For a life insurer, LIC sells too few pure life policies

Photo: Mint
Photo: Mint


These serve people better but are harder to sell and insurance agents have no incentive to push them

On Sunday, the Life Insurance Corporation (LIC) of India, the country’s largest life insurance company, filed a draft red herring prospectus (DRHP) with the stock market regulator, the Securities and Exchange Board of India, for its forthcoming initial public offering (IPO). The government hopes to sell 5% of its holding in LIC through this IPO and raise money to finance its fiscal deficit.

The DRHP is full of interesting details about the company, including the fact that it sells very little term insurance, which is the purest form of life insurance, where a nominee is paid a sum assured in case of the policyholder’s death. Other forms of life-insurance policies are largely insurance mixed with investing, be it endowment or money-back policies or unit-linked insurance plans for that matter.

Interestingly, in 2020-21, LIC’s new business premiums acquired by selling term insurance policies stood at 1.89 billion. As per the DRHP, this formed just 0.33% of LIC’s total new business premiums acquired by selling its individual products in India.

The ratio stood at 0.28% and 0.32% in 2018-19 and 2019-20, respectively. For the first six months of 2021-22, the new business premiums acquired by selling term insurance policies stood at 0.89 billion or around 0.41% of the total new business premiums acquired.

So, what does this tell us? It tells us that India’s premier life insurer sells very little pure insurance. Sure, the other kinds of policies that LIC sells also have insurance built into them. But they are primarily investment policies which largely pay out money at the end of a maturity period. This leaves even those with some life insurance inadequately covered.

Why is this the case? First, there is a reluctance on the part of people to buy term insurance. They don’t like the idea of paying a regular premium for pure insurance and not getting anything back at the end of the policy’s term. Most term insurance policies are rightly structured like that to keep premiums low. But people rarely get this math.

Second, people do not like the idea of talking about death. They find it very uncomfortable.

Third, human minds are impacted by what behavioural economists call the availability heuristic, which essentially means that recent effects have a greater impact on how we behave. As Richard Thaler and Cass Sunstein write in Nudge:The Final Edition: “In the aftermath of a flood, purchases of new flood insurance policies rise sharply—but purchases decline steadily from that point, as vivid memories recede."

Similar logic plays out when it comes to buying term insurance. Unless there has been a sudden death in our immediate family or among friends that led to financial difficulties, the idea of buying term insurance isn’t really attractive. While death is inevitable, the idea of a sudden death is not something people like to consider.

Fourth, individual agents are reluctant to sell term insurance policies and they drive a bulk of the sales of LIC’s individual policies. In 2020-21, individual agents brought in 94.8% of its new business premiums. This jumped to 96.4% in 2021-22. In this scenario, the economic incentive of individual agents becomes important, especially for something that continues to be a ‘push’ product. The premiums on term insurance policies are much lower than other insurance policies. This ensures that the absolute commission that an agent earns on selling a term insurance policy is significantly lower than on selling other forms of insurance, while the effort involved isn’t really very different, given that most people buy insurance to save tax.

This is something that needs to be set right, especially given that a sudden death of an earning member in a family can be a serious financial setback. Given this, when it comes to insurance, it makes sense to insure against the prospect of a large loss. As Thaler and Sunstein write: “The most important principle is to get protection against rare but significant mishaps that can lead to financial ruin. The sorts of risks that should be insured are homes being destroyed by floods or fires, major health problems, the death or disability of a family income earner, and the crash of the family car." Hence, families should buy life and health cover to start with.

So, what can be done to change this situation? One solution is to incentivize people to buy term insurance. And that can be easily done by providing a tax deduction on premiums paid towards buying term insurance, as in the case of health insurance. This can be over and above the 1.5 lakh deduction that is already available under Section 80C of the Income Tax Act, for different kinds of investments, principal repayment of a home loan and other things. Given that term insurance premiums tend to be low, even an extra deduction of up to 10,000, over and above what is allowed under Section 80C, will lead families to insure against the prospect of a financial mess in case something untoward happens. This is the quickest way to have families buy some term insurance. As far as LIC is concerned, specific term insurance targets should be set internally for its agents.

Of course, other than this, the regular cliché of improving financial literacy also applies in this case, like it applies to so many other things.

Vivek Kaul is the author of ‘Bad Money’.

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