Another example of how a toxic product, manufactured by an insurer, sanctioned by the insurance regulator, bought through a crooked agent can destroy your savings

Moneylife Foundation Insurance Helpline got a mail from Satish Shah (name changed) who complained, “I was sold HDFC Life Young Star policy for sum assured of Rs2.5 lakh. After paying them Rs3.2 lakh for 6.25 years @Rs12,500 per quarter from June 2006, they have closed the policy and have offered me a total return of Rs11,678.17 as the value of the policy. The benefit illustration shows a return between Rs2.8 lakh and Rs3.2 lakh @6% and 10% respectively in their table of indicative return attached to the policy.” The customer relied on the misleading benefit illustration that conveniently ignored the steep mortality charges, which made up for 80% of the premium.

How did the insurance-cum-investment lose so much of value? Because of 100% loading of mortality charges due to medical condition of coronary artery disease. He says, “They wanted me to go through some tests. After the test results, they agreed to the policy with the stipulation that the mortality charges would be increased a bit - no clarity as to what the new charges would be and what would be the impact in clear terms.”

In short, the insurance company benefits by keeping the customer in the dark about how much part of the premium really goes towards mortality charges. Do you think Mr Shah would have purchased the policy if the agent had simply disclosed that out of Rs50,000 yearly premium, more than Rs41,000 would go toward risk cover charges? Instead, the agent presents deceptive benefit illustration, sanctioned by the regulator, Insurance Regulatory and Development Authority to seal the deal.

It is certainly an ingenious way for a life insurance company as they benefit with hefty mortality charges due to higher age of the insured as well as from the expensive Waiver of Premium (WoP) feature. After all the other charges of premium allocation and policy administration charges are deducted, what goes into investment is negligible and hence the corpus after seven years is dismal.

The WoP feature, which is what differentiates a child plan, is an expensive affair due to the insurer taking additional risk of paying the premium each year till maturity in the event of insured’s death. So, instead of accumulating wealth for retirement purposes, the senior citizen destroys own savings handing it over to insurance companies. After the fund value becomes smaller than the mortality charges that have to be recovered, the insurance company closes the policy and returns the remaining peanuts to customer. The game is over.

HDFC Life cooked up this product when Deepak Satwalekar was the managing director. Mr Satwalekar, himself a highly risk-averse person, was always a vocal defender of such toxic products, the majority of them sold aggressively through HDFC Bank at enormous commission to the bank, revenues to the insurer and huge losses to the customer.

The question that begs asking is “Why do senior citizens even think about buying an insurance plan and why is insurance company selling it to them?” Life insurance needs should be nil at retirement, else your retirement planning needs to be re-looked at. It is the lure of purported product returns along with hard sell of agents for their commissions that sets the trap. Customers seldom try to find out the risk cover charges. The mortality rates vary with insurers, they are allowed to charge without any cap. They rely on past claims’ experience as one of the factors.

Want to know the fastest way of losing your money quickly? Buy a child plan when you are a senior citizen. That’s the only way insurers make money quickly?

Moral of the story: Never mix you insurance and investment needs. You will get the worst of both.

Moneylife contacted HDFC Life regarding the case. Here is their response:- “We would like to bring to your notice that since Mr. Shah has already approached the Insurance Ombudsman, Delhi and Rajasthan with his complaint and the same is still pending before the Hon'ble Forum, hence we would not be in a position to provide any comment on the instant complaint, which is subsequent to the complaint before the Forum.”