LIC SIIP is not SIP. I repeat. LIC SIIP is not a SIP that you know about.
LIC has a ULIP plan which is (surprisingly) called LIC SIIP (2023). Why the choice of name is surprising is that the word SIP is quite popular with mutual fund investors and it seems that LIC decided to capitalize on that fact.
And in 2020, it launched a ULIP plan called LIC SIIP (Plan 852).
SIIP stands for Systematic Investment Insurance Plan. Though there is nothing wrong with the name in isolation, you would agree that it does resemble mutual fund SIP – which stands for Systematic Investment Plan. Why did a huge government organization like LIC (which is synonymous with trust in India) decide to choose a name which many feel might mislead unsuspecting small policyholders of LIC is something to think about.
But please don’t be confused. LIC SIIP is not a SIP in mutual funds. One of my relatives recently debated with me about his investments in LIC SIIP and why it was a SIP! I had a hard time making him understand why he was confused and why LIC SIIP is not the same as mutual fund SIP. He recently informed me that he eventually surrendered LIC SIIP (Plan 852) and has instead started investing in mutual funds via SIP in direct plans.
But anyways, let’s see what LIC SIIP Ulip is and why you should avoid it.
LIC SIIP (Plan 852)
LIC SIIP is a ULIP or unit-linked insurance plan. A Ulip is a hybrid product which combines investment and insurance. The premiums paid are used in two parts –
- A smaller part is used to provide a life insurance cover throughout the policy’s tenure (it can be between 10 and 25 years).
- The remaining portion of the premium is invested in equity and debt to generate returns. You have 4 choices where this can be invested – these are Bond Fund (100% debt), Secured Fund (45-85% in debt), Balanced Fund (30-70% in equity and debt each) and Growth Fund (40-80% in equity)
You are allowed to switch between these funds 4 times a year without any additional charges. So it’s like a Ulip where you can change between funds. But you can’t have a partial allocation to more than one fund. You have to pick one and 100% of your investment portion will be moved to that chosen LIC SIIP fund.
To further attract people, as usual, LIC offers guaranteed additions as bonuses (as a percentage of annualized premium) that are added to the policy after various tenure completions like 6, 10, 15, 20 and 25 years where you get 5%, 10%, 15%, 20% and 25% of on annualized premium added as a bonus to the policy respectively, as long as the policy remains in force.
ULIPs have had a bad name for high charges in past. Being a ULIP itself, even LIC SIIP has various charges. LIC SIIP premium allocation charges (or PAC) in LIC SIIP are higher in the initial years starting from 8% for 1st year, 5.5% for the 2-5th year and 3% from 6th year onwards. You also have to pay fund management changes and mortality charges. All these charges naturally reduce the amount that finally gets invested.
Generally, mortality charges increase with the age of the policyholder as risk increases with age. But in this ULIP, as age increases, the fund value also increases and it reduces the risk proportionately for the insurer. So the sum-at-risk for LIC goes down gradually and therefore, the impact of mortality charges also goes down in LIC SIIP.
But once again to attract small investors, LIC SIIP offers a feature called Return of Mortality charges if the policy is continued till maturity. This is in addition to the fund value on maturity but only the base mortality charges (without any interest or return on it) will be returned. I think LIC decided to add this feature to tackle the Return of Premium Plans (ROPP) offered by many private insurers in India in their Term Life Insurance plans. While this looks like and is a policyholder-friendly gesture by LIC, mathematically, this won’t be much in any case and won’t add a lot to the returns. Also, this return of mortality charges feature is used aggressively as a selling point by LIC insurance agents who claim that the LIC SIIP is giving life risk cover free of cost. But that is not true if you understand a bit of maths.
The maturity proceeds of LIC SIIP are tax-free if the premium paid does not exceed 10% of the sum assured. Do read more about Life insurance maturity taxation in India. More specifically, read about ULIP taxation too if you were considering this plan.
And I think I didn’t mention this before – unlike many other LIC endowment plans, you don’t get a loan under the LIC SIIP plan as it’s a ULIP. Many LIC policyholders regularly take loans against their LIC and hence want this feature. But this isn’t available in LIC SIIP.
Returns of LIC SIIP (2023)?
Now let’s come to returns. LIC has named its policy SIIP to make it sound similar to a mutual fund’s SIP. So are the returns similar too?
Not at all. Remember first that this is a insurance-cum-investment hybrid product. So a part of the premium goes away to provide insurance coverage. Only the remaining premium gets invested.
Let’s see what LIC has to say about LIC SIIP returns now.
Here is the policy illustration below
So if one pays an annual premium of Rs 1.2 lakh (paid Rs 30,000 each quarter) for 25 years, then at 8% returns from the investment part of the premium, you will get about Rs 69.2 lakh – which translates to a yield of 6.43%per annum. Please note that this is including Guaranteed Additions as well as Return of Mortality charges.
So you invest a total of Rs 30 lakh in 25 years and get Rs 69.2 lakh.
Compare this with pure equity funds where if you invest Rs 1.2 lakh every year (say via Rs 10,000 monthly SIP), then after 25 years, you can have close to Rs 1.75 crore if we assume returns of 12%!
Even if we consider the fact that in the above example LIC SIIP gave a cover of Rs 12 lakh for 25 years – and if we also consider a simple term plan, then for 25 years and Rs 25 lakh cover (I couldn’t find a lower cover and LIC SIIP in above illustration offers just Rs 12 lakh) you will not have to pay more than Rs 10,000 per year in any case.
So if I say that instead of Rs 1.2 lakh per year investment, you invest a lower Rs 1.1 lakh (and the rest Rs 10,000 goes towards term plan premium), even then you get more than Rs 1.50 Cr from mutual fund SIP in 25 years! Compare this with Rs 69 lakh that you get from LIC SIIP (as per the illustration on their website).
So LIC SIIP (Plan 852) is not attractive at all as an investment.
LIC SIIP: Should you invest?
No. Don’t invest in LIC SIIP.
Please don’t buy LIC SIIP even if your family LIC agent (or LIC uncle or aunt) wants to give you some personal discounts to invest in it. You will neither get good returns nor get a big enough life insurance cover with this plan.
I have long maintained and I am sure many of you know that you should never mix investment and insurance – something on which ULIPs, endowment and moneyback plans are built.
Please beware of common mis-selling by LIC agents that they are known for. LIC SIIP is not suitable for most of you. If not LIC SIIP then what to do?
It is very simple.
For life insurance, just purchase a simple plain-vanilla term life insurance plan. That’s it. Nothing else. For your investments, go for debt instruments like PPF, EPF, etc. and for equity, go for SIP in equity mutual funds via direct plans. There are many SIP success stories in India that will motivate you and prove why it works best for small investors.
This SIIP (Plan 852) is a regular premium ULIP from LIC. The name resembles ‘SIP’ in mutual funds but that is where the similarities start and end. It offers returns nowhere close to what you get from SIP in equity mutual funds. Stay away from such high-cost ULIP products in India (2023)
Instead of calculating returns in bond fund pleas invest in growth fund as in mf sip and see the benefits