Life Insurance-Difference between Indicative Returns to Actual Returns

Few days back I received comments on my site asking for guidance whether few charts related to LIC’s traditional plans showing returns of 10% are true or false? When I analyzed those links then I found agents are mis-selling the products showing indicative returns as if  a real return. So let us understand what is the difference between Indicative Returns to Actual Returns.

To bring clarity about how insurance product will give benefit, IRDA allowed Life Insurance Companies to shows the return in two ways. One way is by taking into consideration of 6% and another way is consideration of 10%. This is called “Benefit Illustration”.  The same was again modified by IRDA to 4% and 8% and will come into effect from 1st October 2013.

When you visit LIC site and select any product to view the details you will find this illustration under the tab called “Benefit Illustration”. Have a look at the wordings over there. It clearly says “Some benefits are guaranteed and some benefits are variable with returns based on the future performance of your insurer carrying on life insurance business. If your policy offers guaranteed returns then these will be clearly marked “guaranteed” in the illustration table on this page. If your policy offers variable returns then the illustrations on this page will show two different rates of assumed future investment returns. These assumed rates of return are not guaranteed and they are not upper or lower limits of what you might get back as the value of your policy is dependent on a number of factors including future investment performance.”

Also when you go further they clearly mentioned as

• “The non-guaranteed benefits (1) and (2) in above illustration are calculated so that they are consistent with the Projected Investment Rate of Return assumption of 6% p.a.(Scenario 1) and 10% p.a. (Scenario 2) respectively.  In other words, in preparing this benefit illustration, it is assumed that the Projected Investment Rate of Return that LICI will be able to earn throughout the term of the policy will be 6% p.a. or 10% p.a., as the case may be.  The Projected Investment Rate of Return is not guaranteed.”
• The main objective of the illustration is that the client is able to appreciate the features of the product and the flow of benefits in different circumstances with some level of quantification.
• Future bonus will depend on future profits and as such is not guaranteed. However, once bonus is declared in any year and added to the policy, the bonus so added is guaranteed.

But few agents and Life Insurance selling sites using these indicative returns and showing as if the actual return one receive from the products. Clearly when one gets the information from an agent showing 10% return over the long run then investors will automatically buy such products.

Whether the product will actually give you 10% of the return or not is depend on future bonus declaration of life insurance company. So how one can say that buyers will get guaranteed return of 10%. The best way to arrive at any return calculation for such traditional life insurance product will be considering the current bonus or loyalty addition trends but not the way few agents are showing.

Hope above points will make you caution in future when your agents show you chart showing the exact return charts.