Mis-selling is not just about selling bad products to the consumers. It is also about selling good products the wrong way. In a way, selling any product that is not suitable for the consumer/investor is tantamount is mis-selling.
Selling a life insurance plan to an 80-year old who walked into the branch to open up a fixed deposit is mis-selling. Selling regular premium ULIPs (multi-year policy)with the impression that the premium needs to be paid just once is mis-selling.
By the way, mis-selling is not just limited to insurance sales. It is a widespread phenomenon in the financial services industry. For instance, selling equity mutual funds with the impression of guaranteed 25-30% p.a. returns over the long term is mis-selling. Selling even the best performing equity fund to an investor who can’t digest volatility or has limited risk taking ability is mis-selling. Asking investors to rely on SWP or dividends from equity funds for regular income is mis-selling.
Recently, I had reviewed LIC JeevanShanti, a new annuity plan from LIC. LIC Jeevan Shanti is a fine product. I have always maintained that annuity products can add value to certain portfolios. Therefore, LIC Jeevan Shanti can deliver value for many investors.
LIC Jeevan Shanti comes in both immediate annuity and deferred annuity variants. Under immediate annuity variants, the pension/annuity starts right away. Under deferred annuity variants, the pension starts at the end of the deferral period. For more on LIC Jeevan Shanti, refer to this post. Deferred annuity plans can have merit in some cases. By purchasing a deferred annuity plan, you can lock-in annuity rate (interest) far into the future, which is a big positive.
Where is the potential mis-selling in LIC Jeevan Shanti?
A fellow RIA forwarded promotional material used for selling LIC Shanti. While I can’t say for sure if this material is actually being used for sales, I did come across a Money Life article which mentioned that this illustration is actually being used by the agents.
Clearly, something is not right.
For instance, let’s look at one of the examples given. A 50-year-old will get Rs 192,300 per annum on investing Rs 10 lacs with a deferment period of 20 years. RATE mentioned is 19.23%.
Yes, you get Rs 192,300 per annum on an investment of Rs 10 lacs. However, you start getting this money only after 20 years. It is utter nonsense to call this a RATE of 19.23%. There is little regard for time value of money.
To put things into perspective, let’s consider an alternative investment.
You invest Rs 10 lacs for 20 years in a bank fixed deposit. Let’s assume you earn a return of 6% (post-tax) on your investment. In 20 years, Rs 10 lacs will grow to Rs 32.07 lacs.
For Rs 32.07 lacs to generate an annual income of Rs 192,300, you need a return of only 5.99% p.a.
You can see, in order to generate an income of Rs 192,300 per annum after 20 years from an investment of Rs 10 lacs, I did not have to consider anything above 6%p.a. In that sense, 19.23% is clearly misleading.
I can’t say for sure if this is a case of mis-selling. If the salespeople are providing the right commentary and explaining how it really works (and that the RATE means nothing), I think we are still fine. I am sure many agents explain the workings to the investors. However, the illustration seeds some doubts. If the focus is on the RATE, then we have a problem. As an investor, you need to be aware of such aspects before you sign up for the plan.
Assess the utility of an immediate annuity or a deferred annuity plan for your finances. If you see the utility, go ahead and purchase LIC Jeevan Shanti. LIC Jeevan Shanti is a fine product. Just that don’t get misled by the fancy RATE in the illustrations.