LIC DHAN REKHA PLAN [REVIEW 2022] – SHOULD YOU BUY?

LIC’s Dhan Rekha is a non-linked, non-participating life insurance plan.

This plan claims to provide an appealing combination of protection and savings.

It offers coverage for both the policyholder and their family by claiming to provide them financial support in case of an unfortunate death.

To understand if this Insurance Policy is worth buying or not, read this article.

This LIC Dhan Rekha review is probably the most in-depth, with illustrations and examples.

Before jumping on doing the actual analysis of the plan, let’s start the LIC Dhan Rekha review with…

Table of Contents:

1.) LIC Dhan Rekha Plan: Policy Features and Eligibility
2.) LIC Dhan Rekha Plan: Review of Benefits

• LIC Dhan Rekha Review of Death Benefit:
• LIC Dhan Rekha Review of Survival Benefit:
• LIC Dhan Rekha Review of Maturity Benefit:
• LIC Dhan Rekha Review of Guaranteed Additions Benefit:

3.) Other Benefits of LIC Dhan Rekha Plan:

• Rider Benefits:
• Loan Benefits:

4.) Taxation of LIC Dhan Rekha Plan:
5.) LIC Dhan Rekha Plan: Good or Bad?
6.) LIC Dhan Rekha Plan: Pros

7.)LIC Dhan Rekha Plan: Cons
8.)Comparison of LIC Dhan Rekha Plan against Term Insurance + PPF
9.)Comparison of LIC Dhan Rekha Plan against ELSS Mutual Fund:
10.)Final Verdict:
11.) How to Surrender/cancel Your LIC Dhan Rekha Plan?

• Surrendering During the Free-look Period:
• Surrendering After the Free-look Period:

12.)Conclusion:

LIC Dhan Rekha Plan: Policy Features and Eligibility 

LIC Dhan Rekha Plan has a minimum and maximum age eligibility to buy this policy. 

However, minimum and maximum age eligibility depends upon your premium paying term. Also, it offers a range of policy terms, starting from 20 years to 40 years.

The table below shows the eligibility conditions and other features of the LIC Dhan Rekha Plan.

Other Features of LIC Dhan Rekha Plan:

• A non-linked, non-participating, individual savings life insurance plan.
• Policy term – 20, 30, 40 years with limited premium paying term of 10, 15, 20 respectively (Monthly/Quarterly/ Half-yearly/ Annually or One time)
• Guaranteed addition of 50/ 55/ 60 per thousand of sum assured from the end of the 6th policy year till the end of the tenure. 
• Allows loan facility and includes optional riders.
• Pays a percentage of the basic sum assured as a survival benefit at regular intervals after the end of the premium-paying term.
• Death benefit & Maturity benefit can be received in installments instead of lumpsum.

Benefits claimed by any Insurance Policy are something that grabs the attention of a person. 

So let’s analyze the benefits of the LIC Dhan Rekha Plan in detail.

LIC Dhan Rekha Plan: Review of Benefits 

LIC Dhan Rekha Review of Death Benefit: 

Death Benefit payable on death during the policy term after the date of commencement of risk shall be “Sum Assured on Death” along with Accrued Guaranteed Additions. 

Only if the premiums are paid on time and the policy is active death benefit is payable. 

The “Sum Assured on Death” for single premium payment is 125% of the Basic Sum Assured.

The “Sum Assured on Death” for limited premium payment is the higher of as follows: 

• 125% of Basic Sum Assured or 
•  7 times of annualized premium 

For example, let’s say 30-year-old Varun buys LIC Dhan Rekha with a Sum Assured of ₹10 lakhs. And he pays an annual premium of ₹10,000 for 15 years and a policy term of 30 years. 

In case he, unfortunately, dies during the policy term, Varun’s nominee will receive the death benefit. 

For his LIC Dhan Rekha policy, the possible death benefit options are:

• ₹ 12,50,000 — 125% of Sum Assured
• ₹10,50,000 — 7 times of Premiums (assuming all premiums are paid)

In this case, the death benefit of Varun will be 125% of Sum Assured i.e. ₹12,50,000. 

This illustration is to show that the death benefit is usually the Sum Assured. So, if you want to increase your risk cover the only way to do this is by increasing your policy premium. 

You will get the guaranteed maturity benefit after the policy term if you survive the policy term. The total of Guaranteed Sum Assured and Guaranteed Additions will be the maturity benefit.

It cannot be less than 105% of the total premium paid as of the date of death, excluding any extra premiums, rider premiums if any, and taxes.

