Three misleading marketing communications about life insurance

Did you know that from 2022 just over half of all life insurance policies will last 5 years? For what is essentially a long-term plan, that’s an abysmal number. The roots of this problem lie in the way life insurance is sold, and the problem usually begins with the nature of the marketing communications used by some insurers. Here is a compilation of the top three most misleading insurance marketing communications circulating these days. As they say in life insurance parlance – “Caveat Emptor” or “Buyer Beware!”

“Invest 160,000/pa for 12 years and get 1 Cr tax free Maturity and life cover 35 Lacs at 1 Cr from ABC insurance company”

Misleading because: this SMS misleads someone into believing that one can “invest” Rs 1.6 Lakhs per year in a life insurance policy for 12 years (only Rs. 19.2 Lakhs in pocket) and receive an amount at maturity of Rs. 1 Cr – tax free. This equates to a monumental internal rate of return of 23.86% per year! Considering that traditional life insurance policies make most of their commission payments and invest most of their funds in G-Secs, it would be impossible to achieve such a return. What is more likely is that the maturity value of Rs. 1 Crore is payable after about 35 years. This equates to a more believable IRR of 6% – and makes the product highly avoidable, to say the least.

“Get a pension of 30,000 per month and get Rs. 60 Lacs for your family by investing Rs. 3,000 per month and save tax”

Misleading because it omits critical details such as the time horizon of the investment and whether this “rent” will be immediate or deferred. This SMS appears to be ostensibly promoting a unit-linked pension scheme, which will allow for a commutation of Rs. 60 Lacs at the end of the accumulation period. To get a pension of Rs. 30,000 per month (or Rs. 3.6 Lakhs per year), one would need to earn about 60-70 Lakhs of accrued pension, according to the current rate offered by most insurers. Even if you were to earn a CAGR of 12% on your monthly savings of Rs. 3,000 for a period of 30 years, the end value of the fund would be around Rs. 1 Crore. Considering that you are only allowed to convert 1/3 of the fund value at maturity (tax free), where does the lump sum value of 60 Lakh come from? The numbers just don’t match.

“Get a Rs. 1 Crore term cover for just Rs. 4,265 per year”

Misleading because: if you scroll down to the small wavy print at the bottom of the ad, it will most likely say “for a 24 year old male, fit, non-smoker, with no pre-existing conditions and a family history of a perfect health”. Most likely, your own premium for a Rs. 1 Crore term cover will range from Rs. 8,000 per year to Rs. 15,000 per year – 2X to 3X the premium presented in this communication. If you receive a 1 crore death benefit for something less, you might want to quickly run through the claims payout ratio of the insurer offering the policy. Anything less than 90%, and your “cheaper” policy won’t It’s not really worth it. Think about it: what’s the point of leaving a window of 10% or more open to the possibility that no payments will be made to your family at a time when the worst possible misfortune has just struck them?