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 –
• Can you tell me what percent of business today is being done using a customized benefit illustration for traditional products?
• Is it offered even for rural locations?
• Will you offer customized benefit illustration for traditional products effective 1 October for all the markets?
• Will the initiative of CSC help to implement customized benefit illustrations in rural markets?
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
Read - LIC agents’ last hullabol for selling traditional products before service tax regime
IRDA guidelines impact commission and surrender value of traditional products