Wealth Plus from LIC appears crash-challenging

Investors have seen the wonderful returns generated by ULIPS in the past 5-6 years, but are wary of a crash of the likes witnessed post Lehman Brothers collapse in October 2008. LIC’s latest offering, Wealth Plus, is an 8-year fixed-term product, where LIC guarantees the highest Net Asset Value (NAV) recorded over the first seven years of the policy. Such products have been introduced by several other private life insurance companies and have done well after the financial crisis.

Wealth Plus has two options — a single premium one and another plan where premium is payable for the first three years. The minimum annual premium is Rs 40,000 under the single premium option and Rs 20,000 under the 3-year premium paying term. The sum insured is a modest 1.25X the premium for single premium policies and 5X the annualized premium for policies with a 3-year payment term. The insurance cover continues for two years after the term of the policy.

According to the illustration provided by LIC, a 30-year old who invests a single premium of Rs 40,000 can look forward to getting back Rs 64,679 if the fund value appreciates 10% annually. If the appreciation is 6%, he can expect to get back Rs 47,377 at the end of eight years. On the other hand, if the same investor chooses to invest Rs 20,000 for the first three years, he can look forward to getting Rs 91,445 if the fund appreciates 10% and Rs 70,309 if the appreciation is 6%.

You can get surrender benefits only after the achievement of the third policy anniversary both under single and 3-year Premium Paying Term contract. The surrender value will be the policyholder’s fund value at the date of surrender. There will be no surrender charge. You can also avail of the partial withdrawal facility.

Analysis
Every investor knows the trade-off between risk and reward. But few know about the cost embedded in a guaranteed return. For most investors, guaranteed and assured returns are music to their ears, particularly when they have gone through a bout of volatility in the market.

In short, the working behind such products is that the highest NAV is assured by shifting assets to debt as timed by the fund manager. The downside is that the fund managers cannot allow spikes in the scheme’s NAV.