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.

12 Responses

  1. Hi !

    One of my friend has been working with Edelweiss Tokio Life Insurance & he suggested to go for Edelweiss Term Insurance + Income replacement solution for my Insurance Need as i am planning to buy 2 crore term plan as Edelweiss gives guaranteed inflated monthly income 5% p.a. starting from year 1 in case of happening of uncertain death.

    This option looks same like what HDFC Life Click 2 Protect Plus plan offers…..
    Pls advise whether to go with Edelweiss or HDFC ???

    He also shows me credential of company that recently its all ULIP funds got 5 Star Ratings from Morning Star …. Pls also guide on 5 Star ratings & about morning star…..

    1. Gaurav-ULIPs are different products than Term Insurance. So ignore the comparison. Instead I might have preferred HDFC over new company. But as usual it depends on your comfort with company, price and feature which matches you personally.

    2. Rate of Return assumption of 6% p.a.(Scenario 1) and 10% p.a. (Scenario 2)
      Sir,my question is that how did they calculated the above percentages against the amount paid. Would you please advise with an example? This is just to understand the calculation method.
      Thanks Vinod

  2. Do you think this is being done by LIC agents only and not by any other company? Or it is just that you have so far not received any querry about it?

    1. DB Desai-This is done by all agents irrespective of the company they represent. But the majority will be from LIC agents. I received the query, you can check older comments on this blog. You will notice such comments by readers.

  3. Hi, I wish to make one time investment of Rs: 50,000/= with LIC for a period of 15 years, kindly suggest which plan is the best and why and what will the the final amount that I will get at maturity……thank you for your help

      1. Hi, Mr. Basavaraj, thank you very much for your reply, I am thinking in two terms, 1st. is insurance cover and the 2nd. is savings. I feel that LIC is more secure than any other companies around, although sometimes the returns are less. I will await for your suggestions if there is anything better in your mind….Thanks

        1. Albert-I feel it is better to take the term plan separately to cover your desired life risk for the same 15 year period and rest invest in FDs or NSC (10 yrs) if you are looking for a safety net. This will give you more return than any LIC policy. But two things you need to note for my recommendations, returns from both FDs and NSCs are taxable income at maturity. If you are more comfortable then I suggest you some debt funds which more tax efficient than FDs in the long run.

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