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    Jeevan Saral: Why you must evaluate endowment plans very carefully


    A PIL was recently filed against LIC by investors in the Jeevan Saral plan. Here’s a look at how such endowment policies work.

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    Do your research and understand the product instead of relying on the agent’s explanation or insurers’ brand image.
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    The spotlight is back on endowment plans. Life Insurance Corporation of India’s (LIC) Jeevan Saral, withdrawn in 2014, was in the news recently after a PIL was filed in the Supreme Court , alleging that LIC had mis-sold the product by misleading policyholders. The apex court made it clear it was not expressing any opinion on the merits of the case.

    A not-so-Saral affair
    Launched in 2004, Jeevan Saral was sold as an easy-to-understand plan. The policyholder had to choose the premium, and the sum assured would be at least 250 times the monthly premium, besides loyalty additions. In this ‘simple’ structure lay the genesis of a controversy. “Irrespective of whether the policyholder was 25 or 50, the sum assured was the same—minimum 250 times the monthly premium. Mortality charges were levied accordingly. Many agents sold the product to older individuals, without considering whether the life cover was needed or not,” says Melvin Joseph, Founder, Finvin Financial Planners.

    Pure protection cover is meant to replace the breadwinner’s income in the event of her death. In India, however, life insurance has been sold as a savingscum-insurance product, despite the fact that most endowment policies yield low returns—4-6% per annum. Many policyholders end up shelling out mortality charges for a cover they do not need. Since mortality charges are linked to age, older policyholders have to shell out more. “In case of Jeevan Saral, returns for higher age groups were in the negative in many cases. The higher mortality charges ate into the final corpus. Some ended with a corpus much lower than total premiums paid,” adds Joseph.

    An ET Wealth analysis of nearly 50 Jeevan Saral-related complaints filed with insurance ombudsman offices between 2015 and 2017 shows that some complainants received merely 30-40% of total premiums paid till maturity. Complainants alleged that LIC reached out to them closer to maturity with the contention that the maturity sum assured figures were either omitted or erroneously interchanged with the death sum assured, and the actual maturity sum assured was different. This ‘revised’ sum assured, plus loyalty additions declared, was much lower than premiums paid.

    LIC explained the discrepancy as a “typographical error”, as per complaint records on the website of Executive Council of Insurers. “The respondent (LIC) has all the support system like manpower, technology and actuarial expertise. It cannot take 11 years for detecting the error—at the time of maturity of the policy. The policy document is an evidence of contract and the respondent cannot be allowed the liberty to issue incorrect policy document on the pretext of some snag,” the order passed by Mumbai Ombudsman office on 26 July 2017 noted, directing the company to pay all premiums paid by the complainant so far, minus the maturity payout already paid, along with loyalty additions.

    A Maharashtra state commission announced a similar verdict in December 2018. However, some insurance ombudsman offices chose to buy LIC’s typographical error argument. Then there are cases where the maturity sum assured was not mentioned clearly and policyholders’ pleas to treat the death sum assured as maturity sum assured were dismissed. LIC did not respond to an email seeking comments.

    Sequels not likely
    The saga is unlikely to be repeated, say experts. “In other products, premium is decided on the basis of age and sum assured chosen at the time of purchase. But in this policy, the same sum assured was offered for all age groups,” explains Joseph. Identical premium and sum assured as younger age groups meant higher mortality charges for older individuals, which affected the maturity corpus.

    The product is not available any more. All old endowment products were withdrawn after Irdai’s fresh guidelines on traditional, non-linked products came into force in 2013. The regulations brought in a host of changes, including cap on commissions, higher surrender values and customised benefit illustrations where projected maturity values for participating endowment plans take into account premiums paid, age, sum assured and projected rate of return of 4% and 8% per annum.

    Remember, even these are not assured returns but are used for illustrative purposes. The customised benefit illustrations can be used to calculate IRR, which will hint at the impact of charges, including mortality, on the maturity value, even though they are not disclosed separately.

    No compounding, low returns
    How much a 35-year-old male policyholder stands to gain
    • Annual premium Rs 50,000
    • Policy tenure 15 years
    • Premium paying 10 years
    • Maturity sum assured Rs 5 lakh
    • Simple annual bonus* 3.80%
    • Annual bonus Rs 19,000
    • Expected maturity value** Rs 7.85 lakh
    • IRR 4.32%
    **Sum assured plus annual accumulated bonuses paid over 15 years for a regular premium, participating endowment plan.

    Awareness is the key
    Do your own research and understand the product instead of relying on the agent’s explanation or insurers’ brand image. Endowment plans come primarily in two forms: participating and nonparticipating. The latter are simpler to understand as the maturity payouts are clearly defined. It’s the participating, also called with-profits, plans that can be difficult to comprehend. They are not market-linked, but the returns, in the form of annual, interim or terminal bonuses, are not guaranteed. Annual bonuses can be simple bonuses that do not compound, but some insurers could offer compounded reversionary bonuses.

    Though endowment plans are seen as risk-free products, the returns for participating policies depend on surpluses generated by the participating fund managed by the insurer, which are then distributed amongst policyholders. After completion of a certain number of years, some plans could offer loyalty additions, expressed as a percentage addition to the base sum assured. The idea is to encourage the policyholder to stick. While the returns are likely to be stable, they are neither guaranteed nor attractive. Also, returns remain low because bonuses accrued do not compound over the tenure or rates are low.
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