Recently LIC declared the bonus rates for the year 2021 – 2022 (As per March 2021 valuation). Let us see the complete details about LIC Bonus Rates – 2021- 22 and how they affect your life insurance returns.
LIC of India has declared the latest bonus rates for the valuation period 1 st April 2020 to 31st March 2021.
Meaning of bonus for LIC policies
When you buy a traditional with profit product from LIC, then your returns from such policy mainly depend on what will be the rate of bonus. LIC declares bonus on the yearly basis. Usually, you will not find any such drastic change. But it is always better to track the bonus rates.
Let us say you bought LIC’s Jeevan Anand for the term of 20 years and the sum assured as Rs.5,00,000. If LIC declared a bonus as Rs.45 for this product, then the calculation will be as below.
The bonus rates will be based on three criteria.
# Term of policy-Higher the tenure means higher the rate.
# Sum Assured-LIC bonus depends on per Rs.1,000 of Sum Assured. Hence, if you bought higher sum assured policy, then your bonus accumulation will be at the higher end.
So from above example, if LIC declared you Rs.45 as bonus per Rs.1,000 sum assured for 20 years policy, then the bonus accumulation for that year will be as below.
Rs.22,500=(Rs.45 x Rs.5,00,000)/Rs.1,000.
Remember this Rs.22,500 will not be payable to you. But it will be with LIC and you receive this amount during the time of death claim or maturity. The most important point to note is that they will not add any amount on this Rs.22,500. It will remain the same till the period of death claim or maturity date.
There are various types of benefits LIC policies offer you like Bonus, Loyalty Addition or Final Additional Bonus.
Types of LIC benefits
# Simple Reversionary Bonus
LIC will declare this on yearly basis and added to your policy account. You will get it either at maturity or if there is a death claim. If you decide to exit from the policy during the policy period by surrendering it, then a certain portion of such accrued bonus will be payable to you. Do remember that this type of bonus does not compound every year and hence it is called a simple reversionary bonus.
# Final Additional Bonus (FAB)
Final Additional Bonus (FAB) is a one-time additional bonus, which is paid along with the maturity amount. It is an additional one-time bonus along with the simple reversionary bonus and added to the policy account. As I told you, it is a one-time payment you will receive at maturity, death claim if you surrender it (one year preceding the date of maturity).
# Loyalty Bonus (LA)
Based on the policy features, certain LIC policies are eligible to avail this LA. LA is also a one-time payment kind of benefit. Unlike the simple reversionary bonus, which becomes a part of the policy benefits as and when it is declared, loyalty additions shall be available to the policyholder only at the time of exit from the policy. Hence, they became the part of policy benefit at once during the policy exit (due to maturity, death, or surrender)
How to calculate returns for your LIC policy?
In simple, I explained how to calculate bonus for a year. But LIC offers different products like the endowment, limited endowment or money back plans. In such a situation, you may find it difficult to calculate returns on your LIC plan. Hence, I created a video about this.
The below video will explain to you how to calculate returns on your LIC plans using an excel sheet. It is too simple and convenient for you to calculate.
LIC Bonus Rates – 2021- 22 | Complete details
Hope you got clarity about the importance of bonus rates for your traditional plans. Now let us concentrate on recently declared LIC Bonus Rates – 2021- 22.
The below reversionary bonus rates are applicable for the policy year entered upon during the inter valuation period i.e. 01/04/2020 to 31/03/2021 and in force for full sum assured as on 31/03/2021. It would apply to policies resulting into claims by death or maturity (including those discounted within one year of maturity) or surrendered on or after 01/01/2021.
The interim bonus rates are applicable to policies in respect of each policy year entered upon after 31/03/2021 and result into claims by death or maturity (including those discounted within one year of maturity) or are surrendered during the period commencing from 01/01/2021 and ending 9 months from the date of next valuation.
This time, I separated the plans in two ways. One for the old policies which are closed and another list for the new policies which are currently available for purchase.
The below bonus rates are for the old plans.
LIC Final Additional Bonus Rates – 2021- 22
As explained above, Final Addition Bonus (FAB) is a one-time additional bonus paid along with the final payment of the policy. The minimum term required for the eligibility of the Final Additional Bonus as per the current valuation is 15 years also, FAB rates increase with the increase in sum assured of the policy.
These Final (Additional) Bonuses are applicable In the case of Plans of Groups 1, 2, 8, 9, and 10 mentioned below.
- (Group 1) Whole Life type (Plans 2, 5, 6, 8, 10, 28 (Before Conversion), 35, 36, 37, 38, 49,77,78, 85 & 86)
- (Group 2) Endowment type (Plans 14, 17, 27 (After Conversion), 28 (After Conversion), 34, 39 40, 41, 42, 50, 54, 79, 80, 81, 84, 87, 90, 91, 92, 95, 101, 102, 103, 109, 110 & 121)
- (Group 8) Jeevan Mitra (Double Cover plan), Jeevan Saathi (Plans 88 & 89)
- (Group 9) Jeevan Mitra (Triple Cover Plan: Plan 133 )
- (Group 10) Limited Payment Endowment (Plan 48)
Let us now see the FAB rates for special plans where the FAB is different from the above rates.
LIC’s Jeevan Saral – Loyalty addition rates 2021-22
LIC Jeevan Saral plan was one among the popular many where many investors invested. Hence, let me share the LA rates of this plan.
LIC Bonus Rates – 2021- 22 – Is it really add value?
Look at the current and past bonus rates of LIC. They are not increasing drastically. In fact, for many policies, the bonus rate is the same for many years. Obviously because of this and no additional return on such declared bonus will erode your return part. Let me share with you one of my client’s real experiences and this seems to be the classic example of how low-yielding such policies will result in a difficult time for you in the future. I am not pointing LIC alone here. It is the case with all insurer’s products where if you invest in such endowment or money back kind of products.
Think and act wisely rather than just running behind someone’s recommendation. If you still feel such 5% or 6% returns are fantastic for your long-term wealth creation, then please go ahead and buy these products. Otherwise, you have to think seriously.
To give you more clarity on how this bonus in a traditional plan works and erodes your wealth, let me take an example. Assume that you took a traditional plan of Rs.5 lakh Sum Assured and the term is 20 years. Let us assume that the bonus rate for this plan is Rs.50 per Rs.1,000 Sum Assured. Hence, each year the insurance company will declare the bonus for your policy of Rs.25,000 (Rs.50*Rs.5,00,000/Rs.1,000). As this declared bonus will not participate in any future growth its value will depreciate with each passing year. If we assume 6% inflation rate, then the first year’s bonus of Rs.25,000 will be worth just Rs.7,715 after the 20th year. Because as it is not earning anything, its value depreciating by each year. If we consider the depreciation of such each year’s bonus, then the same can be graphed as below.
At the policy tenure end, you feel that the insurance company giving you Rs.5,00,000 as a bonus (Rs.25,000*20). However, due to inflation of around 6% and its zero return on each year’s such bonus, it will be just around Rs.2,95,782 (sum of each year’s final value on 20th-year post 6% depreciation). The final difference between the total bonus to the depreciation value due to inflation is a whopping of around 40%. Due to low yielding nature, such products are not suitable for your long-term wealth creation.
Hence, whether it is LIC or some other insurers, never combine your insurance with investment and think of real returns than the plain return numbers.