In your interest.
Online Personal Finance Magazine
No beating about the bush.
After paying annual premium of Rs50,000 for five years, Mr Saxena’s policy was auto surrendered as the fund value was only Rs33,759. Intervention by Moneylife Foundation Insurance Helpline ensured that Tata AIA returned the full premium of five years. Find out how underwriting error was proved
Prakash Saxena (name changed), age 59 years was mis-sold Tata AIG (now called Tata AIA) InvestAssure Gold Whole life ULIP policy in March 2008 for investment purposes. Mr Saxena had paid five premiums with last payment in March 2012. The policy got auto-surrendered in May 2013 as the fund value was lesser than one year of premium of Rs50,000. Tata AIA letter dated 30 May 2013 states that there was non-receipt of premium towards due date of March 2013. Tata AIA sent cheque of Rs33,759 to Mr Saxena as a full and final settlement of all claims and demands under the policy.
Mr Saxena wrote to Moneylife Foundation Insurance Helpline as he had no clue what happened with his policy. He was even willing to pay premium to restart the policy, but the insurer had already mailed him the cheque after closing the policy. Moneylife Foundation Insurance Helpline found that something was inconsistent in the policy terms. The “Schedule of Benefits and Premiums” document clearly states “Number of years premium payable” is five and “Last premium due date” as 30 March 2012 and “Policy term” of 41 years. Mr Saxena had paid five premiums with last payment in March 2012. He did everything as was told by the policy to do. How did the fund value fall below the one premium amount mark? Was it the equity fund option that made the difference?
The answer was actually in the charges which ate over 80% of the annual premium payment. Old ULIPs (pre September 2010) had heavy front loaded charges. Moreover, the mortality charges are steep for older age and it differs with every insurance company. The product which was purchased for investment purposes of Rs50,000 per annum was actually giving insurance cover with only a small amount for investment purposes. It explains why the fund value was only Rs33,759 after five years.
But, did Tata AIA sell the right product to the customer or did they have policy terms that clearly benefitted them? Does Tata AIA benefit from not covering the policyholder who today is nearly 65 years for Rs15 lakh sum assured after enjoying the premium payment for five years? We can’t say. But, the policy terms had contradictions. If “Number of years premium payable” is five and “Last premium due date” is 30 March 2012, why was Tata AIA expecting the policyholder to pay sixth premium on 30 March 2013? If “Number of years premium payable” is five, then why is “Policy term” of 41 years knowing fully well that policy will auto surrender the moment the premium payment is stopped. This is due to the fact that over 80% of the premium payment was going towards the charges. There were clear underwriting errors.
Mr Saxena was under impression that he is buying a whole-life policy and Tata AIA knew that policy will be over after five years. Moneylife Foundation Insurance Helpline highlighted the discrepancies to the insurer. Tata AIA swiftly made a decision to refund the entire premium amount of Rs2.5 lakh to Mr Saxena and they have made the payment. It proves that if there is a genuine case that can be logically proved, the insurance company will have to make amends.
Moneylife has written to Insurance Regulatory and Development Authority (IRDA) stating that the case is not just of mis-selling, but flawed underwriting and hence a toxic product. We requested IRDA to find out from Tata AIA about how many such policies were fraudulently sold and auto-surrendered. Mr Saxena case should not be looked as one-off case, but IRDA help is needed to get justice to all the policyholders who had to suffer.
Moneylife had written about how one senior citizen relied on the misleading benefit illustration of HDFC Life Young Star product that conveniently ignored the steep mortality charges, which made up for 80% of the premium. The insurance company benefited by keeping the customer in the dark about how much part of the premium really goes towards mortality charges. 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 was dismal. HDFC Life child plan sold to senior citizen erodes 96% of investment amount!
We are delighted to report several morale-boosting victories by the Insurance Helpline. Check them here
Traditional insurance products are set for makeover from October. Insurers will have to provide the prospective policyholder a customised benefit illustration. It is time that insurers’ offers become transparent, instead of them handing out worthless generic benefit illustrations
Consider a prospective customer aged 50 years wanting to buy a 10-year premium payment term (PPT) LIC Jeevan Anand policy. What is the value if he is shown a benefit illustration for a 35-year old buying a 25-year PPT policy? The generic illustration is a worthless piece of data, as the mortality rates increase steeply with age, and the reversionary bonus rate differs with the PPT. A 50-year old policyholder will pay much higher risk cover charges every year than a 35-year old. The impact of it is that the 50-year old policyholder will have much lower returns at the end of policy term than the 35-year old. But the benefit illustration does not reflect this. Moreover, recently declared LIC bonus rates have Jeevan Anand PPT less than 11 years, giving a bonus of Rs37 per thousand sum assured (PTSA), Rs40 PTSA for PPT 11 to 15 years, Rs44 PTSA for PPT 16 to 20 years and Rs48 PTSA for PPT over 20 years.