However, in the case of minor Life Assured, whose age at entry is below 8 years, on death before the commencement of Risk, return of premium(s) paid excluding taxes, any extra amount chargeable under the policy due to underwriting decision and rider premium(s), if any, shall be payable. 

LIC Dhan Rekha Review of Survival Benefit:

A specific proportion of the Basic Sum Assured will be paid if the life assured survives for each of the specified durations during the policy period, provided the policy is in force.

The Fixed Percentage of Survival benefit for various policy terms is as below:

LIC Dhan Rekha Review of Maturity Benefit:

“Sum Assured on Maturity” plus accrued Guaranteed Additions shall be payable if the Policyholder survives the specified Date of Maturity provided the policy is in force. Where “Basic Sum Assured” equals “Sum Assured on Maturity.”

Let’s say 30-year-old Karan buy the LIC Dhan Rekha policy. 

He buys the policy term of 30 years with a 15 years premium payment term. And the annual premium amount is ₹73,342 for a life cover of ₹11 lakhs. 

The sum assured in this case is ₹10 lakhs. 

When the policy matures, Karan will receive ₹10,00,000 as the Sum Assured plus ₹13,00,000  as Guaranteed Additions.

The total guaranteed maturity benefit will be ₹23 lakhs. 

Guaranteed Additions are determined based on Policyholder’s age, annual premium, policy term, and premium payment term.

While receiving guaranteed benefits and additions seems appealing, the rate of return on this policy is unknown. You can only compare this policy to better options if you have an annual rate of return.

The illustration table below shows the calculation of IRR from the LIC Dhan Rekha plan.

In any case, an IRR of 4.38% after 30 years is a poor investment. It’s also lower than the interest rates on most fixed deposits. 

Moreover, a 4.38% cannot even beat the inflation rate in the long term. 

As a result, in terms of actual return, your investments will depreciate rather than increase to assist you to accomplish your financial goals.

With the help of this LIC Dhan Rekha Calculator, you can easily calculate the premium, Money-Back amount, maturity amount as per your age, policy term, and sum assured.

LIC Dhan Rekha Review of Guaranteed Additions Benefit:

Policyholders get Guaranteed Additions as long as the policy is in force and all premiums are paid on time. 

With the increase in the duration of the policy, the rate of Guaranteed Additions also shall increase as specified below:

In the event of death, while the policy is still in force, the Guaranteed Addition in the year of death will be for the entire policy year.

Are there any other benefits that this plan has to offer to you?

Other Benefits of LIC Dhan Rekha Plan:

Rider Benefits:

Riders are available to a policyholder under this plan on payment of additional premium as defined below:

• Single-Premium Payment – Under this plan, you can avail of LIC’s Accidental Death and Disability Benefit Rider and LIC’s New Term Assurance Rider.  
• Limited Premium Payment – Under this plan, you can avail any of five optional riders. Policyholders can opt for either of the following: 

1. a) LIC’s Accidental Death and Disability Benefit Rider
2. b) Accident Benefit Rider
3. c) LIC’s New Term Assurance Rider
4. d) Critical illness Rider
5. e) Premium Waiver Benefit Rider

Read more in detail about the Riders in the official brochure here: LIC Dhan Rekha Plan PDF

Loan Benefits:

Loan benefits are available for Policyholders within the surrender value of the policy for such amounts, subject to the following terms and conditions:

• Under Single Premium – 

• The loan can be obtained at any time during the policy term after 3 months from the completion of the policy. 
• The maximum loan that can be granted shall be 75% of Surrender Value. 

• Under Limited Premium 

•  The loan can be obtained if at least two years’ worth of premiums has been paid. 

The maximum loan that can be provided shall be:

• For in-force policies: up to 90% of Surrender Value 
• For paid-up policies: up to 80% of Surrender Value

For loans sanctioned during the 12 months commencing from 1st May 2021 to 30th April 2022, the applicable interest rate shall be 9.5% p.a. compounding half-yearly. However, LIC reserves the right to change this interest rate at any time.

Taxation of LIC Dhan Rekha Plan:

Investments in LIC Dhan Rekha Plan are tax-exempt u/s 80C of the Income Tax Act. 

However, investments up to 1.5 lakhs in a financial year are exempt under section 80C.

On the other hand, the benefits from the LIC Dhan Rekha policy are completely tax-exempt u/s 10(10D) of the Income Tax Act. 

LIC Dhan Rekha Plan: Good or Bad?

