What is a sales illustrations?
The illustrations help a customer to understand a policy in a better way. Basically, a benefit illustration is a year-by-year summary of costs and benefits and how costs will affect the growth of your fund. While costs are known in the policy, one needs to assume a rate of return in order to show the implication of these costs on the returns. To provide a solution, the regulator allowed two rates: 4% on the conservative side and 8% on the aggressive side.The sales Illustration shows you the year wise premium inflow and the benefits receivable at an Assumed rate of Returns.
What is Assumed Rate of Returns?
This is the rate of return expected to be given by the product on maturity. You have to understand that these are just assumed rates of growth and only for illustrative purposes.
why @4% and @8%
It is the Government regulations to show assumed rates at 4% and 8%.
It is difficult to reject an insurance policyproposal that pays around Rs 1 crore on an annual investment of Rs 2 lakh for 20 years. This is assuming a growth rate of 10% each year; the Insurance and Regulatory Development Authority (Irda) allows agents to show growth at 4% and 8%.
While in unit-linked insurance plans (Ulips), a 8% assumed rate of return may still hold confident, considering that over period above 10 years equities are capable of returning at least 10-12%, it is too high a number for traditional plans that invest mainly in debt products.
Is 8% an Illusion or truth in Endowment Plans?
Unlike ULIP plans, traditional plans do not participate in the market benefits. Instead these plans are participating in the profits of the companies on the investments made from their investments in the debt instruments. All the Endowment/ Traditional plan funds are invested in the debt funds only. Hence there are high chances that maximum traditional plans may not even come closer to the 8% mark.
This is mainly of the fact that the returns of these plans are calculated on the basis of the bonus declared by the company. Example: Mr Arun has taken a policy with sum assured of Rs. 230000 for a premium of Rs.100000( single premium) from LIC. According to the LIC BONUS FOR FINANCIAL YEAR 2014-15 says that the best Bonus paid is Rs.50/1000 sum assured. So the total benefit under this plan may work out to 525000 in 25 years. But still the IRR here works out to be around 7%.
This is the bitter truth in the traditional plans we come across today. The plan at its best can not even give 7% but still IRDA allows the insurance companies to show illustration for the impossible 8% in the sales illustration.
Here we aim at providing the complete transparency in endowment plans which is being hided by the sales people. Be clear on this part of the workings of the traditional endowment and money back plans.
We are working on the endowment plans Actual Expected Rate of returns. We will publish it shortly.
Instead of going to these kind of traditional Insurance plans you can choose combination of Term plans with other saving options. Even ULIP plans are much more a better choice than the traditional Endowment insurance plans.