Ever wondered why your insurance (and investment) plan is not providing returns anywhere close to what was shown to you at the time of purchase? Well, there can be multiple reasons. Perhaps, the markets did not perform as well as expected. Or may be, your insurance agent did not disclose the complete information during the sales meeting. There is nothing much you can do if the markets did not do well. However, you could have avoided falling prey to the sales pitch by doing some homework. A number of insurance companies and their sales teams follow not-so-ethical practices which can be harmful to the investors in the long run. In this series of posts, I will write about various such practices/ tricks used by insurance companies to sell products to their customers.
In this article, I highlight one such trick that I came across last week. A few days back, I received a message from an insurance company. The message read like this: “Plan to retire with confidence and get Guaranteed capital return of 30 lacs after 20 years by investing 48K annually for 10 years. SMS XX to XXXXX T&C Apply.” I highlighted the word “Guaranteed” to show that returns were promised.
How did I interpret the plan:
I have to invest Rs 48K per annum for 10 years. At the end of 20 years, I will get back Rs 30 lacs i.e. If I start today, I will invest Rs 48K per annum till 2025 (or 2024) and will get back Rs 30 lacs. Just looking at the numbers, the plan looked promising. To verify, I did spreadsheet analysis to ascertain the exact returns. The return on offer was 12.0% p.a. Please note the return is after all the costs of the plan have been taken into account. The return was guaranteed too. Awesome, isn’t it?
As suggested in the message, I sent an SMS to the designated number and got a call back in a few hours. They did tell me the name of the retirement plan under consideration but stopped short of telling anything else. They insisted on setting up a meeting with their sales executive so that he/she could show me all the illustrations. Nothing wrong with that. Though I decided not to meet the sales person, I did read the pension plan brochure available on the company website to find out if it had any similarity to what was mentioned in the SMS.
What was the actual plan?
It was a regular pension plan where you contribute for a fixed number of years and get lump sum/pension benefits at maturity. There was limited life insurance component in the plan. We will not go into exact details of the plans or whether you should invest in such a plan. We just intend to highlight the difference between the promotion message and the actual plan.
- The returns, as per the pension plan, are not guaranteed. You are guaranteed only 101% of the total premiums paid. So, for Rs 48,000 paid per year for ten years, the guaranteed amount comes out to Rs. 4.84 lacs. This is nowhere close to Rs 30 lacs as mentioned in the SMS.
- Since the product is a pension plan, the investor will be allowed to withdraw only one-third of the maturity amount as lump sum. So, even if the corpus somehow reaches the promised amount of Rs 30 lacs, the investor will be allowed to withdraw only Rs 10 lacs as lump sum. The remaining two-third amount (Rs 20 lacs in this case) shall be used to purchase annuity/pension.
- As per IRDA norms, the insurance company has to provide an illustration benefits table assuming rates of return (on invested funds) at 4% and 8%. This pension plan brochure did have such a table. At gross yield (return) of 4%, the net yield was 2%. For gross yield of 8%, the net yield was 6%. Net yield is the yield (return) after accounting for all the costs of investing in the plan. Gross yield is calculated before accounting for the costs. What you get at the end (maturity) is the net yield. Expectedly, there was no mention of net yield in the entire brochure. I did the calculations in a spreadsheet. If the difference between gross and net yield is 2%, for the investor to get a return of 12%, the return on invested funds must be 14% p.a. Guaranteed returns of 14% p.a. for 20 years, where is the insurance company going to invest?
The entire idea behind such an SMS was to lure you into meeting the sales executive. The sales executive would carry fancy projections/illustration sheets to show that such returns were not just possible but quite likely. You would be bombarded with useless information such as bonus/booster benefits to create a positive impact. These bonus/booster benefits are specifically put in the plans so that you find it difficult to assess the actual returns. If you are too lazy to read the plan properly and do some calculations yourself, you are likely to fall prey to the sales pitch.
We will not put the entire blame on the insurance company or its agents. In no way, do we intend to show the insurance industry or its distribution network in bad light. They will keep selling such plans till such time the investors keep buying them. Most sales people, not just from insurance industry, will talk only about the good features of their product and hide information that will adversely affect your purchase decision. This is an acceptable sales practice. However, the insurance company could have avoided using keywords such as “Guaranteed” in any kind of promotion for such a plan.
The onus is on you, the investor. You should be able to see beyond such sales tactics used by insurance companies. You must read the plan properly and understand its various costs and features. If you are finding it difficult to do the return calculations yourself, please talk to a friend who can help you. You can also avail services of a fee-only financial planner (certified financial planner or a SEBI registered investment adviser). He/she may charge you a small fee but will save you money many times over in the long run.
Deepesh is a fee-only financial planner and Founder, PersonalFinancePlan
Photo Credit: I could be your magician, Jin 2009. Original image and information about usage rights/license can be downloaded from Flickr.com
Disclaimer: I run a fee-only financial planning firm. Hence, I have vested interest in asking you to avail services from a fee-only financial planner.