5 reasons why Senior Citizens should avoid Life Insurance Products

Senior citizens are soft-targets for mis-selling.

Why?

First, they may not be comfortable researching the financial products or may not have requisite skill/ resources to understand the product before buying. How many are comfortable researching a product online?

Secondly, they may lack the physical and mental strength to get justice if they realize they have been mis-sold a product.

Thus, unscrupulous salespersons can target them with impunity.

Mis-selling happens everywhere. When it comes to financial products, mis-selling is nowhere more pronounced than insurance products.

It is not that mis-selling does not happen in mutual funds. However, since the incentives are front-loaded in insurance products, there is a much greater incentive to mis-selling in case of insurance products.

In my opinion, mis-selling is way more institutionalized in case of insurance products. Add to that an effete regulator such as IRDA, it becomes a never-ending party for dishonest agents.

Caveat Emptor (buyer beware).

In this post, I will talk about reasons why Senior Citizens should shun life insurance products altogether i.e. there is no need for them to purchase any life insurance product.

If you understand or agree with my point of view, it becomes much easier to avoid being a victim of life insurance mis-selling. Being a senior citizen, you simply have to say No to any life insurance product.

In this post, I will use Senior Citizens and retired persons/retirees interchangeably. I am essentially talking about a stage of life where you have discontinued formal employment and rely on your investments/pension for your income.

Here are 5 reasons why Senior Citizens should not purchase life insurance products.

#1 You may not need it

If you have planned your finances well before retirement, you shouldn’t need life cover during retirement i.e. you should have enough money by the time you retire.

And if you already have enough for regular expenses, contingencies and goals, you don’t really need any life cover. Even a term life insurance plan is not required.

#2 You may not be able to afford it.

If you purchase a life insurance plan during retirement, you will have to pay premiums to continue the plan. This will put unnecessary pressure on your cashflows.

Many agents push single premium life insurance plans to save you this trouble. I will discuss later in this post why you should avoid single premium plans too.

#3 You will get poor returns

This is a very critical point.

As I understand, most senior citizens or retirees purchase life insurance plans for returns (and not really for life cover).

What if I were to tell you that your higher age will bring down your returns?

Yes, that’s right.

This happens because, in bundled products, a part of your premium or accumulated wealth goes towards mortality charges. Mortality charges are the charges levied by the insurance company to provide you life cover. And mortality charges will increase with age.

Let’s consider an example in traditional plans. Traditional plans are opaque and you don’t get any bifurcation of costs. Therefore, it is difficult to pinpoint how much is going towards mortality charges. However, we can still assess the impact.

Let’s suppose a 30-year old person (A) and a 60-year old person (B) purchase the same plan with Sum Assured of Rs 10 lacs. The policy tenure is also same.

At the time of maturity, both will get the same amount of money. This is because Sum Assured is same and the bonuses depend on the policy term (which is also same)

However, the premium for B will be way higher than the premium for A because B is older than A.

This automatically tells you that the returns for B will be lower than the returns earned by A. B pays more every year to get the same amount at policy maturity.

In case of ULIPs, a portion of your fund value goes to meet mortality charges. The mortality charges are charged on a monthly or quarterly basis. Clearly, if your age is higher, more of your money goes towards mortality charges.

If money is going towards mortality charges, less is left for investment and it compromises your returns.

In extreme cases, mortality charges can eat up almost the entire investments of senior citizens in ULIPs. Here are a few links: (How to shrink Rs 50,000 to Rs 248?) (How Rs 3.2 lacs became Rs 11,678 in 6 years?)

I have covered this aspect in great detail in this post on ULIPs and Traditional plans.

You didn’t need to incur mortality charges in the first place if you didn’t need life cover.

#4 You will have to pay tax on maturity proceeds

Most of us believe that any proceeds from a life insurance company are exempt from tax.

This is true for death benefit but not always for maturity benefit.

For the maturity benefit to be exempt from tax, the annual premium for the Life insurance plan must be less than 10% of the Death Sum Assured (death benefit) for all the policy years i.e. Life Cover should be at least 10 times the annual premium. This is as per Section 10(10D) of the Income Tax Act.

Most single premium plans are unlikely to meet this condition.  I copy an excerpt from IRDA Linked Insurance Products Regulations, 2013. These regulations apply to Unit Linked Insurance Plans.

As you can see, single premium plans are almost doomed (from the tax point of view) for everyone.

For regular premium products, investors below 45 years of age are safe from taxation viewpoint since the life cover will be at least 10 times annual premium. For investors above 45, the minimum multiple is only 7 (has to be 10 for tax-free maturity proceeds).

Do note these are minimum multiples allowed. An insurance company can always structure a single premium product that allows life cover of 10 times premium.  However, you can expect returns to be lower for such plans because more money will go towards mortality charges.

By the way, this is not just limited to Unit Linked Insurance Plans. Even single premium traditional life insurance plans face the same problem. LIC Bima Bachat plan is a case in point.

Therefore, low returns coupled with taxable maturity proceeds. For senior citizens, investing in insurance products for returns can be a nightmare.

#5 You may lose flexibility with your money

During retirement, you may want your money/investments to be readily accessible. Your ability to raise funds from other sources may be compromised during retirement. This will lead to increased reliance on your existing savings.

We all know traditional plans can have high surrender/exit charges. In case of ULIPs too, your money is locked-in for 5 years.  Liquidity can be an issue with insurance products.

Additional Links

You may not need life insurance during retirement

Are ULIPs better than Mutual Funds?

In ULIPs and traditional Life insurance plans, your age affects returns

In ULIPs, mortality charges are higher than term insurance plans