Stop selling 10-15 year tenure life policies to customers aged above 65

Seventy-one-year-old retired financial services professional RV Madhavan is desperately looking for cash amidst the rush to buy additional essentials during the Coronavirus-linked lockdown. He just spent Rs 2 lakh (as annual premium) in March 2020 buying a 'savings plan' from an insurance company. Turns out he will end up paying almost Rs 12 lakh as premium for this policy to get benefits only 15 years later.

"I was told that I would be able to get double the money as returns but I wasn't aware that the benefits would be paid out only after 15 years. Now since I have paid one premium, I would need to continue it for four more years before surrendering this product. I could have used this money for some other purpose," he said.

Madhavan was sold this investment/savings product by a 'friendly' agent who should have sold a more appropriate product for this age group.

One glance at the life insurance premium collection data for FY20 will show you that the actual yearly increase in number of policies sold to individuals is negligible.

IRDAI data shows that private life insurers saw a 4 percent year-on-year (YoY) drop in the number of policies sold even as new premiums rose by 11.7 percent YoY. This is an indication that it is merely the ticket size of insurance products that is increasing and new policies sold remain similar to previous years.

The worst is policies with high ticket-sizes being sold to those above 65 years of age. On one hand, these individuals do not understand the policy tenure while on the other, they end up paying a very high premium which is difficult to sustain over a long term.

Mumbai's 74-year-old Kavita Sable had to miss paying the Rs 3 lakh insurance premium for a savings plan she bought two years ago from a private life insurer because she could not arrange for cash by redeeming other investments.

"I was not able to transfer cash from other investments like mutual funds to pay this premium. My friends now tell me that I made a mistake by buying a 10 year tenure product at this age with such high annual premiums," she added.

Most of these policies are sold by agents who end up earning a fat commission by selling these products. Higher the premium and policy tenure, more is the commission paid. The ones who lose are the senior citizen policyholders.

Surrendering a policy prematurely means that a significant portion of the premium paid is lost and only minimum benefit is received. Even if the paid-up value is built after three years of premium payment, this is lower than the actual money paid during this period. A better idea would be to put this money in a fixed liquid instrument with a minimum but guaranteed return.

For senior citizens, liquid assets are crucial considering their age and the allied health issues. Delhi's 67-year-old Anita Bhalla learnt it the hard way.

Bhalla's agent told her that she could withdraw the money from her policy whenever she wanted while earning returns continuously. She paid Rs 2.8 lakh as premium for a 15-year insurance policy and is now stuck without cash amidst a medical emergency.

"I was hospitalised and urgently needed cash for the treatment. I thought I could cancel the policy and pay the charges. But I realised that since only one year has been completed in the policy, I would end up losing the entire amount if I let it lapse. I made a mistake by buying it," she added.

While buyers might exercise caution and not choose insurance products with very high premium and policy term if they are above 65 years unless the individual belongs to the higher-income category. Individual customers need to evaluate if they indeed have the risk appetite at 65 years to buy a policy and pay high premiums for the next 15-20 years.

But the real onus is on the insurance company and its distributors (like agents and banks). While an insurer and its distributor may end up collecting hefty premiums by selling such policies, it comes at a cost of persistency drop or low renewals.

Once the customer finds out that it is not possible unable to sustain these premium payments, he/she would drop out by not making future renewal payments. In the end, the insurer's brand image as well as its operating matrics suffer.