Ramesh wanted to renew his FD and visited his bank. At the bank, he was sold a policy with promises of superior features than fixed deposit. Ramesh was sold with features as below:
- You will have a better return than fixed deposit
- Return will be tax-free whereas FD returns are taxable
- You will also have risk cover
However, Ramesh was not told the following:
- Returns are not guaranteed and would depend on the market or on the performance of the Insurance company
- Returns can be tax-free only if the life cover is more than 10 times of premium paid. But the option of 10 times cover would impact the returns.
- Mostly all single premium policies offer 1.25 times of premium paid. Thus proceeds also become taxable
- Capital in fixed deposit is liquid and can be withdrawn.
- The minimum tenure of a single premium is 10 years. Early surrender would have a cost.
Why Ramesh was sold an Insurance? The obvious answer lies in the commission to the seller. If Ramesh is unlucky then a regular premium policy is sold as a single premium. This is done because the regular premium policy has a higher commission than the commission on a single premium.
In such a case, a reference is given to the IRDA ruling that the first-year premium is refunded after 5 years. However, the client is not told about the charges and a minimal return promised. When the client does not pay the second year premium then the money is taken in a surrendered fund with a minimal return of 4 %.
It is better to opt for Mutual Fund in place of a Fixed Deposit