To calculate the returns on LIC Policies, first we need to understand various terms associated with this calculation.
In LIC there are broadly two types of plans:
I- Non Participating Plans: Plans which have no Maturity Sum Assured, needless to say no share in surplus either.
II- Participating Plans: Plans which have some Maturity Sum Assured, which may or may not be the same as Death Sum Assured (e.g. Jeevan Saral ). There are further 3 categories under Participating Plans:
a) Plans with Guaranteed Additions – Whatever the results of the company this portion is paid to this type of policy holders. In case there is profit, after paying 10% to the Govt., from the remaining portion of the surplus amount the amount of guaranteed addition is paid first. In case of loss, this amount will have to be paid from reserves. A company which does not have good profit history or does not have adequate reserves will not introduce Guaranteed Addition Plans.
b) With Profit Plans- These policy holders get the share of surplus from the sum after deducting guaranteed addition portion in the form of Bonus / Loyalty Additions / FAB etc.
c) Without Profit Plans- These policy holders get only Sum Assured. e.g. Term Insurance.
Under without profit plans there will be no bonus or GA payable to you and on the date of maturity, only the sum assured will be paid. Under term insurance plans nothing is payable if the insured person lives up-to maturity date and such plans are called non-participating policies as they are not reckoned at the time of valuation of surplus. With-profit plans are participating policies as they participate in surplus valuation and until recently 95% of the surplus was distributed as bonus to all with-profit policyholders and 5% was being given to Govt of India as its share of surplus, for the Rs.5 crores contributed by the the Govt way back in 1956 at the time of nationalisation of LIC. This 5% is sought to be revised now to 10% and 90% of the surplus getting distributed to the policyholders.
Bonus is the additional amount the policy holder will get along with the Sum assured on the maturity of the LIC Policy, provided the minimum no of premiums has been paid. When we say “Bonus”, it is “Simple Reversionary Bonus” that we are talking about. This bonus is declared at the end of every financial year and it is per thousand of the Sum Assured on annual basis. The bonus is declared in advance, however it is paid off only when your policy matures or at the death of the policy holder, whichever is earlier. In you surrender your policy you will not receive the accrued bonus. This happens so because the value calculated is a future value and you receive only a reduced amount in today’s monetary terms which comes out to be really less. You get entitled to the Accrued Bonus only if you have shelled out 5 premiums from you pocket towards your policy. The Bonus is not fixed and it may vary. No bonus has been declared for any other General Annuity or Pension plans.
In case any payment arises under the policy during the year, due to maturity, death or Surrender, before the declaration of bonus for the year, an interim bonus will be added, at the rate of bonus declared in the previous years.
Loyalty Addition (LA)
The loyalty addition is given upon the maturity of the policy, and not before. It’s a small percentage of the sum assured. Broadly speaking, loyalty addition is the difference between the performance, of LIC in the specified year and the guaranteed additions. It is LICs effort to further share its surplus after valuation with the policy holders, as LIC is a non-profit organization. The policy holder should have paid premium for a minimum specified number of years for the policy to be eligible for loyalty addition. A loyalty addition is NOT payable for policies which are surrendered. But it is payable if policy is discounted in last policy year provided last year’s premiums have remained to be unpaid.
Final (Additional) Bonus (FAB)
Final Additional Bonus is similar to the Loyalty addition that will be generally paid to the policies with Policy Term greater than 15 years. you get entitled to receive FAB only when your policy has completed 15 years which means that you have paid premiums towards your policy continuously for 15 years. If you hold a policy that offers to pay “Guaranteed Additions” then FAB would not be applicable. No Final (Additional ) Bonus is declared in respect of annuity policies.
Guaranteed Addition (GA)
Guaranteed Additions refers to the additional amount or assured sums that you will receive for a specific period at the beginning or at the end of some event in addition to the sum assured at the maturity. LIC’s Jeevan Shree-1 offers Rs 50 per Rs 1000 Sum Assured for each completed year for the initial 5 years.