Insurance policies sold as 'savings'?

The Insurance Regulatory and Development Authority of India (IRDA) is flooded with complaints from consumers across the board of life insurance policies being mis-sold to them.

Gullible consumers are offered these policies which are sold as `excellent investment avenues with tax benefits’, only to find that the product, at the end of the term for which it is taken, gives very poor or inadequate returns. Can this hoodwinking and mis-selling be stopped by the IRDA? Certainly, if it addresses some basic facts and issues at stake.

In India, the concept of `insurance’ is not understood by a large majority of persons, largely because of the general lack of literacy/education or the concept of being `resigned to one’s fate’. Consumers always want `something back’ when they pay money upfront to any person or institution. The concept of covering risk, if and when it occurs, is foreign to this mentality which believes that a sum of money regularly paid, without returns, is a losing scenario.
The Life Insurance Corporation of India addressed all these concerns with their endowment policies wherein the consumer was asked to pay a certain premium for a fixed period, given life insurance cover and at the end of the term, paid a substantial sum of money as return of capital with bonuses.

With the opening up of the insurance sector at the turn of the century and private players being ushered into the field of insurance to challenge LIC’s monopoly, financial analysts seriously looked at the returns available from the policies sold by LIC and other companies to find out whether the consumer was being kept at the forefront while drawing up the life-coverage plus returns policies.
The results were surprising to say the least. Even the best policies being offered in the market were giving returns lower than 4 per cent on the capital invested by the consumer with the company. Insurance companies also get away blithely from these situations, stating that the excess money is for risk cover and a life insurance policy should hence never be compared with other savings instruments.

In addition, the return on capital was directly proportional to the `bonus’ declared on each insurance policy thus leaving the fate of the consumer to the vagaries of the share and other financial markets, in addition to being a test of the company’s financial advisers and investment officers.

The LIC and all other companies repeatedly stated that the bonus declared was not mandatory and would depend on market conditions. It is also a matter of record that a large number of `lapsed policies’ (where the consumer stops paying premium after a few years) have boosted the bottom-lines of insurance companies.

Return-based policies
A simple back-of-the envelope calculation in the return-based policies shows abysmal rates of interest on investment by insurance companies in all policies across the spectrum. In almost all cases, if the consumer had kept his money in his own savings bank account (nowadays offering 4 to 7 per cent, depending on the bank) the principal and interest would have far exceeded the amount returned by the insurance company at the end of the policy term.

This calculation includes the saving accruing to the consumer in terms of various sections of the Income Tax Act for purchasing these policies. What then is the saving in these policies sold as `savings instruments’ and misleading the consumer?

The complex imbroglio of the need for savings, insurance and tax benefits can be unbundled in a simple way. Insurance should and is always bought for risk cover – which means the death or incapacitation of the individual is covered by the policy. This need can be met by simple `Risk Cover Only’ policies also known as term polices in insurance jargon. The balance money which can be saved between the term policy and a currently marketed regular policy can be invested in tax savings instruments (as provided in the Income Tax Act) of the consumer’s choice which get him a minimum return of 8 per cent in the worst of circumstances.

Knowing the Indian consumer and his aversion to the `nothing-for-money paid’ attitude and the insurance companies’ willingness to milk them, the only solution for this complex issue would be for IRDA to separate savings and insurance, with a clear diktat that insurance and savings are two ends of the spectrum – and the twain shall never meet!

(The writer is Hon Secretary of the Consumer Guidance Society of India, Mumbai)

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