Capital Guaranteed (in USD) Insurance Plan for NRIs – An Analysis

Looking at the success of the Leveraged FCNR deposits, increased interest of NRIs of investment in Leveraged products, continuous inquiry from NRIs to increase their returns and lower LIBOR rates, financial services industry is very much interested to come up with the products that offer Capital Protection/Guarantee of Capital in Foreign Currency or USD. One of such product that I have come across is the LIC International Capital Guaranteed Insurance Plan currently being marketed to NRIs from Middle East.

Product:
You would invest US $25,000 and would get leverage of US$50,000 and your investment would be US $75,000. After 5 years, you would get “guaranteed” amount of about US $95,000 (Guaranteed amount of $85,000 plus bonus declared by LIC – assumed $25 per $1000 sum assured, which is not fixed). In addition, you would be insured for about US $ 85,000 for the term of 5 years. The borrowing would be at the floating rate at rate of 3 month LIBOR + 1.50%.

Benefits:

  1. “Guaranteed” Return in USD of 9-10%
  2. Insurance cover of $85,000
  3. Tax free Return for NRIs as income outside India
  4. No Repatriation/Remittance rules or restrictions – investment outside India
  5. Manageable – only 2 times leverage
  6. Life Insurance Corporation (LIC) product – a respectable name for Indians/NRIs
  7. Almost all the investment at start – One time only

My Analysis:
1. Concept (very important):
The TOTAL investment of $75,000 would become $95,000 in 5 years. In short, your return on total investment would be 4.85% p.a. only, which is the same as the return on the FCNR deposits in USD for 5 years.

Only because of leverage, which is currently available at cheaper rate @ 1.75%, you would get the additional spread of 3.1%. Assuming, about 0.6% would go towards the insurance cost (mortality premium) and other costs (marketing, set up, KYC, etc.),  your total return would be FCNR FD rate on your principal of 4.85% and 2 times the spread (as the leverage is 2 times: 2×2.5% = 5%) i.e. total of about 9.85%. It is the same rate of return promised to you as a Guaranteed return.

No Leverage, No Benefit. This is the real crux of the product. Everything else is just the package.

2. “Guaranteed” Maturity Amount:
The Guaranteed maturity amount is based on the assumption that the company would declare and pay US $25 of assured bonus per $1,000 of sum assured every year. However, there is no guarantee of the bonus amount and the maturity amount can fluctuate. The bonus could be higher or lower or none at all. As per the company representative, the average bonus for this product in last 10 years has been $26.25 per $1000. (I have not verified the bonus amount). This increases the risk.

3. Leverage:
All the risks and benefit of leverage would apply. Leverage is a great return enhancer if the cost of leverage is lower than the return it generates. If the return decreases or cost increases, you could be in trouble. Also, the loan is in your personal name with the bank and investment is with an investment company, which is not the same.  You would be personally liable if the return is lower than promised (Credit Risk). Also, you would only get 2 times the leverage. Higher the leverage, higher the potential return and higher the risk.

4. Fixed vs. floating rate:
You would borrow the funds from a bank on a floating rate at a rate of 3 month LIBOR + 1.50%.

Currently the 3 month LIBOR on USD is 0.23585%, i.e. at a cost of 1.74%. The scenario or illustration given by the company is based on 3 month LIBOR of 0.24% and 0.54%, which is a very narrow range. The 3 month LIBOR has fluctuated widely in past and in January 2007, it has been as high as 5.36%. If the 3 month LIBOR shoots up that high, you would be paying money out of your pocket. If you can get the leverage at fixed rate, that would be an added benefit.

5. Option to repay loan
Investors are also given an option to pay off the loan amount earlier. While it is not recommended, it may be advisable if the 3 month LIBOR suddenly shoots up to limit the loss. However, if they do, they lose the very advantage of investing in the product i.e. spread. If you plan to prepay the loan, there is no spread or advantage; and the return would be the same as FCNR FD rate. And, with the “guaranteed” bonus, it may not be advisable to invest in the product but to invest in FCNR deposits.

6. Insurance:
It is an insurance product and you are provided with the insurance cover of about 3.5 times of your investments. While, it looks like an added advantage, the sum at risk is only $10,000 ($85,000 – $75000) or max. $60,000 ($85,000-$25,000) for 5 years, which is very low and the premium would be about $20 to maximum $100 only.

7. Premature Withdrawal:
While the plan allows for premature withdrawal (surrender), the surrender factor / cost is high. While you cannot surrender for 2 years and the maturity is 5 years, the cost of surrender earlier is about 23%, 16%, 8% for surrender after 2, 3 and 4 years respectively, which is high.

8. Interest:
The product/plan requires that you pay the interest amount from your pocket annually. So, you would have to keep the funds to serve the debt.

9. Indian Taxes/RBI rules:
As the product/plan is offered to NRIs (NRI/PIO/OCI) outside India, the loan is given by a foreign bank outside India and investment is made in the plan outside India, the rules and regulations of the Income Tax Act and/or FEMA may not apply to the investor. The income would accrue or arise and/or be received outside India and may not be subject to income tax for NRIs. As the investment and redemption is outside India, rules and restrictions of FEMA may not apply to investors.

