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Novel features of Jeevan Saral

Jeevan Saral provides a much higher risk cover than conventional insurance plans.

THERE ARE two types of life assurance contracts. The conventional and the unit linked.

Under the conventional type, the insurer is contractually bound to pay the sum assured, along with bonuses already declared, on maturity or on earlier death of the life assured. Even if asset values fall due to adverse market conditions, the shareholders are responsible for payment of the contracted amount.

Under the unit-linked insurance, on the other hand, there is no assurance, and only promises of high returns are given. The amount to the credit of the policyholder at any point of time is stated in terms of "number of units".

The amount due to the policyholder at the time of maturity of the policy or to his family in case of earlier death will be equal to the number of units multiplied by the NAV (net asset value) of the unit on that date. Depending on market conditions, this amount can be very high or dismally low.

This means that while both risk of death and risk of adverse market conditions are covered under conventional plans, only the risk of death is covered under unit-linked plans. In lieu of this limitation of cover, unit linked plans offer liquidity.

One can foreclose his policy at any time and take the value (based on the NAV) of units to his credit, less some small deduction towards exit load. Under the conventional plans, the surrender value available in case of foreclosure is significantly lower.

The new plan, Jeevan Saral, introduced recently by the LIC, combines the positive features of the two types of contracts.

While covering both risk of death and risk of adverse market conditions, it provides also the liquidity that distinguishes unit-linked insurance. For example, if a person purchasing a Jeevan Saral policy for a term of 25 years decides to surrender (that is, foreclose) it after, say, 12 years, the maturity value, along with bonus, corresponding to a term of 12 years will be paid.

In other words, a surrender will not be treated as a foreclosure but as normal maturity. One can also surrender a part of his policy, and keep the balance policy in force, with a proportionate reduction in future premiums.

The plan also provides a much higher risk cover than conventional insurance plans. In case of death, not only the sum assured under the policy, with bonus, will be paid but also all premiums received, excluding the first year premium, will be refunded. A novel feature indeed. There are technical difficulties in combining such liquidity and flexibility with annual declaration of bonuses. Perhaps because of these difficulties, the LIC seems to have opted for only loyalty additions payable at the time of exit, by death, surrender or maturity.

The term "Loyalty Addition" is equivalent to "Final Additional Bonus" and, as far as the policyholder is concerned, the amount receivable at the time of exit will not be any different from the amount he would have received in the case of traditional annual bonuses.

How much loyalty addition can one expect ? A few years ago, a definite reply could easily have been given to this question. It is not that easy now, in an environment of continuously falling interest rates, with no one having any clear idea as to how the rates will move in future. So, the life insurance companies have been directed by the Insurance Regulatory and Development Authority to give in their sales brochure, indicative bonus additions under two different conditions, 6 per cent and 10 per cent.

That is, the companies have to state the total amount of bonus that they could pay under a policy, assuming that the interest rate will stabilise around 6 per cent or 10 per cent in the coming years.

On going through the sales brochure brought out by the LIC in respect of Jeevan Saral, it appears that the corporation's estimates are not only typically conservative but are too cautious. Independent calculations show that, corresponding to entry age 30 and annual premium of Rs.4,800 (Rs. 400 p.m), the loyalty addition available in case the interest rates stabilise around 6 per cent and 10 per cent respectively, would be,

The corporation may review its policy, keeping in view the maxim that understating the prospects is as wrong as overstating it.

One may feel that the benefits available under this new plan are too good to be true and wonder whether there is some catch somewhere. There does not however appear to be any.

Except that the corporation seems to have changed its strategy — providing for a lower profit (to the shareholder) per policy and passing the benefit of such reduction to the policyholder. However, the higher turnover resulting from such an increase in benefits will ensure that though the profit per unit may decrease, the total profit to the shareholder (the Government) will only increase. A very simple business strategy.

R. Ramakrishnan

(Actuary)

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