Is the phenomenal response to the Life Insurance Corporation’s (LIC) Jeevan Aastha scheme (that closed on Wednesday) a tribute to the life insurance
behemoth’s cleverness in structuring a winning product? Or is it — collections are estimated to cross Rs 8,000 crore — more a reflection of some smart, and not-so-transparent, selling by LIC? The answer is a bit of both. LIC certainly demonstrated an uncanny ability to assess the pulse of the market right, designing an assured returns product that seems tailor-made for uncertain times. But much of the success of the scheme is because LIC was less-than-fully transparent about the benefits. Unfortunately, the insurance regulator, IRDA, too, seems to have turned a Nelson’s eye to the not-so-subtle mis-selling going on right under its nose. Prima facie, Jeevan Aastha is a single premium assurance plan with guaranteed benefits on death or maturity. In an environment where banks have reduced interest rates on fixed deposits (FDs), it seemed to offer the best of both worlds — a higher (tax-free) return than FDs and insurance cover as well. Not surprisingly, it met with a huge response, though a careful calculation shows returns are likely to be much less — in the range of 6.75% to 7.25% per annum in most cases! This paper has often argued the need for greater financial literacy on the part of investors (and greater transparency on the part of players). Even so it is doubtful many investors, even those who are fairly clued-in, would have been able to pierce the veil behind LIC’s complicated ‘benefit illustration’. For instance, insurance proceeds are normally tax-free. But if the premium payable on any insurance plan exceeds 20% of the sum assured, the proceeds become fully taxable. In the case of Jeevan Aastha, the single premium is often likely to be more than 20% of the maturity proceeds rendering the maturity amount taxable. However, LIC chose not to disclose this. Caveat emptor must be the guiding principle especially where money is involved. Nevertheless, it is high time financial players stopped playing a cat-and-mouse game with investors, counting on their naiveté to garner funds. Where they do not, the regulators must step in and compel them to do so.
behemoth’s cleverness in structuring a winning product? Or is it — collections are estimated to cross Rs 8,000 crore — more a reflection of some smart, and not-so-transparent, selling by LIC? The answer is a bit of both. LIC certainly demonstrated an uncanny ability to assess the pulse of the market right, designing an assured returns product that seems tailor-made for uncertain times. But much of the success of the scheme is because LIC was less-than-fully transparent about the benefits. Unfortunately, the insurance regulator, IRDA, too, seems to have turned a Nelson’s eye to the not-so-subtle mis-selling going on right under its nose. Prima facie, Jeevan Aastha is a single premium assurance plan with guaranteed benefits on death or maturity. In an environment where banks have reduced interest rates on fixed deposits (FDs), it seemed to offer the best of both worlds — a higher (tax-free) return than FDs and insurance cover as well. Not surprisingly, it met with a huge response, though a careful calculation shows returns are likely to be much less — in the range of 6.75% to 7.25% per annum in most cases! This paper has often argued the need for greater financial literacy on the part of investors (and greater transparency on the part of players). Even so it is doubtful many investors, even those who are fairly clued-in, would have been able to pierce the veil behind LIC’s complicated ‘benefit illustration’. For instance, insurance proceeds are normally tax-free. But if the premium payable on any insurance plan exceeds 20% of the sum assured, the proceeds become fully taxable. In the case of Jeevan Aastha, the single premium is often likely to be more than 20% of the maturity proceeds rendering the maturity amount taxable. However, LIC chose not to disclose this. Caveat emptor must be the guiding principle especially where money is involved. Nevertheless, it is high time financial players stopped playing a cat-and-mouse game with investors, counting on their naiveté to garner funds. Where they do not, the regulators must step in and compel them to do so.
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