To decide on whether LIC Dhan Rekha is a good or a bad investment to achieve your financial goals, we can evaluate it by the two-stage analysis.

In the first stage let us analyze the Pros and cons of the LIC Dhan Rekha’s plan. This can help us get some clarity on whether it is a good or bad plan.

At the second stage, we will compare this with 2 other investment options. The second stage of this comparative research will reveal whether this is a good or bad one.

LIC Dhan Rekha Plan: Pros

• Dhan Rekha – 863 gives you a regular cashback. Because if you invest for the long term, you will receive returns after half of the insurance period, or every 5 years.
• LIC Dhan Rekha-863 provides us with a GA of Rs.50, Rs.55, and Rs.60 based on the policy type you choose. These are safe and guaranteed returns.
• It is an insurance plan that also does investments. So, you might get advancements from investments.
• Provides Survival benefits/Money Back
• Low Premium for Ladies. 
• Unlike most insurance policies, Dhan Rekha doesn’t deduce money for death benefits. Instead, the actual GSA is paid.
• When it comes to trusting, LIC is a well-trusted company. And it has been in the picture for a long time. So, mostly this plan might be good.

LIC Dhan Rekha Plan: Cons 

• There will be a significant capital loss if you surrender your policy. 
• At the end of every five years, GA is paid. But for the first 5 years, you don’t get anything. Also, once invested, you cannot surrender this policy without completing it. You will get nothing if you didn’t complete the minimum maturity period available. 
• The lockdown period is higher. It is half the policy time.
• After 40 years of full investments in LIC Dhan Rekha-863, you are not getting any more than an IRR of around 4%. Compared with other generic and pre-existing insurance policies this IRR value is very low. Given that you are investing for 40 years. (Detailed comparison is shown later in this article.)
• According to records, in 2020, India had an inflation rate of 6.62%. Even if we round off the IRR from LIC Dhan Rekha-863, it comes up to 5%. So, this leads to a negative return rate of 1%.
• Reaching life goals could be uneasy due to the above point.
• Due to the above factor, reaching a pre-planned life goal is mostly not possible.
• Returns are not compounded every year, instead, it is an endowment plan.
• Poor liquidity. Also, mismatch of the maturity time and actual requirement of the amount.

These cons essentially do not serve the very purpose of investing in the Dhan Rekha plan. 

Even if you are an investor with a low-risk tolerance, you still must analyze the potential risk and return from this policy. This enables you to identify better choices with the same or lower risks.

Is there any better alternative to LIC Dhan Rekha Plan?

A term life insurance policy can provide you with the same or even greater risk coverage for a much lower policy price.

To be fair, only a term insurance policy may provide appropriate life insurance coverage. It assists you in avoiding hidden fees and promotes better personal financial management.

For example, the annual premium for a life cover of ₹11 Lakhs for 30 years policy term will be only around ₹15,000 with a term insurance plan. Keeping your money and insurance separate is always a good idea.

It will handle risk management for you, allowing you to concentrate on managing your investments.

On the other hand, there are investment options that can yield higher returns. Some of these may even have relatively lesser investment risk—for example, PPF.

Let’s compare the LIC Dhan Rekha plan benefits against PPF followed by an even better alternative option.

Comparison of LIC Dhan Rekha Plan against Term Insurance + PPF

Public Provident Fund or PPF—is an investment instrument from the Govt. of India.

It is a well-known investment instrument that provides guaranteed profits. Since the LIC Dhan Rekha Plan also offers guaranteed returns, it would be good to measure its performance against PPF. 

Let’s calculate the returns from PPF by investing the same amount for the same period as we did in the Dhan Rekha illustration above. 

Note: After 15 years a part of the investment capital—₹15000—is deducted to pay for the separate term life policy for the next 15 years. 

Yet, the calculations in the table show that PPF delivers almost ₹44 lakhs for the same investment as the LIC Dhan Rekha plan. It is about ₹21 lakhs higher than what the Dhan Rekha plan can offer. 

PPF along with a term insurance plan is a better alternative than the LIC Dhan Rekha plan. 

Not to mention the fact that PPF investments, interest earned, and maturity amounts are all tax-free.

To know about the PPF scheme in detail, you must read this, 15 things you may not know about PPF 

If you are a conservative investor looking for guaranteed returns, PPF may be your ideal investment choice. But if you have a long-term financial goal and have the tolerance for calculated investment risk, you have an even better alternative. 

Comparison of LIC Dhan Rekha Plan against ELSS Mutual Fund:

ELSS mutual funds are equity-oriented mutual funds that invest in stocks.

