Are you stuck with an endowment policy from Life Insurance Corporation, or LIC, and don't know what to do with it? You know that the returns will not be more than 6% a year but cannot surrender the policy as that may mean losing 60-70% premium that you have paid over the years. The life covers that these plans offer don't have much to boast about either.
Ask any financial planner and he will tell you how you have erred by buying an endowment insurance plan instead of a term plan, a pure insurance product.
However, all is not lost. You can still salvage yourself partially by availing of the 'fringe benefits' of your LIC policy or any other endowment plan.
The biggest benefit of having an LIC policy is that you can take a loan against it at a reasonable rate. LIC offers loans against its policies at 10% a year. The interest is payable every six months. The interest rate on loan against an LIC policy was 9% a year ago. It was increased to 10% around March 2012.
Usually, the interest rate on loans against endowment policies is benchmarked to the 10-year reference rate. The interest rates can be 100-200 basis points above the reference rate, which is a combination of prevalent rates on government securities and corporate bonds. Private insurers offer loan against endowments polices at a higher rate of 11-14%.
The loan amount can be up to 90% of the surrender value and bonus accrued. In paid-up policies, the loan limit is 85% of the surrender value.
An endowment policy acquires surrender value after premiums have been paid for three years. It is 30% of basic premiums paid, excluding the first-year premium. Premiums for riders such as accidental death benefit are not included in the calculation.
Considering that interest rates on personal loans are 14-20%, a loan against endowment policy at 10-11% a year is not a bad option. Suppose you have taken a personal loan of Rs 1 lakh at 15% a year for five years. Your monthly instalment will be Rs 2,650 and interest paid during the loan tenure will be Rs 42,750. However, if the interest rate is 10%, the monthly instalment will be Rs 2,125 and the interest paid during the loan's five-year term will be Rs 27,500. Thus, you save Rs 15,000 by opting for a loan against the policy. Also, since these are secured loans, the documentation involved is minimal.
The minimum tenure of an LIC loan is six months
. If there is a claim either due to maturity of the policy or death within six months from the date of the loan, interest is charged only up to the date of maturity/death.
You can either repay the loan with interest or pay just the interest and allow the principal amount to be deducted from the accumulated corpus during claim settlement. These loans can be taken more than once by clearing the earlier ones.
Banks, too, offer loan against insurance policies (only approved endowment plans), though they charge a higher rate than insurance companies. For instance, State Bank of India is offering loans against LIC policies at 14.20% or 4.5% above the current base rate. Axis Bank is charging up to 15%. Still, these are much less than personal loan rates, which can go up to 20%.
"Though availing of a loan against an insurance policy is like borrowing your own money, people stuck with these plans can use these benefits," says Shipli Johri, a Gurgaon-based financial planner.
"You can get a decent loan amount against an insurance policy, only if you have paid the tenure for a relatively longer term (over 5 years)," says Jitendra Solanki, a New Delhi-based financial planner.
Another 'benefit' of an LIC policy, though not very significant, is that the LIC certificate, being a government document, is accepted as an address proof while applying for a driving licence or in Know Your Customer procedures of some financial institutions.
Though ideally one should buy only term plans and keep investments and insurance separate, it is no secret that endowment plans, especially from LIC, have been very popular among investors. These schemes offer little return and life cover, but premature closing may not be the best option.
So, if you are among the investors with an endowment insurance plan, do not forget to avail of the fringe benefits offered by endowment plans.