My friend from college called me on a Tuesday morning. I was a little surprised. He had been in touch for the last 18 years since we finished college but generally, he would call late evenings or on weekends.

After the initial greeting, he immediately jumped to the topic, “I am on the verge of investing Rs.1 lakh p.a for the next 10 years in a life insurance savings plan and I thought that I will take the last advice from you before signing it off today.”  He said that he was taking it from a relationship manager from his bank’s branch whom he knew for quite some time and he was following up quite a lot by taking this “limited period offer, high returns plan”. “The IRR (rate of return) what the plan will Yield is well above 10 % is what I have been promised.  I have the plan illustration, and how it will work from the company official email ID– the returns are shown there as guaranteed maturity benefits and sum assured, so this time there is no catch I think,” he said, sounding very confident. 

He is a seasoned businessman and has very good financial knowledge. This statement stumped me.  I gathered my thoughts and just said “Send me all the information you have about the plan and don’t sign up until I check it and call you back.”

As soon as I got the plan details and the illustration (which was indeed sent to him by the company representative from his official mail ID) I set out to understand the policy numbers.  Here is what was proposed :

Premium payment every year for the next 10 years: ₹1,00,000/-

Policy term: 15 years

Payback period: From year 11 to 15, i.e., 5 years

Payback amounts: Now here is where the confusion starts (or rather is twisted for convenient mis-selling)

The proposal says you will get guaranteed money back from year 11-14 for 4 years which is approximately ₹5,40,000/ also on year 15 you will get the maturity amount + guaranteed loyalty additions + survival benefits which add up to around 10 lakhs (makes sense till here), but they have conveniently not added the sum assured in the official chart, which was there in the scheme details in the illustration –  saying that also is payable which is around ₹9 lakhs !!! Phew, this is the catch! Will the sum assured also be paid (in case of policyholder survived the period) in this plan?  NO…

So I did my own calculation of the scheme.  With the outgo of ₹1 lakh every year for the next 10 years and the cashback from year 11 and maturity benefits, I arrived at this – The IRR was actually coming up to 4.8 % only and not the 10 % + claimed by the relationship manager, in these days of about 5% of returns from FDs, anyone would fall into this trap to get more than double!!

Investing smart is not only about making good returns from well-timed investing it’s also about not falling into pitfalls.  Imagine getting stuck with a long term investment with returns that don’t even beat inflation…My friend called back with this query to the relationship manager and predictably he said the sum assured is generally paid as well in all policies and that is understood !!! 

For your insurance needs, take a plain vanilla term plan and for your investments do invest in pure investments products like stocks, PPF, mutual funds, bank FD’s, RDs, NPS, etc, and keep things simple.

Author: Mr. Nirmal M Jain | Mr. Nirmal M Jain is a Co-Founder at HappyWise Financial Services. He has helped over 100 Families over the last 15 years of his services in the Financial Planning Sector. He has been a mentor to several people to help them better understand investments, stocks, mutual funds, financial planning, personal finance and above all his favourite term “The Power Of Compounding!”.

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