Why understanding benefit illustration is important when buying life insurance?
A life insurance benefit illustration (BI) is a set of projections, prepared by the actuaries of the insurance company. The BI basically shows how your (policyholders’) insurance policy fund/money invested will perform over a period of time.
Mis-selling in the insurance sector is rampant where unaware customers are sold products not suitable for them. Although there are insurance sales agents that help you choose the right policies as per your need and lifestyle, there are many unscrupulous insurance sales agents who try to sell life insurance by misrepresenting facts in the benefit illustration.
When buying life insurance, the insurance agent or insurer is supposed to provide you with a benefit illustration. This illustration should be studied carefully as it shows how the returns on your life insurance policy would be computed and also the level of returns where these are guaranteed.
There are many insurance sales agents who sell life insurance policies showing their own policy illustration (with exaggerate rate of return) and not showing the authorised benefit illustration to the customers. Therefore, it’s important for policy buyers to read and understand this illustration properly.
In case of policies with variable/non-guaranteed returns (e.g. ULIPs), the IRDAI has mandated that benefit illustrations must show returns computation based on both 4 % and 8% rates of return.
C S Sudheer, Founder & CEO – IndianMoney.com said that insurance sales agents are known to exaggerate returns when selling life insurance plans especially in case of unit-linked plans. These agents promise high returns and entice customers especially when the stock market is doing well. Insurers must compulsorily show customised benefit illustrations assuming gross investment returns of 4 percent per annum and 8 percent per annum. “You must understand that these assumed rates are standardized by the regulator.
He said, “You must clearly understand this and not give the sales agent an opportunity to promise unrealistic returns or make use of the policy illustration to trick you. (This happens if you don’t understand the policy benefit illustration).”
What is a life insurance policy illustration?
A life insurance policy illustration is a set of projections, prepared by the actuaries of the insurance company. The benefit illustration basically shows how your (policyholders’) insurance policy fund/money invested will perform over a period of time. It includes financial projections for every year until the maturity, throughout the policy term. However, these set of projections are based on certain assumptions and do not guarantee how much your policy will be worth in any given particular year, except where values are clearly stated as ‘guaranteed.’
Also, be aware that a benefit illustration will not be relevant in case of a pure term insurance policy because it does not provide any return. The money charged for pure term insurance is entirely used to meet mortality risk charges of life insurance and no part of the money is invested. Consequently, there are no ‘returns’ in a pure term life insurance. The benefits in such an insurance would comprise the coverage of the policy, i.e., the benefits to the nominees in case of death of the insured.
Be aware of this IRDAI ruling
The Insurance Regulatory and Development Authority of India (IRDAI) has directed insurers to mandatorily issue benefit illustrations (for policies with variable returns) based on two different assumed rates of return (4 percent per annum and 8 percent per annum) as per a prescribed format. Insurers have to comply with the above by December 1, 2019.
Thus, where the regulator is taking proactive measures to safeguard buyers, the buyers should also make sure that unscrupulous sales agents don’t hoodwink them into buying unsuitable policies based on unrealistic promises.
What you should do
Next time you talk to an insurance sales agent, ask them for a benefit illustration (as per the IRDAI format) for the insurance policy you are buying. Rakesh Goyal, Director, Probus Insurance Brokers said that the customer should see annual premium invested, guaranteed returns, and non-guaranteed returns, in the benefit illustration carefully.” Also, a policy should not be solely evaluated based on the non-guaranteed returns as those are based on assumed projections. You must consider other factors like how much insurance cover you need, which financial goal to link with the investment, etc., before buying a life insurance policy,” he said.
What to do if you have already been mis-sold a policy?
Insurance buyers should be well aware of the ways in which a life insurance policy can be mis-sold to them by an insurance agent or a broker.
If you think that a policy has been mis-sold, you can still ask for a refund by returning the insurance policy to the insurer within the free-look period of 15 days which starts after you get the policy document.
You can still raise a complaint even after the free-look period is over. In such a case, you will have to raise the grievance with the insurer, Insurance Ombudsman, or through IRDAI’s online Integrated Grievance Management System (IGMS) website.