10. Other:
There may be more factors but in addition to above, factors such as your change in residential status, country of residence, taxation of maturity amount, processing fees (if any), etc. may also affect your return.

My View – Should you invest?
I strongly believe that every investment products has something good features. However, whether the investment is good for you or not, is critically important. You should not invest just because the investment is good or great; you should only invest if you are convinced that it is great for you and your overall portfolio. For example, if you buy a phone or a car, you do not buy because it has great features; you buy because it matches your requirements.

This investment is not free of risk. The two major risks are the interest rate based on 3 month LIBOR, which can fluctuate and the amount of Bonus declared by LIC.  However, if you can understand the risks, it has a potential to give you better returns.

Whether you should invest or not depends on your risk profile, return requirement, term, your local currency and leverage currency, your overall portfolio, etc. Please let me know if you have any question about this or similar product and need to know whether it is suitable for you.

Please note that the product or analysis is provided for general information purposes and I have nothing for/against any company or product.

About Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India)

Mr. Jigar specializes on NRI Investments and Taxation. He is proud to be one of only 21 CFA Charterholders in India working as consultants. (In 2011, when he became CFA Charterholder, out of 97,173 CFA Charterholders in the World, only 697 Charterholders were in India and only 3% work as consultant; Source: www.newcfa.org). He received his MBA (Finance) from University of Illinois, Chicago, USA, CPA from USA and a Chartered Accountant from India. Jigar has over 15 years of professional experience including more than 4 years with KPMG USA’s Risk Advisory Services. Currently, he provides Wealth Management and taxation consulting serving clients from USA, UK, Americas, Europe, Middle East, Asia, Africa, Australia and India.
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19 Responses to Capital Guaranteed (in USD) Insurance Plan for NRIs – An Analysis

  1. Ramani says:

    Two NRIs invested in US Dollar Insurance Scheme (PENSP – Single Premium Endowment Plan) and Deferred Annuity Scheme of LIC International (both 5 years term). Capital and a certain minimum return is guaranteed. Additional returns, through a variable annually declared bonus. Subsequently they returned to India and are presently in RNOR status and Resident Status. Kindly clarify the tax implication on the capital gains achieved from the investment. Will appreciate your early response.

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      As foreign income is taxable for Ordinary Residents, I would think the income would be taxable if for the person who is “Ordinary Resident” of India. However, it may not be taxable for the person whose residential status is RNOR. Please check with LIC to get more clarification about the scheme, income and taxability. Thanks.

  2. subramanian says:

    Exellent analysis of the scheme.
    However considering the current scenario, 5 year FCNR USD rate is around 3% , 3 month LIBOR still around 0.33%, news from China shaking all the markets, if the Leveraged product give you a return of 7% + is it worth looking into?? Is not the bonus from LIC guaranteed?? Pls advice.
    thanks & regards

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      I am not sure if this plan is still available. If you find it good, please contact the respected branch/person. Thanks.

  3. ravi says:

    dear sir,

    the lic bahrain jeevan nivesh has a guaranteed bonus of 32.50 use per 1000 sa usd ?(as per website )

    can you please let me know the premium for a 25000 usd.. policy age 43..all inclusive premium (no leverage taken here)

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      I would suggest you to check with the respected company for your requirement. Thanks.

  4. Raj says:

    Could you kindly advice regarding where to buy this product in US..Please Suggest..

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      It was not available in USA. I am not sure if this is still available to anyone. Thanks.

  5. V.G.Vachhani says:

    Dear Mr. Jigar Patel,
    It was great explanation on investment. I am NRI returnee. I have some NRE deposites ( in Indian Rs and $) maturing in future. When interest received on it shall be taxable?
    Do you give advise on such issue at your office?

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      The interest on NRE is taxable on your permanent return to India. We specialize on NRI investment and taxation and provide the service. Please contact us if you want to discuss in detail. Thanks.

  6. correct – JEEVAN NIVESH PLAN OF LIC INTERNATION

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      I have not reviewed the product but when I review, I will post my opinion on the product. Thanks.

  7. FGB came with other product of LIC International – Jeevan Sathi Plan (238) for 3 years maturity and with fixed interest at 2.80% on five times leverage for three years.. please advise your valuable input / opinion for this product.

    kind regards
    Abhinav Gupta
    +97150-5598644

  8. Subu says:

    Hi, I would want to know that if I put $10,000 which is like INR600,000, in NRE fixed deposit, for 3 years and say after 3 years I get a return of INR 700,000 (calculation may not be correct but just an example). Now I don’t repatriate this maturity amount, but reinvest this INR 700,000, for 5 years in the same NRE account. Now will the interest on this INR 700,000 be tax free or taxable in India?

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      As per current income tax act, any interest on NRE accounts is taxfree in India. Thanks.

  9. Sanjay says:

    Thanks for such detailed and infromative analysis this really helped me.

  10. pranav joshi says:

    How to buy this product? pls advise.

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      The product was being offered through the First Gulf Bank in UAE. Please contact their representative. Thanks.

  11. Rajeev G says:

    Thanks for the analysis, insight and highlighting the potential risk/reward scenarios.

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