40,000           40,000
035        40,000           40,000
036        40,000           40,000
037        40,000           40,000
038        40,000           40,000
039        40,000           40,000
040        40,000           40,000
041        40,000           40,000
042        40,000           40,000
043        40,000           40,000
044        40,000           40,000
045        40,000           40,000
046        40,000           40,000
047        40,000           40,000
048        40,000           40,000
049        40,000           40,000
050        40,000           40,000
051        40,000           40,000
052        40,000           40,000
053        40,000           40,000
054        40,000           40,000
055      500,000        500,000
IRR  4.55%     2,060,000

Now the same working with assumed profit sharing (not guaranteed).

With Assumed Profit Sharing
Sr. No.  Premium  Returns
001       (38,722)                      –
002       (38,722)                      –
003       (38,722)                      –
004       (38,722)                      –
005       (38,722)                      –
006       (38,722)                      –
007       (38,722)                      –
008       (38,722)                      –
009       (38,722)                      –
010       (38,722)                      –
011       (38,722)                      –
012       (38,722)                      –
013       (38,722)                      –
014       (38,722)                      –
015       (38,722)                      –
016        40,000           40,000
017        40,000           40,000
018        40,000           40,000
019        40,000           40,000
020        40,000           40,000
021        40,000           40,000
022        40,000           40,000
023        40,000           40,000
024        40,000           40,000
025        40,000           40,000
026        40,000           40,000
027        40,000           40,000
028        40,000           40,000
029        40,000           40,000
030        40,000           40,000
031        40,000           40,000
032        40,000           40,000
033        40,000           40,000
034        40,000           40,000
035        40,000           40,000
036        40,000           40,000
037        40,000           40,000
038        40,000           40,000
039        40,000           40,000
040        40,000           40,000
041        40,000           40,000
042        40,000           40,000
043        40,000           40,000
044        40,000           40,000
045        40,000           40,000
046        40,000           40,000
047        40,000           40,000
048        40,000           40,000
049        40,000           40,000
050        40,000           40,000
051        40,000           40,000
052        40,000           40,000
053        40,000           40,000
054        40,000           40,000
055   3,530,000     3,530,000
 IRR 6.15%     5,090,000

If we see the above working the actual Guaranteed Return results in an annualized return of only 4.55 % and with assumed Profit sharing, which is not guaranteed works out to 6.15 %.

What actually is this 8 % all about?

LIC Jeevan Umang Plan No. 845 Illustration
LIC Jeevan Umang Plan No. 845 Survival Benefits

As per LIC, the 8 % Survival benefit is paid on the Sum assured value after 15 years of regular premium payment, hence in the above illustration Rs. 40,000 is 8 % of the Sum Assured Rs. 5,00,000.

However, this is not same as earning 8 % PA on your investment as claimed in the advertisements. Investors must calculate the annualized return as done in the tables above and not be carried away by the advertisements and illustrations provided by agents.

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