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K. ARAVIND
Life insurance companies use a variety of strategies to attract customers. A few years ago, stock-linked insurance policies, known as ULIPs, tended to sell with false profit potential. Among such strategies is the promise of a guaranteed return on certain insurance policies.
Almost all life insurance companies have guaranteed life insurance plans that fall under the category of endowment policies. Instead of declaring a bonus on such policies (the bonus will fluctuate according to the profit the insurance company makes) a sum called Guaranteed Return is paid.
Guaranteed returns vary from plan to plan. Some plans offer a guaranteed return based on the sum assured. Some plans include a guaranteed return from the second year of the policy. At the same time, some other plans include a guaranteed return only after a few years.
Some plans, like money-back plans, pay regular income to the policyholder at regular intervals. In some other plans a lump sum is received at the end of the policy term. In some plans, income is paid in fixed years after maturity.
The return that the insurance company actually claims to pay on such plans is lower than that received from fixed deposits. The return received by the investor ranges from four per cent to six per cent from standard endowment and money back policies. The return from guaranteed return plans is even lower.
Let’s look at an example. Suppose a policy with tenure of ten years and the policy holder has to pay premium for eight years. 150% of the premium is refunded to the policyholder for the next eight years after the end of the policy term. It’s natural to think this return is attractive. But what is the actual return received by the policyholder?
Even though the premium is payable for eight years the policy coverage is for ten years. Ten years later, the next eight years will be income-generating. If 20,000 is the annual premium and Rs. 30,000 is the annual premium. In fact, the policyholder’s return on this income from the tenth to the seventeenth year is only 2.9 per cent. The policyholder is actually being deceived.
