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Business News/ Opinion / Why term plans are simply easier
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Why term plans are simply easier

They are plain and simple, they allow for comparison

Jayachandran/MintPremium
Jayachandran/Mint

As someone who reviews insurance plans for Mint Money, I have realized that of late, all the reviews lead to the same conclusion: a customer is better off keeping the two financial needs of insurance and investment separate. Instead of buying an insurance plan that doubles as a guaranteed investment product, it is better to buy a term plan for insurance and have a product like Public Provident Fund for investment. A senior insurance company executive I spoke to for a product review had the same grouse with me. “I will talk but my worry is that you will still end up saying buy a term plan instead," he said.

Honestly, I am surprised, if not disappointed, at the similarity because each plan is different from the other, not only in terms of construction but also in terms of the quantum of benefits. And yet the minute you put the plans through the blender of Excel sheets, they all throw up the same rate of return: 4% per annum or thereabouts. And every time the Excel throws up a return of 4%, I feel a little cheated. The way insurance policies are structured, it takes considerable time and tools to understand the benefits in detail. At first glance though, when you read that a policy will give 12% of the sum assured every year for 10 years along with guaranteed maturity benefits, there is a flicker of hope. But it vanishes as soon as you do the math.

It seems the industry is constantly innovating new ways to trap a customer in a financial product that gives no more than 4% return. And to sell these plans is an army of insurance agents who don’t need an education qualification of more than 12th standard to sell these complex products.

The word “guarantee" is a powerful tool with which these policies win half the battle; the rest is won by fancy packaging. So, it’s understandable that customers feel drawn to these products. The insurance regulator, however, doesn’t seem to be worried about the fallout of the complexity of these products, much less the opacity of these plans. Traditional policies do not disclose costs or the manner of investing your money. Further, the way benefits are spelt out, these plans can’t be compared even within the same product category, let alone other financial products. This compounds the opaqueness even more. Half-baked information sugar coated with guaranteed return is a recipe for disaster much like misinformation on unit-linked insurance plans (Ulips) veiled by the euphoria of the bull run spelt not so long ago. Yet the Insurance Regulatory and Development Authority (Irda) doesn’t seem inclined to learn from past mistakes.

But for those who are concerned about these products, the writing on the wall is already visible. I spoke to the head of a financial services company that has also started helping insurers revive lapsed policies for a fee. They call up policyholders on behalf of the insurers and convince them to revive their policies. According to them, they have seen a surge in lapsed traditional plans. When they started in 2012, 90-95% of the policies they got were Ulips, but in a span of two years, the share of Ulips has come down to 50% and that of traditional plans has increased to 50%. This punctures the popular notion spread by the industry that customers have started demanding traditional plans because here their money is not linked to the vagaries of the market. It proves yet again that if a product is not simple and easy to understand, there will be many dropouts.

This is perhaps why a term plan is so easy to recommend and understand. And because it’s plain and simple, it allows for comparison. At the very minimum you can compare the premiums or go the extra mile and compare the claim settling record of insurers.

Given the popularity of guaranteed insurance products and the complexity that the packaging lends to these products, the least Irda can and should do is mandate better disclosure that would enable comparison.

In case of guaranteed return plans, disclosure of the rate of return is a must. For non-guaranteed insurance plans, or what we call participating traditional plans (benefits are pegged to the performance of the participating fund), the illustration mandated by Irda showing the benefits on assumed gross return of 4% and 8%, should also show the net return to gauge the impact of costs just like Ulips.

In Ulips, the surrender costs have been clipped to a bare minimum, but in traditional plans, lapsing a policy still means a huge dent in your investments as the surrender charges in the initial years are quite high.

Despite many reviews mentioning the fact that disclosure of the rate of return is needed in guaranteed benefits products, the industry has not snapped into action. The insurers are perhaps waiting for a cue from Irda. Now Irda must rise to the occasion.

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Published: 01 Oct 2014, 06:39 PM IST
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