Since this is a market-linked investment, there is some risk involved. 

However, because risk and return are linked, ELSS mutual funds provide a higher return on investment.

If an investor’s risk tolerance is high, he should consider investing in an ELSS fund rather than the LIC Dhan Rekha plan.

For example, let’s say an investor invests the same amount as seen in the Dhan Rekha plan illustration in an ELSS fund. A part of the investment capital—₹15000—is deducted to provide the life cover with a term plan. 

Assuming a conservative 12% CAGR, the returns from the ELSS mutual fund scheme are shown in the table below. 

Even after assuming a conservative return rate, the ELSS Mutual Fund has delivered a far higher return, despite the substantial investment risk.

It is almost five times higher return from the LIC Dhan Rekha plan. 

However, one can still argue that the LIC Dhan Rekha plan maturity benefits are tax-free. But, ELSS Mutual Fund returns are not tax-free, even though they have an 80C tax benefit.

As a result, the gains from your ELSS fund investment will be subject to LTCG tax.

The post-tax returns from the ELSS Mutual Fund scheme are shown in the table below.

Despite the 10% LTCG tax, the returns from the ELSS investment are still far higher than the returns offered by the LIC Dhan Rekha Plan. 

However, as your primary objective is to achieve your financial goals faster, rather than looking for tax exemption – it is completely worth your big financial goals. 

Suitability:

This plan is suitable only for persons who: 

• May lack self-discipline in investing.
• Are impulsive buyers.
• Often do discretionary expenses.

Final Verdict:

LIC Dhan Rekha Plan may attract investors in the name of guaranteed returns. 

• Judging by the comparison, Dhan Rekha has a good profile and promising words. If you are a low-risk investor, you can purchase a term insurance plan and invest the rest on a fixed deposit. 
• If you are a person who can take a risk, you may opt for index funds, which have a chance of getting your annual returns of 10% to 12%.
• Mixing investment and insurance is a bad thought.
• A person who has bad self-discipline in investing is more prone to investing here. You must be an impulsive buyer, or who does disciplined expense.
• If you feel that 5% of your returns are sufficient, you can still opt for this plan, after carefully having all the discussed points in mind.

You can still course-correct your investments in the right direction if you have already purchased this policy.

Starting with surrendering your LIC Dhan Rekha plan. 

How to Surrender/cancel Your LIC Dhan Rekha Plan?

If the Policyholder is not satisfied with the policy LIC allows the policyholders to surrender their policy during the free-look period with zero to minimal charges. 

Surrendering During the Free-look Period:

The free-look period is 15 days from the date policy is purchased.

If you are dissatisfied with the policy’s “Terms and Conditions,” you can return the policy to the Corporation within 15 days from the date of receipt of the policy bond.

The Corporation will terminate the policy and refund the premium deposited upon receipt of the same.

They may deduct the proportionate risk premium (for Base Policy and Rider(s), if any) for the period of cover, charges for medical examination, special reports, if any, and stamp duty charges.

If the coverage is purchased online or through telemarketing, the free-look period is 30 days.

Surrendering After the Free-look Period:

What if the free-look period is already over? 

In that case, you can still surrender your policy based on the below conditions.

• The policy can be surrendered by the Policyholder at any time during the policy term if it is paid with a single premium.

• The policyholder can surrender the policy at any time throughout the policy term if two full years’ premiums have been paid under Limited Premium Payment.

However, you will only obtain the surrender value benefit in this situation.

The Guaranteed Surrender Value payable during the policy term is equal to the total premiums paid (excluding any extra premiums, any premiums for rider(s), if any, and taxes) multiplied by the Guaranteed Surrender Value factor applicable to total premiums paid plus accrued Guaranteed Additions multiplied by the GSV factor applicable to accrued Guaranteed Additions less any survival benefits already paid.

Hence, we recommend you consult your financial advisor before surrendering/canceling your policy. They can assist you in making the best financial decision possible.

Conclusion:

• A life insurance plan aims to mitigate financial uncertainty for your family in case of an eventuality.
• The SA can be estimated based on Human Life Value or HLV, which factors in your age, present and potential future earnings, present and future expenses/ liabilities, and general inflation levels. 
• Pure term policy offers higher life cover at a relatively lower premium.
• The investment can be done separately depending upon the corpus required, time horizon & risk appetite.
• Keep your insurance and investments separate, and make sure you fully comprehend the product before investing. These two simple tips will get you a long way.

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