How Rs 3.2 lacs became Rs 11,678 in 6 years?

Birth of a child brings joy not only to the parents but also parents of the parents i.e. grandparents.  It is not uncommon to see grandparents making an investment in the name of their grandchildren. They want to contribute towards their grand children’s future.

In this post, I will pick a case where a senior citizen picked up an investment product and invested approximately Rs 3.2 lacs over 6 years. He ended up with a princely sum of Rs 11,678.

Shocked? Well, I am not making up the numbers.

How did this happen?

How Rs 3.2 lacs became Rs 11,678 in 6 years?

By the way, he didn’t invest in a penny stock. He merely purchased a child plan from an insurance company.

He purchased (or was sold) HDFC Life Young Star Policy for Sum Assured of Rs 2.5 lacs with quarterly premium of Rs 12,500. He paid the premium of Rs 3.2 lacs in 6.25 years. When the policy was closed by the insurance company, he got a princely sum of Rs 11,678.

I came across this case in an article in an old edition of Money Life magazine and have relied on the information shared in the post.

What went wrong?

In any ULIP (unit linked insurance plan), a part of your premium installment goes towards providing life cover (mortality charges) and the remaining amount is invested in a fund.

Under a term life insurance plan, you pay only the mortality charges since there is no investment angle.

Let’s look at the reasons.

Mortality Charges increase with age

Quite clearly, if the mortality charges are higher, the lesser amount will be left to invest. And mortality charges will increase as you grow older. Why?  The probability of a 65 year old dying in the next 1 year is much higher than the probability of a 25-year old dying in the next one year.

A serious illness can increase mortality charges further

In this specific case, the consumer had a coronary heart disease, which resulted in doubling of mortality charges. The reason is that the chances of demise of the policy holder are higher because of the illness.

Nature of child plans

Nature of child plans is such that in the event of death of the policyholder, future premiums are paid by the insurance company. This rider is commonly known as waiver of premium rider.  By purchasing this rider, you ensure that the investments for your child’s future continue in your absence. Noble thought per se.

However, in this specific case, since the applicant was a senior citizen, this rider came at a high cost. Essentially, it will increase mortality charges even further.

Must Read: Unit linked Child plans: Should you buy?

Intermediary Commissions

This is an old case. The policy was sold in 2006. At the time, agent commissions in ULIPs were very high. That would have also eaten into the corpus.

With revised ULIP guidelines, commissions have been capped. Hence, this is no longer as big a problem. Since the commissions are capped in ULIPs, the banks and insurance agents have shunned ULIPs these days and started selling traditional plans because traditional plans still offer high commissions.

Going by MoneyLife article, Rs 41,000 out of annual premium of Rs 50,000 (Rs 12,500 X 4) went towards mortality charges (life insurance cover).  Hardly anything left for investment.

And that’s how an investment of Rs 3.2 lacs became Rs 11,678 in 6.25 years.

Must Read: Which is the best term insurance plan for you?

Where is the responsibility of agent or insurance company?

This is the classic case of mis-selling. 

This is similar to a case where investment of Rs 50,000 in an insurance plan from SBI Life became Rs 248 in five years. Read more about the case here.

Did the agent not know that the mortality charges will eat heavily into returns?

Did the underwriting team of the insurance company not know?

Nobody cared to inform the old man what he was getting into. His investment was doomed since the day he purchased the plan.  The unfortunate part is that the insurance agent and the insurance company knew but didn’t do anything.

If he knew almost 80% of his annual investment will go towards life cover (that perhaps he didn’t even need), would he have purchased the plan? I am quite sure he would have stayed away.

I just wonder if the transaction took place at a branch of HDFC Bank. There is no such mention in the MoneyLife article. Hence, it will be prudent to give HDFC Bank the benefit of doubt. However, bankers typically do not have any qualms in selling the most inappropriate products to their customers.

For all you know, the gentleman may have walked into the bank branch just to open an FD or a RD for his grandchild. And banks do not let you open FD so easily these days. You can read about experience of one of my clients when he walked into a bank branch for opening a PPF account in this post.

What should you do?

  1. Do not mix investment and insurance.
  2. Assess if you need a life cover. You may not need life insurance during retirement.
  3. Develop greater awareness about financial products. Do not trust anyone. Look into potential conflict of interest. You need to be aware to ask the right kind of questions. If you rely too much on others, you will be taken for a ride sooner or later.
  4. Keep track of your investments: If the policy holder had kept track of growth in investment corpus, he would have realized that something is wrong quite early.
  5. Do not fall for fancy product names. Do not fall for emotional sale pitches. Make a rational and objective decision.
  6. Do not visit a bank for seeking investment advice. I have said this many times before. Most bank officials are not well trained. Even if they are trained well, they are trained well in making sales and earning commissions for the banks. The bank officials never pay any heed to your requirements. You are better off going to a casino and gamble your money away.  It will give you greater thrill and less heartburn later.
  7. Seek professional advice, if required. When it comes to financial products, it seems everybody is an expert. Nobody holds back in offering unsolicited advice when it comes to investments. Seek advice from a qualified person (say a SEBI Registered Investment Advisor). You might have to pay a fee. However, the cost of purchasing a poor financial product is much higher than the fee that you pay to an advisor.

About Money Life: In my opinion, MoneyLife is a personal finance magazine that every personal finance enthusiast must subscribe too. I am a subscriber myself. This magazine focuses on consumer and investor activism,  which are not well covered in any other personal finance magazine.

Additional Read

  1. MoneyLife Article
  2. Do’s and Don’ts while planning for children’s future
  3. ULIPs < Mutual Funds + Term Insurance
  4. No parent should purchase LIC Jeevan Tarun
  5. Don’t invest in LIC New Children’s Money Back plan

Disclosure

I am a SEBI Registered Investment Adviser (RIA) and may have vested interest in recommending you services of a SEBI RIA.

The article was originally published on August 6, 2016.

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Deepesh Raghaw

Deepesh is a SEBI Registered Investment Adviser and an alumnus of IIM Lucknow. Deepesh provides customized Financial Planning and Investment solutions to his clients. Deepesh is passionate about personal finance and contributes regularly to leading Business Newspapers. Deepesh appears regularly on personal finance shows on Business Television.

6 Responses to How Rs 3.2 lacs became Rs 11,678 in 6 years?

  1. Karthik says:

    “Do not visit a bank for seeking investment advice”. This is spot on!

  2. Shyamal says:

    Sir, I want to invest to gain in future also to have tax benefit. May be I have to do seperately. Presently I am having mutual fund investment in SBI Rs.3000/monthly. I wanted to start LIC Jeevan Anand. Please guide… I can invest Rs 10000/monthly.

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