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
 IRR6.15%    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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Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.
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2 Comments

  1. please do clarify somewhere that these schemes are different from the Vaya Vandana Yojana offered by LIC which actually does offer 8% guaranteed returns for senior citizens.

    1. Of course VVY is different. This is a Govt Scheme offered through LIC and is not an LIC plan. Also there are caps in Vaya Vandana Yojana – 15 lks per person, Lock-in and the returns are taxed.

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