Life insurance illustrations – what is wrong

It is customary for life insurance salesmen (by whatever name called) to sell life insurance by showing what is called an “illustration”. What is wrong with this “illustration” that is shown to potential customers?

Simple, it does not mean a thing!

IRDA has stipulated that the illustration should be made with 2 projected returns: 6% and 10% p.a. growth.  This leads most prospective buyers of life insurance to believe (erroneously, of course)  that the policy will pay  at least 6% per annum.

The illustration makes assumptions on mortality charges (in some cases it is not guaranteed), fund charges (normally not guaranteed to stay there), stickiness (all customers will continue to be with the company), death values (valid), tax structure, etc. while making the projections.

Though there is nothing wrong with 6% and 10% as assumptions there should also be a lower expectation – why not an illustration with a 0% assumption? Look at what happens if there is NEGATIVE return like say Jan 08 till date. No illustration making NEGATIVE return assumptions is created by the insurance companies. Why? Well this question has not been asked for far too long.

Actually why is a life illustration made? Well it is for you, as a customer, so that you can compare the costs and charges across fund houses.

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