It is Technical difficult to combine regular yearly bonus with the flexibility built in LIC JEEVAN SARAL. So the concept of Loyalty Addition has been introduced instead of the regular bonus. There is lot of myth about Loyalty Addition that going by the experience of recent years, that amount given by the ways of Loyalty Addition may be negligible. It will be not so in the case of LIC JEEVAN SARAL. Actuarial analysis will show that the actual Loyalty Addition that can be paid will not be less than the total regular bonus payable on death claim, surrender or maturity.
It is only a change of concept. The policyholder will be the ultimate gainer by this change of concept. One has to keep the policy in force only for ten years, and not till maturity, to be eligible for Loyalty Additions. Freedom has been given to surrender the policy at any time after 10yrs without any loss.
Determination of Loyalty Addition
Consider an average Jeevan Saral Policy, with a monthly premium of Rs 4000/-( i.e. annual premium of Rs 48000/-) The Sum assured under this policy will be Rs 10,00,000. Let the age of this policyholder be 38. During the first year, the risk cover will be for Rs 10,00,000 and one year term assurance premium for this risk cover will be about Rs 1390 (Rs 1.39 for 1000). During the second year, the risk cover will be for ( Sum Assured + one year’s premium). i.e. Rs 10,48,000 and the age will be 39. So one year term premium for this risk cover will be for (sum assured + 2 yrs premiums) i.e. Rs 10,96,000. And the age will be 37. The one year term premium for the risk cover will be about Rs 1750. Thus the premium for the risk cover appears to go on increasing because of increase in age and also increase in amount of claim payable on death.
But the above working ignores the fund accumulating in the account of the policyholder. At the beginning of each year, Rs 48000 is received from the policyholder. After meeting the marketing expenses, administrative expenses and also the mortality charges the balance premium left get accumulated with interest. For example at the end of the 17th year, the fund to the credit of the policy holder will be about 12,00,000. If the death occurs during the 18th year, the amount of claim payable will be Rs 12,00,000 + 17yrs premium = Rs 20,16,000. Since there is already a fund of Rs 12,00,000 to the credit of the policyholder, the real risk to the corporation is only to the extent of Rs 8,16,000. In fact after few years, the sum at risk (Amount payable on death LESS Fund to the credit of the policy holder) will start reducing gradually. While because of Increase in age, the premium chargeable per Rs 1000 risk cover will be increasing, the sum at risk will be decreasing. Due to combine effect, the premium chargeable for risk cover may even start decreasing after a certain stage.
- So the above illustration shows that with longer period of LIC JEEVAN SARAL policy, the corporation’s liability decreases and premium can be further invested to provide more benefits to LIC POLICY holders.
- LIC has to pay income tax every year on the bonus amount declared on all with profit plans but since there is no bonus declared every year in LIC JEEVAN SARAL so income tax is also saved and reinvested to provide more profit to LIC POLICY holder by the means of Loyalty Addition.
- LIC has to pay 5% of the amount of bonus declared every year to the central government that is also saved and reinvested to provide more profit to LIC POLICY holder by the means of Loyalty Addition.
- In LIC with bonus plans, on death claims or on paid up policies even before 10yrs, LIC pays Sum Assured + bonus of the all the yrs (from the date of commencement) but in LIC JEEVAN SARAL since there is no loyalty addition before 10yrs, the money saved in this way is again reinvested to provide more profit to the LIC POLICY holder who run their policies for 10yrs or more by the means of Loyalty Addition.
The premium amount received in LIC JEEVAN SARAL plan will be invested for longer period. Hence the yield of the investment of premium amount of Jeevan Saral Plan will be higher than under endowment plans on those the bonus is declared every year and paid on death claim and surrender of policies.