Rs1 trillion. That’s just a small introduction to the full extent of investor funds lost due to badly sold life insurance products in India. We’re used to investors having issues with stock market-related events, but a growing mass market in retail financial products introduces us to the first large-scale investor issue in retail financial products. If the subprime crisis was the result of badly constructed and mis-sold home mortgage products, life insurance products in India are on the same road. They are badly structured and are being mis-sold.

Illustration: Jayachandran / Mint

When investors realize their error in buying a product they did not understand fully and turn to product details, they find they are caught in a trap. Regulation ensures that they lose the first- and second-year premium fully and get a tiny fraction of their total investment after year 3. Life insurance products take up to 10 years before they work for investors. People who stopped paying premiums after year 1 in India in 2008-09 contributed Rs1 trillion as agent income and to insurance companies, some of whom are sitting on hundreds of crores of rupees as income from lapsation. Could a part of this corporate income be wilful? And these are just the numbers for traditional policies. Add the figures from the more popular unit-linked policies, or Ulips where lapsation rates are said to be around 40-50% for private insurers, and we could be looking at a multiple of this number. This is pure retail money down the drain. Also down the drain is retail investor confidence in insurance, markets and financial products. The damage could cost India its pace of growth as domestic funds will scare away into unproductive assets.

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