Can you hold LIC responsible for misselling of its low yield products?

LIC – Life Insurance Corporation of India is the oldest Life Insurance Company in India. It is still of the most trusted Insurance company for many Indians. It indeed has served millions of people in their bad times and as well as good times. Up to last 2 decades insurance means LIC for Indians. LIC always stand firm on its motto “ Zindagi ke Saath Bhi, Zindagi ke Baad Bhi”

LIC has multiple insurance plans suitable for every section of the society. Normally life insurance company provides Pure term Insurance plan, term insurance plan with riders and returning of premiums, ULIPs, Money back policies, endowment plans, whole life plans, pension plans, market linked pension plans and plan specially designed for child education. Each of these plans are unique in nature and suitable for different needs. These plans are broadly classified in traditional and market linked insurance plans.

Traditional Plans are

• Pure term Insurance plan
• Term insurance plan with riders and returning of premiums
• Money back policies
• endowment plans
• whole life plans
• pension plans
• plan specially designed for child education

Market linked Insurance plans

• ULIPs
• Market linked pension plans.
• Market linked Children plans

Marketing of these plans are mainly done by the LIC agents. These agents are not on a payroll of the company rather they get paid commissions which are their earning source.

LIC and other insurance companies has huge commission rate for traditional plans and market linked plan. Agents earn 20 to 25% commission on first year premiums on traditional plans for policy term of 10 and 15 yrs respectively where they can earn 30 to 40% commission on first year premiums on ULIPs.

Effectively these commissions reflect how much of your premium goes in the fund for earning returns. Suppose you pay an annual premium of Rs 10,000 on a 15-year endowment policy. In the first year up to Rs 4,000 would get deducted as agent’s commission so after all the other charges (did you forget policy administration charge, fund management charge, mortality charge, etc?!) you can expect about Rs 3,000 left to go to your fund in the first year.

These traditional plans offers guarantee returns to customers, so they need to be invested in Debt category only. That’s why their returns are so less i.e. 4 to 5% in long run.

Reasons why Traditional plans are marketed strongly by Insurance agents.

Earning more commissions for agents PREMIUM should be large or customer should buy traditional plans. So these traditional plans are sold to customers forcefully.

Customers are still afraid of market linked plan as they want guaranteed return on their premiums.

Since long LIC plans are mostly used for investment purposes more than Insurance purpose. People were happy with 1 lac SA in endowment or money back policies but want Bonus and guaranteed returns at the end of term.

Still people buy LICs traditional plans for kids education for the surety of the CORPUS even if they have to shell huge premiums year-on-year.

As premiums for Term plan is low so it is not that famous among agents even if it is a traditional plan as they earn less commission because the premium are very less compared to traditional plan.

People still think term plan is wastage of money as at the end of term they are not getting any money back. So they think their premiums are wasted. If they agree many prefer Term Insurance with return of premium option thinking that they can get back at least the premium amount. But don’t understand that they earn ZERO interest on these premiums in policy term.

IMPORTANT POINT TO NOTE

Above mentioned plans are offered by all the insurance companies not only LIC. Its not LIC’s mistake if you buy these traditional plan where you get 4/5% return. It is miss selling by the Insurance Agents. We as Customers are equally responsible as we not aware of the function of Insurance planning in Financial Planning. We mix insurance and investment together and stuck up with these low paying insurance plans. And we realize this mistake still many people hesitate to surrender those policies as only 55 to 60% of total premium paid will be returned. And they keep on serving these policies till the end.

But it is always better to surrender these traditional policies and go for pure Term policy for Insurance cover where you will get maximum SA with lower premium. Its like amputating a finger now instead of amputating a full hand in long run.

So MIND IT

it is not LIC or other insurance companies who are cheating their customers but it is we who are being fooled by the insurance agents.

Last thought:

Is there a smarter way of avoiding agency costs? Yes, there is. You can buy pure term policies online directly from the insurer and pay zero commission. You get better insurance cover for lower premium. Similarly, for the investment part you can invest in mutual funds through the direct mode.

Please remember : Insurance any way is not a great investment tool