A generic benefit illustration is not just worthless but is even prone to mis-selling. Existing traditional products are being phased out by the end of September. New traditional products approved by Insurance Regulatory and Development Authority (IRDA) will hit the market from October. The new guidelines have the requirement of customised benefit illustration: “All insurance products shall provide the prospective policyholder a customized benefit illustration, illustrating the guaranteed and non-guaranteed benefits at gross investment returns of 4% and 8% respectively and as specified by IRDA or Life Insurance Council from time to time. The corresponding net yield shall be demonstrated only with respect to gross investment return of 8% p.a. Such benefit illustration shall be signed by both the prospective policyholder and the intermediary and shall form part of the policy document.”
It means that from next month insurance companies can no longer give generic benefit illustrations for traditional products. Today, LIC has generic benefit illustrations for its traditional products. Some private insurers offer customised benefit illustrations with a few of them offering online customised benefit illustrations. According to one private insurer, “We offer customised benefit illustration for traditional products in most markets. It is difficult to implement it for rural markets. We have raised question to IRDA about difficulty with 100% compliance with the requirement. Ask me to do what I can implement.”
V Manickam, secretary general, Life Insurance Council, says, “Insurance companies will have to comply with the IRDA guidelines on customised benefit illustration. We have not heard from life insurers about difficulty in implementation. There is initiative of common service centers (CSCs) e-Governance Services India Ltd which should help with rural markets.”
Moneylife emailed to eight insurance companies including LIC asking the following questions –
There was no response from any of the insurers except one, who responded “No comments can be offered to your query. As a registered insurer in India, we are bound to follow the guidelines.”
It’s time insurance companies including LIC get proactive about offering transparency to customers. A Harvard Business School study shows that LIC agents have an incentive to recommend more expensive and less suitable products to consumers. The study suggests that the government-owned organisation does not encourage its sales agents to provide better advice and that government ownership does not appear to solve the problem of unsuitable advice.
Lackadaisical approach from some private insurers is also prevalent. Benefit illustrations of many old ULIPs were mis-leading. Agents would present deceptive benefit illustration, sanctioned by the Regulator to seal the deal. Moneylife had written about how one senior citizen relied on the misleading benefit illustration of HDFC Life Young Star product that conveniently ignored the steep mortality charges, which made up for 80% of the premium. The insurance company benefited by keeping the customer in the dark about how much part of the premium really goes towards mortality charges. 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 was dismal. HDFC Life child plan sold to senior citizen erodes 96% of investment amount!
Bajaj Allianz Life sold old ULIP (Capital Unit Gain) to a consumer without obtaining his signature on the sales illustration, as mandated by IRDA. Moneylife intervention helped to solve a difficult case that even insurance ombudsman had refused to take up. Bajaj Allianz generously agreed to a settlement of Rs30,000. Bajaj Allianz Life refunds Rs30,000: Another Moneylife Helpline success
Traditional insurance products are set for a makeover from October. While there are some positives with new regulations, insurance agents are mis-selling existing products as a limited time opportunity. LIC agents have an additional incentive of service tax levy to push products before the deadline
From October 2013, Life Insurance Corporation of India (LIC) will charge policyholders service tax on the premium of traditional products. Until now, this tax was absorbed by the insurer. The service tax for traditional products is 3.09% of the first-year premium and 1.545% in subsequent years. In a recent announcement, Insurance Regulatory and Development Authority (IRDA) mandated that service tax will not be included in the contractual premium, but it is to be collected from policyholders separately. It is expected, that with service tax being charged separately from the policyholder, the bonus on the product would improve. But, LIC agents are using the service tax levy as an excuse to push sales before the October 2013 deadline.
Today, LIC agents are just as busy as they are during the tax-savings season due to additional reason i.e. existing traditional products will be discontinued after September 2013. While there are some positives for customers with new regulations like higher surrender value, lower agent commission and better insurance cover, agents are mis-selling existing traditional products as a limited time opportunity. An insurance agent of any company trying to shove life insurance policy, as a deal worth grabbing, is only talking baloney. After all, reduced agent commissions next month cannot be something agents look forward to.
According to one ethical LIC agent, “There is confusion among agents and hence the strategy is to go for the kill as they are unsure about their effectiveness to sell new traditional products next month. Moreover, we don’t know about the new products LIC has lined-up. But, if I hard-sell to my customers today, then how do I sell them products next month?”
Life Insurance Council, the industry body of life insurers in India, has proposed to Insurance Regulatory and Development Authority (IRDA) an extension of reasonable time for new traditional products regime to take place. V Manickam, secretary general, Life Insurance Council says that he has not asked for specific number of days/months of extension, but looks confident that insurance companies will get reasonable extension. IRDA making an extension before end of September will hardly be a surprise. In March 2013, IRDA had said that ‘standard proposal form’ guidelines would be effective from 16 February 2013. It has already been extended for life insurance companies to 1 April 2014.
There are media reports about LIC portfolio reducing from 52 products to just seven next month plus four new launches. While LIC is tight lipped about new product details to agency force, it may be doing so to mop up as much premium this month as possible, before unveiling the products next month. While insurance companies are in the process of product re-filing, we have to see how many products IRDA can approve.
Here are some important changes for traditional insurance products coming next month: