Investment-linked life insurance schemes are conning you


My friend Shilla called up distraught and shocked. As part of portfolio consolidation, she had surrendered some endowment insurance policies but got to know that she will not even get back her principal, even though she has held the policies for more than 10 years. She was befuddled as to how it is possible to lose her money despite long-term holding with a “safe” institution.

It is sad to see investors lose their hard-earned money because of mis-selling of life insurance-cum-investment policies in India. Unscrupulous agents, lack of transparency from insurance companies and a regulator who is not seen as working in the interest of the policyholders are responsible for this sad state of affairs.

Shilla had been advised by an agent in 2009 to split her investment into 21 policies, one maturing each year from 2025 to 2045. Her investment over a 140-month period works out to Rs 14.57 lakh. If she surrenders the policies now, she will get back Rs 13.42 lakh, due to penalties for early withdrawal.
Shilla feels very let down by the whole system. Being a single mother, she invested believing that she would have some security, at least the principal would be secured and she would get some decent returns. The main reason individuals choose life insurance schemes is because they feel that the government-promoted insurance company would be a safe place to invest. Most expect returns similar to fixed deposits (FDs) and not super normal returns. Little do they know the returns never cross 4-5 percent. Based on the illustration provided on the company website, the above policy has an XIRR, i.e., net return of 5.39 percent, if the policy generates 10 percent per annum, which is unlikely, given mortality and other costs. It doubles in 25 years compared to NSC which doubles in 10.5 years.

For years, I have been cautioning investors against putting their money in investment-linked insurance schemes. Yet they do so, because some agent tells them they will get a guaranteed return of 10 percent per annum, principal is secured, and position these schemes as being ‘secure’.

I would urge all individuals to note the following points and not get conned by agents and insurance companies.

1) Other than post office schemes and FDs, no financial instrument can guarantee a return. So, the next time, ask your agent to show the guarantee of return in the policy document. Certain policies like capital guaranteed schemes tout 8 percent returns. Ask your agent for XIRR calculation to know the actual return. The XIRR is 4-5 percent in these plans.

2) The last 10-year return on FDs was 7.15 percent per annum and for Nifty 50, it was 14.77 percent per annum. Shilla’s investments would have been worth Rs 22 lakh if she had invested this money in FDs and Rs 37 lakh if she had invested in Nifty50 index fund. But she is getting Rs 13.62 lakh instead, thanks to a wrong investment choice. Forget beating inflation, she is losing capital. Even money left in savings account would have grown to Rs 18 lakh.

3) Insurance-cum-investment schemes are illiquid and have large penalties for early exit. This is not explained to customers, and most who have to exit due to an emergency, have to do so with huge losses. Nobody feels good exiting a 12-year-old investment with a loss on capital.

4) Transparency while investing is important. Neither the agents nor the insurance company clearly state returns or other rules. In fact, companies have misleading advertisements and agents are known to mis-sell. Make a habit of checking all the guidelines on exit/early closure before investing.

5) Stop falling for fear psychosis. Most agents are known to position mutual funds as volatile investments with high probability of loss compared to insurance plans, which give 10 percent return without any risk. If you want an investment with no volatility, invest in PPF or FDs, or post office schemes.

6) Insurance companies also invest investor funds in equities but investors do not bother to check the portfolios or the costs. If you want to grow money, you will need to take risks. But take risk the right way, by entrusting your money to a mutual fund, which is better regulated and much more transparent. Insurance is to protect risk on life and a term plan will suffice for that.

7) All that the agents care for is their commissions which can go up to 40-50 percent of first year premium. In Shilla’s case, the agent knew she was a single parent and these were savings for her daughter’s future and her retirement and yet he suggested these plans. The agents themselves, probably do not know how bad these plans are. They simply sell because they make fat incentives.

It is in your best interest to STAY AWAY from any investment-linked insurance plans.

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