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Why LIC Amritbaal policy is a complete wastage of money: how to invest for your child in the right way

We review the new LIC Amritbaal insurance cum investment plan so that parents are aware that the plan is not good for most people. We will also show what to do instead for your kid’s goals.

Why LIC Amritbaal policy is a complete wastage of money: how to invest for your child in the right way


Posted on 22 Feb 2024
Author: Sayan Sircar
8 mins read
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We review the new LIC Amritbaal insurance cum investment plan so that parents are aware that the plan is not good for most people. We will also show what to do instead for your kid’s goals.

Why LIC Amritbaal policy is a complete wastage of money: how to invest for your child in the right way

📚 Topics covered:

What is the product?

As per the brochure on the LIC India website, LICs Amritbaal, Plan No 874, UIN: 512N365V01

is a Non-Linked, Non-Participating, Individual, Savings, Life Insurance plan

What do these terms mean?

  • Non-Linked: returns from the policy are not linked to stock market returns
  • Non-Participating: this plan offers guaranteed benefits only and no bonuses (whose amounts will be known only at maturity) will be declared
  • Individual: the policy covers one single person and not a group of people
  • Savings: the plan offers both insurance and investment in one product

The plan is specifically designed to have an adequate corpus to meet the higher education and other needs of your child

The maturity period is selected to the time when the child goes to college. Whether the corpus is “adequate” or not will depend on two things:

We will discuss this point in detail in this article.

It facilitates accumulation of corpus through Guaranteed Addition

This is the hook that brings in parents. The brochure says “Guaranteed Addition ₹80 per thousand Basic Sum Assured throughout the Policy Term” and many people interpret this as an 8% return. We will explain how this calculation works and how the return, though guaranteed, is not 8%.

Breaking down the plan options

Who pays the premium?

The parent takes the policy and pays the premium.

Whose life is insured?

This policy ignores the risk of the earning parents dying and not leaving behind enough money for the child. Instead of insuring the more likely risk of the premature death of the parent,

this policy pays out money if the child dies.

This is absurd.

The insurance is taken on the life kid who is not yet 13 at the time of buying the policy. This will be harsh but it should be obvious that the target market for this plan is people who plan to financially benefit from their own child’s death.

Most people should give up on considering this plan and jump to the alternatives section by clicking the link below:

⬇️ Jump to the alternative investment plan section

How much premium is to be paid and when?

  • Entry age (of the child): The policy is bought for a child from birth up to age 13
  • Maturity age (of the child): From 18 to 25
  • Premium payment can be 1-time or for the first few years (limited time)

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Returns offered (IRR) of the plan

No, it is not 8%. That will be remarkable and it is very clearly not so. The plan offers ₹80 per 1000 of the sum assured (8%) as a guaranteed addition. But this amount is paid at the end. It is not paid every year and therefore does not compound.

Limited period premium payment

We have taken this example from the brochure:

LIC Amritbaal illustration 1

and calculated the XIRR of the investment

LIC Amritbaal XIRR Calculation

Single premium payment amount

This example is also from the brochure:

LIC Amritbaal illustration for Single Payment

The IRR for this example is 6.22%.

This whole plan is therefore a compromise with

  • an insurance component which is not needed
  • a return component which is handily beaten, without any risk and with a full government guarantee, by PPF (7.1% tax-free) or Sukanya Samriddhi Yojana (for girl children, currently offering 8.2%, also tax-free)

Related:
How to pay for an IIT Engineering degree with only PPF investment?

Of course, investors willing to take a bit more risk, which they should to beat educational inflation (7-10%), have the option of investing in equity and debt markets via mutual funds.

Who should invest in this plan?

A parent may invest in this plan if they fulfil all of the conditions below:

  • their minor child (age 13 or less) has income from salary (unlikely) or other sources (for example sponsorships or stipends)
  • this income is used to run the household expenses
  • the family will be in financial distress if the child stops earning money

Other parents should avoid this plan and follow the alternative planning method below.

What are the alternatives to investing in this plan?

Step 1: Identify your child’s goals

Your child’s school and other regular expenses will come from monthly income. But you need to plan for bigger expenses in advance:

Which of these are you saving for:

To understand how to create a child’s education plan:

Step 2: Insure yourself first

You need to ensure that an untimely death will not prevent your child from going to their future dream college. Term insurance is the right product here. Every earning member of the family must have adequate term insurance.

The whole family, i.e. child and parents should also have sufficient health insurance. This step prevents loss of income or a setback to investment goals due to illness.

Step 3: Make an investment plan to cover your child

Children’s education and other goals do not exist in isolation. They are a part of the comprehensive goal-based planning that parents need to do for their own retirement and everything else. The process is explained best with these examples:

There are more case studies here: Case Studies.

We have proven that the goal-based investing process works in most market conditions in this article: What is the best way to invest for your child’s college education?.

Step 4: Review the plan once a year

As time passes, things change:

  • stock markets go up and down creating or reducing portfolio value
  • income increases or decreases (sabbaticals, parents leaving the workforce to look at the kids, illnesses, parents re-entering the workforce)
  • the amount of money available increases (windfalls like inheritance or RSUs) or decreases (loss of income, death, medical emergencies)
  • college degree plans change as the kid grows up

Therefore the plan created in Step 3 has to be reviewed and rebalanced to check if you are still on track: Are your investments on track for your goals?.

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Next steps:

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This post titled Why LIC Amritbaal policy is a complete wastage of money: how to invest for your child in the right way first appeared on 22 Feb 2024 at https://arthgyaan.com


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