It was the third reminder in as many days to submit my tax-saving investment declaration. Problem was I was still short of my target by Rs 20,000—where should I invest? My mother insisted on a government-backed instrument. She is still suspicious that private companies can shut shop and vanish.
The answer came with my newspaper the next day—a flyer that stated in bright red: "Tax saving with life cover and retirement planning . LIC introduces a monthly deposit scheme similar to a post office scheme." What’s more, I could also win a gold coin if I invested.
Time was running out. The new product was the only ‘safe’ instrument on my radar (I had more five-year FDs than I intended to accumulate). So I called in late at my office and headed to the address printed on the pamphlet.
The insurance consultant’s office was a study in contrast—dingy outside and plush interiors. Spotting a free counter, I approached the consultant and told him that I wanted to invest in their new monthly deposit scheme.
“Very good. It is a great scheme. You have to invest only Rs 2,000 a month. It is just like the post office recurring deposit. But it has more benefits,” he said, pulling out a colourful paper from a file.
“The investment is tax deductible and you get an insurance cover free. The post office doesn’t give insurance,” he rambled on. He hadn’t heard of postal life insurance, or hoped that I hadn’t. Why would LIC, whose bread and butter is life cover, offer it for no charge?
I did not voice my doubts. The consultant flipped over the colourful sheet and said: “If you invest Rs 2,000 every month, you will get a gold coin worth Rs 3,500 free. If you invest more, you get coins of proportionately higher value. Plus one more gold coin for five references.”
I wasn’t to be dazzled by the freebies, even if it were gold coins. I asked about the returns from the scheme. “You have to invest for 10 years at least. The maximum time period is 35 years,” he began. “But 10 years is a long time,” I interrupted.
“You are allowed to get out after three years, but you should keep investing till 10 years because the returns are better,” he replied. I later found out that the early exit came at a price: 20% of the cover after three years and 10% after four years. The consultant had forgotten to tell me about it. After all, I didn’t ask, right?
The next colourful sheet had dense tables about returns. He started his explanation: “If you invest Rs 2,000 every month for three years, you earn Rs 40,975. However, by sticking on for 10 years, you get Rs 9.56 lakh if you die and Rs 4.26 lakh if you don’t. That is almost double the investment you make.” The consultant could have phrased it better. I am not squirmy about death, but the way he put it, it seemed profitable to die.
As with his claims of free insurance, I did not inform him about my objection to his syntax. There was another, more important reason to worry about: Returns. “I read that in the post office scheme, money doubles in about 8.7 years. Does this mean they give higher returns?” I asked.
“The amount invested in the post office cannot be withdrawn partially and you cannot continue investing in it beyond 10 years,” he replied.
The pattern was frustrating; every time I compared returns, financial agents or brokers pretended not to hear.
I asked about the returns again. “The post office scheme gives only 8% returns. This offers 10% assured returns with free insurance. The maturity amount is also tax free whereas income from post office schemes is taxable. This is why we call this plan the ATM plan—anytime money plan,” he replied.
He wasn’t way off the mark. Post office deposits offer a little over 8% interest. I was also impressed that the consultant stuck to the Insurance Regulatory Development Authority (Irda) norms: To quote 10% returns in the calculation example. The small catch: It is the highest return that can be quoted as Irda has set a range of
6-10% annual returns.
But why think about the Irda when I was investing in a monthly deposit scheme? It was then that I noticed the consultant hadn’t told me the name of the plan. I flipped the chart. The name of the policy was written in bold: “LIC’s Jeevan Saral”.
It was shocking, and on afterthought, expected. An endowment policy was being passed off as a monthly deposit scheme—it was classic mis-selling. Now that endowment policies offer higher commissions than Ulips , no wonder agents are pushing them hard.
The consultant continued his sales pitch: “You pay Rs 4.8 lakh for 20 years and earn Rs 16 lakh if you don’t die. If you do, your nominees get Rs 19.16 lakh if you die naturally. You can also earn a higher amount: Pay Rs 42 more every month and get accidental death benefit of almost Rs 25 lakh.”
I started to leave, muttering about how I did not want such a long-term commitment. What if I couldn’t pay the premium after five years? “Don’t worry. After the third year, LIC gives loan against this policy. You can take a loan and use it to pay the premium up to 10 years. Repay the loan from the maturity amount. Anyway, you get a bonus after the ninth year. There will be enough left for yourself,” he replied.
An endowment policy camouflaged as a monthly deposit scheme. Advice to take a loan for fulfilling an investment commitment. It couldn’t get worse. I rushed to office to type out the story.
Source: Economic Times
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February 18, 2011